Mukesh Ambani-run Reliance Industries will raise between $3 billion and $4 billion to boost its digital and retail business as its talks with Chinese ecommerce giant Alibaba to raise capital haven’t progressed. This is in addition to $3 billion the conglomerate intends to add in the form of borrowings.

It was reported earlier this week by Mint that Alibaba and Reliance Retail are in talks to form a joint venture to counter the dominance of Amazon and Flipkart (now majority owned by Walmart) in Indian ecommerce. Alibaba, the financial daily said, would invest at least $5 billion in the venture in return for up to 50% stake.

An Alibaba source confirmed the discussions and said that investment teams representing both sides had met but the talks didn’t progress. If the deal had gone through, it would have been Alibaba’s largest investment in India – much larger than its interest in payments-to-ecommerce company Paytm.

Reliance’s capital-raising plans, including talks with Alibaba, are aimed at setting the price of Reliance Jio shares ahead of an initial public offer (IPO) planned in the next couple of years. “The investment will help Reliance not only to raise the money but also benchmark Jio’s valuation in the months to come,” another source told FactorDaily.

A Reliance spokesperson denied talks with Alibaba. “There have been no discussions with Alibaba or with anyone else on acquiring a stake in Reliance Retail Limited. This statement is completely speculative and highly irresponsible… There was no meeting between our Chairman and Mr Jack Ma in Mumbai in July-end as indicated in the story,” the spokesperson said on email, without commenting on the IPO or capital-raising plans.

An email sent to Alibaba with questions remained unanswered at the time of publishing this story.

Blue chip valuations

In November last year, investment bank Goldman Sachs called Reliance Jio “the next growth engine” for Reliance Industries and valued Jio at $43 billion enterprise value (the value of equity and debt minus cash) and $22 billion in equity terms — which is likely to have risen with the Ambani company’s plans for omni-channel retail and its Giga Fiber fibre-to-home project.

Bharti Airtel, the country’s largest telecom company, has a market capitalisation of $21.42 billion.

Goldman Sachs has also predicted that Jio would make operating income of $5 billion by 2025. Reliance Industries has raised over $37 billion debt for Jio.

Two of the three sources FactorDaily spoke to said Reliance has decided to focus its talks with other investors. “Reliance had approached Alibaba in the beginning because both of them want to build a digital ecosystem… but now it will talk to other investors,” said the second source.

Reliance’s fund-raising moves come at a time when the Indian retail market – not just ecommerce – is seeing big change. The Economic Times reported earlier this week that Amazon, investment bank Goldman Sachs, and local private equity house Samara Capital was working together to buy More, the Aditya Birla food and grocery supermarket chain.

Bank versus telco

A third person, who is a Reliance insider, said that talks with Alibaba did not materialise because of “cultural differences” between the two companies. “Alibaba is more like a strategic investor, which wants to build a China-like ecosystem in India… something that mirrors Alibaba in China,” he said.

Paytm, increasingly a copy of the Alibaba model – with its payments and banking; digital services like movie and travel tickets; ecommerce; and cloud infrastructure businesses – is dependent on the “network effect”. The idea is to offer customers everything: whether it is buying air tickets, electronic appliances, or grocery or whether it is payments and banking services or for investments.

Ambani’s strategy, in contrast, has the data network as the core of its telecom-entertainment-commerce stack. “That’s a big difference considering Alibaba’s centrepiece is commerce,” said the second source. Reliance’s big push will always be the use of data by millions of Indians, who watch movies and serials, play games, buy goods, and make payments using the internet.

Alibaba would have wanted a significant say in the way Jio is managed if it invested money. Ambani will not be willing to share or cede management control, said the third source. “The digital and the retail businesses are Reliance Industries’ future and long-term growth drivers… It wouldn’t be controlled by any outsider,” the source said.

The policy moat

The company’s span of influence in the Indian ecosystem is evident in the role it played in formulation of the draft for India’s ecommerce policy that, among other things, recommends several conditions for online retail business in the country.

Companies with foreign investment, for instance, are not to be allowed to keep inventory – meaning Amazon and Flipkart, which squeeze efficiencies by leveraging their own inventories alongside third-party sellers on their platforms, will be on the back foot. Reliance Retail operates as an inventory-led offline retail chain that is India’s largest retail network with an annual turnover of Rs 70,000 crore.

A columnist recently argued that if the policy goes to become law, Reliance will emerge as the real competitor.

India’s internet economy is forecast to be worth $1 trillion by 2025. Everyone, including Ambani, wants to get a portion of the pie. If Reliance manages to corner 15% to 20% of that, he is looking at a business of at least $150 billion – compared to the some $66 billion the group reports as revenues now.

---