SoftBank is likely to make $2-3 billion investment in Reliance Jio, the number three telecom operator in India.
There is no official confirmation from both SoftBank and Reliance Jio. SoftBank, the leading telecom operator in Japan and with presence in the US through Sprint, never tried to enter the Indian telecom market earlier.
NTT Docomo, the other leading telecom operator in Japan, entered the Indian telecom market by buying stake in Tata Teleservices (TTSL) and exited recently.
“Softbank has long been seen as a potential investor in Jio,” JP Morgan said in a research report. “For the past 2 years, our conversations with investors have highlighted expectations of Softbank investing in Jio and hence the news flow is not surprising.”
It was reported that SoftBank’s Vision Fund is currently undertaking due diligence to buy a stake in Jio Infocomm. Reliance Jio, promoted by Mukesh Ambani, has 300 million plus subscribers on its 4G network in India.
“Investors would likely want to see an equity inflow of more than $5 billion from a single investor or a combination of investors for a meaningful de-leveraging,” JP Morgan said.
JP Morgan has valued Reliance Jio at $50 billion. It put implied equity value at $25 billion. Reliance Retail was valued at an implied equity value of $35 billion.
“A potentially smaller equity sale, which although would establish a larger equity value of Jio, would not be seen as a meaningful positive, in our view,” it said. “We also need to see what the potential stake sale would involve.”
“More importantly, from a stock price perspective, we believe the potential investment would have to be an equity investment in Jio and not in the proposed InviT as that would be a quasi-debt investment.”
Jio is the carriage and content vehicle, while Reliance Retail is the offline retailer. It remains to be seen where the eventual commerce would sit — Jio or Retail — and whether it would be part of any Jio equity stake.
“We maintain our view that while the earnings environment for the company is deteriorating with downside risks to refining and petrochemical, stock multiples would keep on moving higher on expectations of potentially large stake sales on higher than current implied equity values for the various businesses,” JP Morgan said.
HSBC Global Research in a separate report said RIL’s adjusted net debt has declined to $33.2 billion in the fourth quarter of 2018-19 from $42.7 billion in third quarter. This was a result of the restructuring of the telecom operations of Jio by transferring control of fibre and towers to two separate infrastructure trusts (InvITs) along with Rs 70,000 crore or $10 billion of external liabilities and part of RIL’s investments of Rs 36,600 crore or $5 billion.
“RIL will monetise these investments once external investors bring capital into the InvITs in the coming months. Jio, as an anchor tenant, will pay rentals for using these assets. In addition, RIL expects a business case beyond Jio’s usage as other telecom operators and customers can also lease these assets and can participate in any such upside after the trusts service liabilities of Rs 1,07,000 crore,” HSBC said.
It said investors will initially likely regard this restructuring as mainly a financing transaction to offload debt from RIL’s balance sheet, considering there is limited clarity on payments by Jio, as well as any revenue upside from other customers, PTI reported.
Reliance Jio has transferred its 7 lakh route km of fibre and 1.75 lakh route km built and underdevelopment towers into two separate subsidiaries — one for the towers and one for the fiber assets.
Jio has transferred the control of these subsidiaries to separate infrastructure trusts (InvIT) which will be managed by an independent party.
“RIL expects external investors to bring in capital into these trusts which will be dropped down into two subsidiaries to refinance liabilities as well as pay for part of its investments into these assets,” HSBC said.