Handshake at Arm’s Length

It is a big step forward in the reconciliation process between the Ambani siblings. However， the telecom deal between Mukesh and Anil has not resulted in any equity partnership between the two. By all accounts， the 2005 split in shareholdings continues to hold and will define the possible future partnerships between the brothers.

Indeed， there was much speculation before the deal was announced that the Mukesh-owned Reliance Jio Infocomm would pick up a stake in Anil’s Reliance Communication （RCom） or its telecom tow- ers subsidiary， Reliance Infratel. But the brothers have clearly decided to keep each other’s businesses at arm’s length.

Under the pact， Reliance Jio， Reliance Industries Ltd’s （RIL） telecom arm， will pay RCom `1，200 crore to use its 120，000 kilometre nationwide optical fibre network for the roll-out of 4G services.

The network was set up in 2003 and 2004 when Mukesh Ambani was in control of the then unified Reliance Group. Industry insiders say that the network had been built in a way that there is no need to dig up the ground again. Additional pipes had been laid that were lying idle and more pipes can be inserted without much trouble to accomodate Reliance Jio’s 4G services. Also， RCom will have the right to use any fibre-optic network that Reliance Jio sets up in future.

Saurabh Mukherjea， Head of Institutional Equities at Ambit Capital points out that RIL has spare capital and Anil’s Reliance Group could do with fund infusion. “Also， two years back， Mukesh Ambani stated his intention to build businesses in telecom， financial services and power， and Anil’s group has a presence in these areas. Therefore， you will see more cooperation between the two empires in coming years，” he says.

The deal， announced April 2， will see Reliance Jio using the inter-city network of fibre-optic cables. Negotiations are on between the two groups for use of RCom’s intra-city fibre optic cables as well as the telecom towers network. Setting up the network from scratch would cost RIL `12 to 13 lakh per km – the pact gives RIL the usage of a nationwide network at just about `1 lakh per km.

RCom shares reacted favourably after the announcement， gaining over 10 per cent. However， the RIL stock lost ground marginally with analysts divided in their estimate of the impact of the deal on the company. A report by Religare Capital Markets said this was the start of a major telecom capital expenditure（capex） by the company. “Entry of the wellcapitalised RIL could be detrimental for the already-strained telecom sector. For RIL， this non-core business investment which would require additional capex before turning profitable would likely prove less value-accretive in near-to-mid-term，” the report said.

However， Vinod Sharma， Head of Private Broking at HDFC Securities felt that the deal was “mutually beneficial” and would result in Mukesh Ambani spending less than competitors in his telecom foray. Ambit’s Mukherjea adds that RIL is looking for alternative investment avenues since its core business is slowing down. “Petrochemicals is a highly commoditised business and is also going through a global slowdown，” he says.

Will the fast growing financial services business be the next meeting ground for the Ambani brothers？ It is likely， say analysts， and it could mean RIL parks its surplus funds in the financial products of Anil’s Reliance Group. Already RIL has invested more than `800 crore in various mutual fund schemes of Anil’s Reliance Mutual Fund over the past eight months.

There is some speculation that Mukesh and Anil could make a combined bid for a banking licence. But there are also media reports claiming that RIL has already asked former Citibank chief executive Vikram Pandit to head its proposed bank independent of any truck with Anil. RIL， however， has denied any such move.

All eyes will now be on Mukesh Ambani and his moves in telecom. RIL is speaking not just to Anil Ambani but other telecom players for further infrastructure sharing deals. Once all the infrastructure is in place the company will do some more pilot-testing of its 4G services. Currently， pilot projects are on in Mumbai， Delhi and Jamnagar only.

The signals for the markets are clear. In the spirit of the new name of Mukesh’s company Reliance Jio – it used to be called Reliance Infotel till a month and a half ago –the Ambani brothers have decided to “live and let live” （Jio aur Jeene do）.