Ambanis sing 'All izz well'

Finally Kokilaben Ambani, illustrious Dhirubhai Ambani’s widow and mother of the warring billionaire brothers Mukesh and Anil Ambani, had her way. Her two sons - after five years of bitter feud, often laced with hefty smear ad-campaigns - signed truce last week ending all the old agreements including non-compete clauses that had been a constant source of acrimony between them. 

Peace pact 

The new pact envisages the Ambani brothers to enter any business under the sun, with one exception for elder sibling Mukesh to stay away from gas-based power generation business for the next 10 years i.e. till 2022. Simply put, Anil can foray into oil, gas, retail and petrochemical businesses, while Mukesh can cut deals in telecom, power and financial sectors. Though brothers claimed neither is in a hurry to enter a new business, speculations are rife that Mukesh may join hands with Sunil Bharti Mittal and make large investment in his telecom company Bharti Airtel.

At the same time, the new pact is clear that the two sides cannot use the common Reliance brand in sectors opened up to either by the revocation of non-compete clause.  For instance, Mukesh group can’t use the brand name for getting into say, insurance or financial services, nor can Anil group use the Reliance brand to get into refining or retail. In short, both brothers will have to come up with new names or develop new brands altogether. At the same time, the peace pact paves way to ensure gas supply to Anil’s power projects for the next 10 years, at a price to be approved by the government. This will enable Anil to pursue his mega plans of generating over 28,000 mw power in the country.  

Peer pressure

Ambani brothers’ mother Kokilaben is undoubtedly the key person in getting this peace treaty signed - even if that might lead to possible competition between them in the near future. Much-relieved officials from both groups point out ostensibly that it’s aimed at giving greater operational and financial flexibility for both groups, who can join hands projects-wise to partake in high-growth sectors jointly.

Of course, industry observers vouch there was pressure from all sides - government to politicians, industry to investors - to end the long feud.  Even the Prime Minister Manmohan Singh had repeatedly advised the two brothers to sort out their differences “in national interest.”

The court judgment

Let’s face it. The new agreement was a consequence of the Supreme Court verdict earlier this month asking the two brothers to renegotiate their gas agreement within the framework of government policies and prices. The verdict also meant that they have to rewrite the terms of sales of Mukesh-led RIL’s Krishna Godavari (KG) basin to Anil’s Reliance Natural Resources (RNRL), which effectively meant that the latter have to pay much more for the gas than what it would have otherwise paid under the family settlement. It is also true that the long-drawn out battle, which ran for nearly five years, did take a heavy roll on their businesses. Every day of SC hearing amounted to more than Rs 1 crore in lawyers fee and other incidental costs.  More than the legal fee, these cases took away much of their time, management resources and attention too, the opportunity cost of which would run into crores of rupees for both sides. Consequently, after the SC verdict, it was Anand Jain and RIL legal counsel Atul Dayal’s meeting with ADAG executives and “ironed out differences” led to the breakthrough, with the help of mother Kokilaben. It came in handy that Atul Dayal enjoys rapport with Anil with whom he had worked in the undivided empire.

Business implications

Smoking the peace pipe means assured gas supply for 10 years from 2012 - subject to government nod - to Anil’s power projects not restricting to Dadri alone. No compensation was paid to ADA, but gas supply was assured by MDA till 2022. The Biggest gain for Anil is he can pursue his dreams of becoming India’s largest private power producer generating over 28,000 MW.

RNRL whose operations comprise ownership of three coal-bed methane blocks, an exploration and production in Mizoram may be Anil’s investment vehicle in this sector. Anil can also venture into retail as he already has some experience through his telecom and entertainment businesses, avers Deven Choksey of K R Choksey securities.

Though denied as of now by both the groups, it is a plausible situation for Mukesh’s Reliance Industries to acquire equity stakes in gas based power plants run by ADAG. Nothing unusual as world over fuel suppliers regularly buy equity in power projects to enhance their viability and cut risks.   Besides, the gas supply agreement may pave the way for wider collaboration between the two groups. For instance, RIL can buy telecom services and fiber-optic capacity from Anil’s RCOM.  It may not be out of context here, when RIL Group’s President for corporate affairs maintains: “Now, we are one house again.”

Over all, RIL is moving into a trajectory of generating close to $10 billion operating cash flow per annum, according to India Infoline which stated in a note to clients recently, while Goldman Sachs maintains that RIL is expected to generate over $25 billion of excess cash over and above its committed capex in four years from fiscal 2011 to FY14.  If not reinvested, these cash-flows could make RIL debt free by fiscal 2013. 

Bonanza for shareholders

With such huge cash flow at its disposal, and non-compete clause being off its back, RIL have numerous investment possibilities opened up. For starters, RIL can possibly look to invest in Reliance Capital’s MF schemes to park money. Mukesh can enter telecom sector, after all it was he who started RCom and then ceded to Anil as part of family settlement in 2005. Now he can either join hands with an existing player or can buy out any of the capital-starved operators. Perhaps, Ambani truce pact is what the doctor prescribed for a listless market.  At least, that was the market perception on the very next day. Stocks of RIL and Anil’s ADA Group were flying high after the patch-up, on the very next day.  If ADAG’s RCom was the top gainer, up a whopping 11 per cent, Reliance Infra followed closely with 6.2 per cent rise.  At the same time, RIL rose up 2.7 per cent while non-sensex stock from the ADAG stable, RNRL, was up 22 per cent. 

The removal of uncertainty by itself made investors of both groups euphoric. Deepak Pareek, oil and gas analyst at Angel Broking said sentiment would be positive for both groups, “a lot will depend on how they will implement their business plans going forward.”

In general, the two groups’ businesses are now sufficiently different. Both brothers may eventually find that the only way to optimise shareholders’ value most is by focusing on their businesses. Thankfully, now they won’t be distracted by the non-compete clause, which has been trashed for good.

In the past, especially when it was the unified empire of the legendary Dhirubhai Ambani being ably assisted by his two competent sons, many business houses have had tough time facing the might of the undivided Ambani siblings.  They were mighty happy with the family division and the consequent feud which kept brothers on their toes (metaphorically) fighting each other rather than with the competition. It is high time, Ambani brothers get back to their old passion: Make money for themselves and their shareholders. Let’s hope it will be a new beginning.

The Old Agreement

The terms of the non-compete agreements (in 2005)

1. The two groups, RIL and R-Adag agreed not to set up businesses which would compete with the specified existing businesses and reserved business of the other group for a period of 10 years.

2. Further, the non-competition agreement incorporated a right of first refusal in case any group decides to sell off its business

3. The non-compete provision would terminate if any business is sold by either the demerged group or the resulting group to third party.

4. Businesses of Anil (R-Adag) comprised of telephony and related services/infrastructure, power and financial services,

5. Businesses reserved for R-Adag were:

* All areas of media and entertainment excluding content, production or ownership rights, physical distribution of content, print media, radio and television channels (excluding direct-to-home, digital terrestrial television and streaming video) theme parks, restaurants and amusement parks and theatres, exhibitions and multiplexes

* Airport infrastructure except that used as incidental/integral or necessary to any demerged group businesses or business in an area of free competition or businesses not subject to non-compete obligations, investment in airports where the resulting group has not been a successful bidder in the privatisation.   

* Distribution of city gas in Mumbai and Delhi

6.  The businesses reserved for RIL were:

* Petroleum and petroleum retail
* Petrochemical business

7. All other businesses were areas of free competition

New Agreement: Free to compete

The basics:

* RNRL will get gas, subject to government approval, for 10 years starting 2012 at $4.23 a unit. The supply will not be restrictd to Dadri, but will be for all gas-based power plants.

* Gas agreement t be sent to government within two weeks.

* Non-compete agreement has been scrapped to enable Mukesh to enter telecom and power

Own goal

* Both brothers to run empires separately, but in the spirit of harmony.

* Mukesh group may even pick up a minority state in Anil’s gas-based power projects

* Mukesh is free to bid for ultra-mega power projects as long as they are not gas-based. 

Non-competition areas

* The two sides cannot use the Reliance brand name in sectors opened up to either by the revocation of non-competes. 

* So, Mukesh Ambani cannot use the brand name for getting into ADA areas, like Insurance and financial services. Similarly, Anil Ambani cannot use the Reliance brand name to get into petroleum refining and/ or retail.