By Yashvardhan Sarda and Bradley Smahon (Singapore Management University)
Overview of the deal
Acquirer: Facebook Target: Jio Platforms Limited Estimated value: USD5,708.19 million Announcement date: 23rd April 2020 Advisors to Buyer: Bank of America Advisors to Target: Morgan Stanley
Facebook has agreed to acquire a 9.99% stake in Jio Platforms, a subsidiary to Reliance Industries Limited, the largest public-traded company in India as estimated by market capitalization. The deal has been valued at USD5.7 million, bringing about the potential for Facebook to leverage Jio’s network to provide its own services to the vast majority of India.
Company details (Jio Platforms)
Jio Platforms Limited specializes in digital services. Through its ownership of Jio, it offers the leading telecommunications company in India by number of subscribers. The company develops telecommunications and broadband services, underpinned by a digital platform. This includes digital apps, digital ecosystems, and a high-speed connectivity platform. The company also offers an all-IP data strong future proof network with 4G LTE technology.
Founded in 2019, headquartered in Ahemedabad
President and CEO: Mukesh Ambani Number of users: 388 million (approximately half the telecom userbase in India) Market Cap: - USD66 billion LTM Revenue: - N/A LTM EV/Revenue: - N/A
Company details (Facebook)
Facebook, Inc., the world’s leading social networking company, develops apps and platforms focused primarily on communication and how users may be better able to use various platforms to achieve this. The company’s products include Facebook, it's flagship app that allows users to connect with each other online; Instagram, an online community that allows the creative posting and sharing of pictures; Messenger, a messaging application allowing Facebook users to communicate; and WhatsApp, a messaging application allowing mobile phone users to communicate through text, video call, and audio call.
Founded in (2004), headquartered in Menlo Park, California President and CEO: Mark Zuckerberg Number of employees: 10,000+ Market Cap: USD680 Billion - EV: USD630 Billion LTM Revenue: USD73 Billion - LTM EBITDA: USD32.5 Billion LTM EV/Revenue: 8.6x - LTM EV/EBITDA: 18.6x
Projections and assumptions
Jio Platforms is a part of the conglomerate Reliance Industries. This implies that user growth is reliant on Reliance Jio Infocomm’s telecom business which will drive revenue and user growth. This is contingent upon Reliance remaining competitive in the telecommunications sector in India, and retaining its market share post-merger.
This deal was structured as one utilizing anchor investors. For context, anchor investors are institutional investors who are brought on board an offering prior to public distributions for the purpose of creating market confidence in the investment. The two months prior to the announcement saw high-profile institutions such as Silver Lake, KKR, Mubadala Investment Company, Abu Dhabi Investment Authority acquiring stakes valued in the billions of dollars in Jio Platforms. Reliance Industries, the parent company of Jio Platforms, has promised to make the company net debt free by March 2021 – with these investments, this aim has been met along with additional funds to pay off any present debt on Jio’s books. In total, Reliance has sold off a 24.7% stake in Jio Platforms.
The deal is likely to bring attention to the JioMart project. JioMart, an Indian online delivery service that is focused on groceries, looks to combine the use of Whatsapp and JioMart so that customers will be able to connect with businesses. The potential of a dominant e-commerce infrastructure benefitting consumers may come to fruition. Furthermore, the deal will increase Facebook's penetration in India. The past five years have seen more than 560 million people in India have gaining access to the internet. With Jio Platforms user base of 388 million people, the potential of increasing this base may bring about net positives to the merged entity.
On the side of Facebook, the company has approximately 400 million WhatsApp users in India. Plans of developing an online payment app in India have been underway; having a local distributor in Jio could help it in navigating various regulatory issues, including those related to privacy and local storage.
The deal with Reliance also gives Facebook access to the latter’s portfolio of digital apps. These include in-house apps such as Jio Money and Jio TV. Additionally, young start-ups acquired by Reliance or its subsidiaries across categories such as logistics, e-commerce and artificial intelligence exist within this sphere. These apps are slowly increasing penetration and building engagement with the existing users of Reliance Jio. Reliance also plans to launch Jio University in 2021, which has the potential to tap the digital transformation underway in the Ed-Tech sector. This is particularly of interest, considering a post-COVID world where most universities have instituted plans to take the upcoming semester online as part of social distancing measures.
Risks and uncertainties
One of the major risks associated with this deal is the regulation surrounding the vast amount of user data both Jio and Facebook together will manage to garner. Presently, the proposed entity has received regulatory approval; this decision could be altered should Jio and Facebook abuse their use of customer data.
The launch of the super app has an uphill challenge to face in the form of consumer habits in India. Indian consumers are generally less willing to buy groceries online; this has been slightly mitigated due to the imposition of a lockdown.
Jio Platforms' current strategy has been to competitively price its offerings to focus on attaining the dominant market share. This strategy may face resistance should products be changed to higher prices. Consumers will be incentivized to switch to lower-priced competitors.
Perhaps the greatest risk will be the entrance of technology competitors to Facebook in the Indian telecommunications industry. At the time of this writing, Amazon has announced that it is in talks to purchase a USD2 billion stake in Bharti Airtel, Jio’s closest competitor which holds the 2nd largest market share behind Jio in India. From a broader standpoint, India could form the battleground for a new competitive landscape amongst the world’s largest technology companies for telecommunications companies. Google and Microsoft are reported to be considering stakes in Vodafone, the third-largest wireless carrier by subscribers in India, and further investments in Reliance Jio Platforms, respectively.
“At the core of our partnership is the commitment that Mark Zuckerberg, founder of Facebook, and I share for the all-round digital transformation of India and for serving all Indians… In the post-corona era, I am confident of India’s economic recovery and resurgence in the shortest period of time,”