Moody's, Fitch give thumbs-up to $5.7 bn Jio-Facebook deal, says to help RIL deleverage
International credit rating agencies Fitch Ratings and Moody's Investors Service on Thursday said the $5.7 billion Facebook deal will help Reliance Industries deleverage its balance sheet and monetise digital platforms
New Delhi: International credit rating agencies Fitch Ratings and Moody's Investors Service on Thursday said the $5.7 billion Facebook deal will help Reliance Industries deleverage its balance sheet and monetise digital platforms.
In separate issuer comments, the rating agencies said Facebook's investment for a 9.99 percent stake in Jio Platforms - the digital services business of RIL, reinforces the Mukesh Ambani-run firm's commitment to reduce its net debt to zero by 31 March.
Reliance Jio, the wireless market leader with around 390 million subscribers, is a subsidiary of Jio Platforms.
As part of the Facebook deal, which is the single-largest FDI in the Indian telecom and technology sector, Reliance Retail -- RIL's retail arm -- has also partnered with Facebook's WhatsApp to allow RIL's eCommerce business users to use the WhatsApp platform.
Stating that the investment is credit positive, Moody's said it expects the transaction to reduce RIL's consolidated net debt/EBITDA by 0.4x to well below 3.0x, the tolerance level for its Baa2 rating.
The transaction also solidifies Jio's leading market position in India's growing digital ecosystem.
"The investment by Facebook establishes a valuation for RIL's digital services business and can be used as a base for further divestment by the company," it said. This also increases RIL's financial flexibility.
Fitch said it had in August last year revised the outlook on RIL's 'BBB' rating to 'positive' and may upgrade to 'BBB+' if net adjusted debt/EBITDA ratio improves to below 1.5x on a sustained basis.
"The deal is part of RIL's plan to strengthen its businesses and to achieve a net cash position - through partnerships and supported by organic growth and low capex," it said in a statement. "We expect the partnership with Facebook to bolster RIL's consumer business in the medium term."
Fitch said the proceeds from the transaction should help RIL maintain the pace of its deleveraging - counteracting the likely weakness in its refining and petrochemical segment during the year ending March 2021 (FY21).
In addition to the financial investment, the companies also announced a strategic partnership to tap into India's growing online retail and digital payments markets.
"While we expect RIL's earnings from its refining and petrochemical segment to be negatively impacted by the global coronavirus outbreak, its digital services business have benefitted from the increase in demand for digital connectivity," Moody's said.
Moody's said it expects RIL's EBITDA to decline over the next 12 months but its credit metrics may remain appropriate for its ratings if it successfully executes its announced transactions.
Fitch said it expects RIL's oil-to-chemical segment to face volume and margins headwinds due to the impact of the COVID-19 pandemic in line with the industry trend.
The deal, it said, will allow both Facebook and Jio to monetise their digital platforms, engage customers online, and provide direct connectivity between users and merchants.
Usage of digital platforms is likely to grow significantly in the medium term amid severe disruptions caused by lockdowns and social distancing measures.
Increasing reliance on digital platforms might also assist RIL in gaining market share in India's growing eCommerce segment, and soften the impact of lower footfalls in its physical retail stores.
"Jiomart, which is a market-place platform and built in partnership with small merchants and 'kirana' (small neighbourhood retail store) shops, will allow users to buy goods and services using WhatsApp and Facebook Messenger. Jio Platforms will focus on introducing digital solutions for 60 million micro, small and medium businesses; 120 million farmers; 30 million merchants; and millions of SMEs in the informal sector," Fitch said.
On its part, Facebook is likely to be able to expand its platforms - including Facebook Marketplace, Instagram Shopping and Facebook Pay - to help SMEs set up virtual shops on such platforms and sell goods and services.
Facebook plans to roll out WhatsApp Payments in India and other countries in 2020, after having tested this with a million people in India in 2018. WhatsApp Platform, which has started charging businesses, is still offered free to retail users globally, it said.
Facebook reported 641 million daily active users (DAU) in APAC in October-December 2019, up by 14 percent year-on-year and now contributing around 39 percent of overall 1.7 million DAUs.
India is the single-largest market with about 330 million monthly users, and also one of the fastest-growing markets for Facebook. WhatsApp's messaging app also has the largest user base in India, with about 400 million users.
"We believe internet users in the country will rise to at least 800 million by 2022, up from around 600 million in 2019 as India overtook the US to become the world's second-largest smartphone market after China by unit shipments in 2019. DAUs represented around 66% of 2.5 billion monthly active users in December 2019," Fitch added.
Moody's said in July 2019, RIL announced the sale of its telecommunications tower business — which was already transferred to the investment infrastructure trust, InvIT, to Brookfield Asset Management Inc for Rs 25,200 crore.
On 12 August, 2019, RIL announced that it has signed a non-binding letter of intent to sell a 20 percent stake in its oil-to-chemical (O2C) business to Saudi Aramco.
The O2C business, which has an enterprise valuation of $75 billion, includes RIL's refining and petrochemical divisions, and RIL's 51 percent stake in its fuel marketing business. The company also announced that it has entered into a deal with BP Plc to sell a 49 percent stake in its fuel marketing business in India for$1 billion.
Together, proceeds from these transactions will result in a $16 billion reduction in RIL's net debt, Moody's said.
(Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Firstpost)
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