Why the Ambanis won't be doing too much business dandiya

Images of Mukesh and Anil Ambani chatting casually, with their wives Nita and Tina doing the dandiya (watch video below), all under the benign gaze of mother Kokilaben, made for wonderful colour copy in newspapers towards the year-end.

Even as the extended Ambani family gathered at their ancestral home in Gujarat’s Chorwad village to commemorate the late Dhirubhai Ambani’s 80th birth centenary, the markets speculated about whether this means something more than just family bonhomie. Or whether it had business implications.

On the day newspapers reported Kokilaben as saying “there is love among the brothers”, their shares - especially Anil’s - did a minor jig before returning to the normal gloom.

The brothers’ recent brotherly acts have been brought about more by adversity and opportunity than anything else.

Last year, they buried the hatchet in May in part because Mukesh wanted to re-enter the telecom industry - which would have been forbidden by their separation agreement of 2005. Without a change of heart, Mukesh could not have bid for 4G licences in June-July.

This year, both Anil and Mukesh have come under harsh public and bureaucratic scrutiny, pushing them into another embrace.

While the current all-round market collapse has decimated their separate group valuations, it has roiled Anil more than Mukesh. Having won the war of market valuations, Mukesh probably sees no future threat from little brother Anil. The market capitalisation of Reliance Industries is five times that of Anil’s seven companies put together.

In every way, they are a study in contrasts. Anil is emotional and flamboyant. Mukesh is shy and self-conscious. The former likes to play to the gallery. The latter makes secrecy his hallmark.

Their fortunes have also been divergent.

Mukesh Ambani is rolling in cash (around $ 25 billion, by one assessment); Anil is struggling to raise some for his beleaguered power, infrastructure and telecom companies.

While Mukesh is reputed to be close to the current Congress-led UPA dispensation, Anil found himself cosying up to the Congress’ allies and rivals - the DMK’s A Raja and the Samajwadi Party - and has paid a price for his choices. Raja is in jail, and three of Anil Ambani’s senior executives also spent time in Tihar till they obtained bail in November.

Mukesh Ambani, to be sure, is having own his battles to fight: his Krishna-Godavari offshore fields are showing a fall in output, and the petroleum ministry is raising questions about his investments in the field. But his problems are nowhere near as complex as his younger brother’s. The fall in KG output helps Reliance conserve gas reserves at a time when government-imposed pricing is pathetically low.

The contrasting fortunes of the two brothers are one reason why the markets are looking for clues to see if dandiya between the Ambani wives will lead to business tango.

Let’s be clear on one thing, though: the brothers are not going to work entirely together, not after what they went through after the split, but they are probably entering a phase of co-opetition - competition in some areas and cooperation in others.

The first area they will be competing and cooperating in is telecom, where the terms of the 2005 asset division gave Anil the telecom business but left him with little spare cash for investment. Mukesh was left with the group’s flagship cash cow.

By mid-2012, Mukesh Ambani, who won a national licence for broadband wireless access (BWA) in last year’s 3G auction, will be rolling out his 4G (fourth generation) data services. It is logical to tie up with other telecom operators, and Anil Ambani’s Reliance Communications (RCom) is the obvious partner. Mukesh knows how good RCom’s broadband backbone is, for he was the one who built it.

While a deal with RCom will help Mukesh put cash in Anil’s coffers, another way he could do the same is by becoming a strategic investor in RCom’s telecom towers business. But that’s not a certainty.

To see where else the brothers could tango or tangle, let’s look at their business mix.

Mukesh’s flagship Reliance is a vertically-integrated oil-to-petrochemicals conglomerate that is throwing up over $6 billion in free cash annually. This cash is being used to bankroll forays in retailing, special economic zones and telecom.

Watch this CNBC Awaaz video on the Ambanis celebrating

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Anil’s businesses are more diverse and standalone - ranging from power, telecom, infrastructure, captive coal-mining and finance and insurance. Each one of Anil’s businesses is cash-guzzling, and can theoretically be a potential focus of Mukesh’s free cash.

However, to understand why the brothers may not work together beyond a point, it is important to see how they are not only running different kinds of businesses, but also running them differently.

Mukesh’s style is like his dad’s. The undivided Reliance group was run like a giant cash-generating holding company with two key wings: one wing promoted all the projects, creating and merging companies at will, while the other wing just operates the cash.

No matter what the situation, Reliance is always raising cash at the best possible rates, whether it needs it or not. This way Dhirubhai never had a problem funding any of his projects at the lowest possible cost. His projects were always world class and super-competitive. Reason: his ability pay his vendors cash on the nail fetched him the best deals for plant and machinery.

Mukesh runs his business almost exactly like his dad. For example, recently he gave three foreign banks a mandate to raise $1 billion in dollar-denominated bonds at a time when other Indian companies are seeing how to get out of dollar bonds and he himself is sitting on an estimated $25 billion in idle cash - or cash equivalents.

The reason is simple: dollar interest rates are very low, and by raising dollar funds now, and assuming the greenback can only go down against the rupee over the long term, it’s a canny move.

So, an additional $1 billion here of there is not a big deal for Ambani, who is sitting on tonnes of cash.

Says a recent report in The Economic Times : “It (Reliance) has about Rs 61,490 crore on its books as on September 31, 2011, and Rs 8,300 crore is being added every quarter. Another $3.2 billion is still due from BP (part of BP’s $7.2-billion deal to buy a 30 percent stake in RIL’s 21 oil and gas blocks, including the gas-rich D-6 block). ‘RIL’s treasury stock ($7 billion) could further boost this to $25 billion, or Rs 1,30,000 crore,’” says the newspaper, quoting UBS analysts Ashish Jignani and Ruchi Patwari.

In short, Mukesh essentially operates a giant fund-raising and investing operation that functions like a one-stop, one-client bank. The big bucks are more likely to used to buy energy assets than a share of his brother’s business.

Given this style of operation, Mukesh tends to run all his businesses under one roof - Reliance. This not only affords tax protection for profits from the energy operations as there are loss-making businesses being run in the same set-up (retail, telecom, biotechnology).

Reliance is a highly centralised operation where both strategy and finance are controlled directly by Mukesh.

Anil Ambani, on the other hand, tends to depend more on professional executives - with diverse businesses ranging from power to infrastructure, finance, entertainment and insurance being run separately. Each one is separately listed, and subject to shareholder pressures.

While Mukesh practically runs a bank inside his office, Anil will probably set up a public bank when the regulations allow it - with Reliance Capital being the obvious candidate for a conversion into a bank.

With just one major listed company - Reliance itself - Mukesh’s philosophy is to put all eggs in one basket and watch the basket carefully. Reliance had a market valuation of Rs 2,42,000 crore at last count.

Anil likes to put his eggs in different baskets - but at last pop he had seven listed companies valued at a fifth of his brother’s one company (Rs 51,790 crore).

Given their completely differing business approaches and personalities, it is highly unlikely that the brothers Ambani will mesh their businesses too closely.

Beyond telecom, it is difficult to see a real harvesting of synergies because any serious cash infusion from Mukesh to Anil will mean a dilution of the latter’s ownership. The cash help, if any, will thus remain behind-the-scenes and discreet - unless one wants to sell out completely.

The brothers Ambani will not do too much dandiya beyond what is required for public consumption and inner family conviviality.