Here's why Facebook's Mark Zuckerberg is paying top dollar for a stake in Mukesh Ambani's Reliance Jio

• Facebook has invested $5.7 billion for a 9.9% stake in Mukesh Ambani’s Reliance Jio which puts the pre-deal valuation at ₹4.4 lakh crore.
• The reason Mark Zuckerberg’s investment makes sense is because Jio is likely to be the fastest-growing segment for Reliance in the post-COVID world.
• It’s also a way for Facebook to gain an edge in the Indian market which has largely been a duopoly between Facebook and Google when it comes to digital solutions for over a decade — a duopoly that has come under pressure with ByteDance’s entry.

Facebook announced that it has invested $5.7 billion for a 9.9% stake in Mukesh Ambani’s Reliance Jio platform — India’s largest telecom player by the number of subscribers ⁠— and in early trade, Reliance Industries (RIL) share price jumped up as much as 7.5%.

This is because Facebook’s Mark Zuckerberg has paid a certain premium for a stake in Reliance Jio. The investment has valued Jio at over half of RIL’s total market capitalisation as on April 21.

Jio makes up for less than a tenth of RIL’s consolidated revenue which includes other segments like retail, petrochemicals, and oil and gas exploration to name a few.

What is the real worth of Reliance Jio?
On April 14, HDFC Securities valued Jio at ₹4.8 lakh crore. For every share of RIL which was worth around ₹1,400 then, JIo was estimated to be ₹811 — 57.9% of the market cap.

Deven Choksey, the managing director of KR Choksey Shares & Securities told Business Insider, on April 21, that he valued Jio at ₹550 rupees a share when RIL was trading at around ₹1200. Based on a market cap ₹7.8 lakh crore, Jio would be worth ₹3.4 lakh crore by Deven's estimate.

At a pre-deal value of ₹4.4 lakh crore, Zuckerberg’s buy-in is about 33% higher than what Choksey had estimated on Tuesday. This explains why RIL’s shares have spiked in a market that’s bearing down due to the impact of Coronavirus.

Why Facebook needs Jio
The reason Zuckerberg’s investment makes sense is because Jio is likely to be the fastest-growing segment for Reliance in the post-COVID world.

Even though the Reliance subsidiary is only three-and-a-half years old, it has stolen the top spot from others like Vodafone and Bharti Airtel to become the largest telecom player in the country making it an attractive buy-in for the US company.

“The recent tariff hike should still allow Jio’s EBITDA (earnings before interest, tax, depreciation and amortization) to rise 78% YoY [year-on-year] in FY21. Strong telecom and a weaker rupee will offset big cuts in petrochemicals, refining and retail as FY21 EPS rises a small 1.6% YoY,” estimates capital market and investment group, CLSA.

It’s also a way for Facebook to gain an edge in the Indian market which has largely been a duopoly between Facebook and Google when it comes to digital solutions for over a decade. The duopoly that has recently been threatened by ByteDance making inroads with its mobile apps like TikTok and Resso. Entering India hand-in-hand with Jio will give Facebook access to its 370 million subscribers.

There are over 451 million active internet users in the country today with the number estimated to rise beyond 600 million in the coming year, according to Internet and Mobile Association of India (IAMAI).

What does Asia’s second-richest man get from the deal?
For Ambani, CLSA forecasts that big deals like the one between Ambani and Zuckerberg will help reduce the burden of debt on RIL, which was at about $22 billion ⁠— 2.7 times its EBITDA⁠— at the end of March 2019. CLSA expects that the ratio will fall to 1.7 times in FY22 even before the Jio-Facebook deal was announced.

RIL’s plan to reduce its debt also included a stake sale in its energy business to Saudi Arabia’s Aramco. But the crash in crude oil prices has cast a shadow on the stake sale to Aramco.

A fresh start for Facebook
This could be a new chapter for Facebook who has been trying to crack the Indian market for a while, but precious ventures like FreeBasics and internet.org did not have the expected outcome.

It also puts Facebook head-to-head against the likes of Japan’s SoftBank, which normally holds the title of being India’s largest tech investor with over $10 billion invested across the country in unicorns like Flipkart, Ola and OYO.

See also:
Mark Zuckerberg's Facebook picks up 9.9% stake in Mukesh Ambani's Jio for $5.7 billion

Facebook’s investment in Reliance Jio boosts RIL share value by ₹50,000 crore