India: How To Divvy Up A $22.5 Billion Empire

After splitting giant conglomerate Reliance, the Ambani brothers now must show they can create value for shareholders

It is a saga followed in all its details by the Indian and global business press. The two Ambani brothers, giants of Indian industry, feuded openly for months over their late father's legacy: India's largest private sector company, $22.5 billion Reliance Group. Then, around noon on Saturday, June 18, peace broke out. An e-mail was sent out by the brothers' mother, Kokilaben, declaring that she had brokered an ``amicable'' resolution between her sons. The next afternoon, at a gathering of journalists and market analysts, Anil Ambani announced his plans for his share of the empire. The careworn look that Anil wore during the eight months of bitter battle had faded, and he was almost his usual self -- brash, natty, and cheerful. ``For us -- for me especially -- this is a new beginning,'' he said. ``This is a car without a reverse gear; we are only going forward.''

The deal involves some staggering numbers. Mukesh, 48, will keep the group's petrochemicals flagship, Reliance Industries Ltd., and the smaller Indian Petrochemicals Corp., which together bring in close to $19 billion a year in revenue. Anil, 46, will get power company Reliance Energy, telecom and broadband purveyor Reliance Infocomm, and finance company Reliance Capital. In a complex handoff whose details haven't been confirmed, the brothers are expected to swap their existing shareholdings in each other's companies, with Anil getting an estimated $1 billion in cash to equalize the division.

Following the settlement, everyone from the Finance Minister down to the smallest punter was happy the battle had not torn Reliance Industries -- the keystone of the group -- apart. Reliance is India's most influential business, with 3.3 million shareholders. About 30% of shares in the group's companies are held by foreigners. Its revenues make up 3.5% of the economy. ``People are relieved the fight is over,'' says Bombay broker Sunil Shah. The stock market was so comforted that, at the close of trading on June 20, the four listed Reliance companies had jumped between 3.9% and 24.8%, taking the Bombay index to a high of 7000.

The resolution of the conflict is certainly cause for celebration in India's markets. But a larger question hangs over the deal: Now that they have their own companies to run, what direction will the brothers take? Anil and Mukesh learned business from their father, Dhirubhai, a shrewd ex-schoolteacher who built an empire from a simple textile-trading business. The senior Ambani richly rewarded shareholders by building them a dynamic company. But he was constantly dogged by accusations that he used his enormous influence with politicians to get the best possible deal for his business. The allegations never resulted in a successful prosecution. But the Ambani name inspired fear in some circles -- and continued to do so after the old man's death.


Ironically, the latest accusations against Reliance have come from the family itself. During the feud with his brother, Anil Ambani hurled allegations of corporate-governance violations against Reliance Industries and Reliance Infocomm Ltd., then run by Mukesh. Among them: charges that Mukesh personally appropriated 55% of Infocomm's shares at 1% of their value, then handed out stock to select politicians; that he arranged for parent Reliance Industries to lend $1.8 billion to Infocomm at 7% interest when the company typically earns a 20% return on its capital. Mukesh denied any impropriety. But the accusations emboldened the Department of Telecommunications and the two state-owned telecom operators to take Infocomm to court, charging that the company had improperly routed international calls as local, costing them $100 million. Reliance Infocomm settled the case by agreeing to pay the missing tariffs, plus a $30 million penalty.

Now, Anil, the prime accuser, is the new owner of Infocomm. Will the government get to the bottom of his accusations? Apparently not. The day after the settlement was made public, India's Finance Minister, P. Chidambaram, said that in such family situations, statements are made in the heat of the moment. Consequently, he added: ``If there is any specific violation or complaint, we can look into it. [But] after this settlement, I don't think there is any need for an inquiry.''

The government's decision means it's up to the Ambanis themselves to honor the new rules of corporate behavior -- strictures that younger companies such as Infosys Technologies Ltd. have hastened to heed. First the brothers have to disentangle their respective pieces of the empire. Neither brother returned phone calls asking for details, but what is expected is that within the next six months there will be a complex split wherein parent Reliance Industries will break up into an operating company and a separate holding company, with the latter controlling the three Anil Ambani companies. The total Ambani family ownership in the Reliance companies will remain at around 34%.


Both ambanis now face challenges and opportunities. Mukesh Ambani's petroleum business, comprising oil, gas, and petrochemicals such as polyester, is hugely profitable, spewing out $3 billion in cash every year. But its longstanding tariff protections are almost gone, as India complies with World Trade Organization norms. ``It's an intensely competitive and mature business currently at a cyclical high, and it needs to aggressively find new growth avenues,'' says Manish Chokhani, director of Enam Securities in Bombay. Reliance Industries is already expanding into retail gasoline sales, setting up stations along India's newly built highways. The company is also looking at global expansion: Last year it bought a polyester maker in Germany and in 2003 bought equity in an oil field in Yemen.

Anil Ambani has the smaller share of the business -- but the parts with greater growth prospects, say analysts. Anil says Reliance Energy, currently a small player in Bombay and New Delhi, over the next decade will spend $20 billion to construct four power plants with a total capacity of 20,000 megawatts. He also plans to turn Reliance Capital Ltd., which has largely acted as Reliance Industries' treasury operation, into a financial conglomerate competing with local powerhouses such as ICICI Bank Ltd. (IBN ) And the troublesome Reliance Infocomm? The company, India's second-largest mobile operator, badly needs cash and professional management. Speculation is that Infocomm will attempt to raise about $1 billion in an initial public offering this fall in order to expand its network and boost profits and service.

To accomplish their goals, the brothers have to attract the best professional talent available and keep shareholders' faith. The vast majority of Reliance stakeholders still remember Dhirubhai Ambani, who created billions in wealth for them. For now these investors are willing to extend their goodwill to his sons. It's an opportunity too great to be squandered.

By Manjeet Kripalani in Bombay

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