Sunday, June 19, 2005

Reliance Industries splits - Brothers At Arms

The $23-billion Reliance Industries, representing 4% of India's economy will be split between the brothers Anil and Mukesh Ambani, heirs to the sprawling industrial behemoth created by their father, Dhirubhai Ambani.

Some background may be in order for those unfamiliar with the conglomerate. It operates in the fields of petrochemicals, telecom, textiles, oils, and finance. It is India's largest private sector company, and has the most shareholders of any company in the world. It is also the only Indian private company in the Fortune 500, and the first to float ADRs in the US market. It operates some of the world's largest oil refineries, and their telecom company purchased FLAG Telecom, with 50,000 kilometers of undersea fiber-optic cable. Net profit last year was over one billion dollars, revenues of $23 billion, and market cap estimated at $20 billion.

The founder, Dhirubhai Ambani, structured the company with a number of holding companies, and sub-divisions, over 300 inter-connected organizations. He died in 2002, leaving a murky succession plan. His two sons, Mukesh, a hard-driving engineer, and Anil, seen as a dynamic business-oriented individual, assumed the reins, but signs of a split were visible early on, with Anil a no-show at the IPO of Reliance Infocomm. Mukesh was named the Chairman and Chief Managing Director. Anil filed his papers for the Indian parliament's upper house in 2004, but faced objections from Mukesh's camp.

Anil and Mukesh Ambani

In late 2004, Mukesh admitted to "ownership issues", roiling the Indian markets. Six directors resigned from the board when he declared in an e-mail that he, or rather hsi role as CMD, was the final authority. The Anil refused to sign off on the balance sheet of the corporation, and objected to share transfers between the companies. On Jan 23, 2005, Anil sent a 500-page note to the board declaring a 'lack of transparency' in the operations. The Securities and Exchange Board of India puts the company under the microscope, but takes no action. Deals like the awarding of 30,000,000 shares to a friend of Mukesh at Rs.1/share, worth $100,000,000 are brought into question.

The widow of Dhirubhai Ambani, Kokilaben, stepped in and declared that the two brothers must resolve their differences or split the company by July 6th, the 3rd death anniversary of their father. She announced the details of the split first, even before the Board's announcement, on Saturday.

'I have today amicably resolved the issues between my two sons, Mukesh and Anil, keeping in mind the proud legacy of my husband, Dhirubhai Ambani,' said their widowed mother, Kokilaben, whose husband built the empire from scratch." I am confident both Mukesh and Anil will resolutely uphold the values of their father and work towards protecting and enhancing value for over three million shareholders of the Reliance Group'

The details will take some time to emerge, but elder brother Mukesh will keep control of the flagship Reliance Industries, in the oil, gas and petrochemicals space, and worth about 70-80% of the empire. Younger brother Anil gets control of Reliance Energy, one of India's biggest power utility firms, Reliance Infocomm, market leader in the country's booming telecoms sector, and Reliance Capital, the group's finance arm.

Anil, who is married to one of India's best and most beautiful actresses of the 1970s, Tina Munim, has announced plans to aggressively grow his companies. He aims to transform Reliance Capital, with interests in leasing and infrastructure investment and mutual funds, into a full-spectrum financial services powerhouse. He said Reliance Capital would also move into banking when regulations permitted. Reliance Energy plans to set up a $11 billion coal-based, 12,000-megawatt power plant in the eastern state of Orissa and a 3,740-megawatt gas-based plant in Uttar Pradesh. There are also plans to emulate Wal-Mart in the retailing sector.

The two daughters will each get 5% of the empire, and the mother and brothers share about 30% each. The share price has risen about 12% this month, and should hit the roof now that the uncertainty is resolved.

The Times of India, quoting an unnamed source, reported on Sunday that the stakes in the three companies would be transferred to an Anil Ambani-controlled special purpose vehicle, in which Reliance Industries shareholders would be given shares. The Economic Times said Mukesh would swap his stake in the vehicle for Anil's stake in Reliance Industries, with Mukesh paying 100 billion rupees ($2.3 billion) to settle the balance. The Times of India said the brothers had agreed to a 10-year non-compete clause, and said both can use the Reliance brand.

Various industrialists have hailed the arrangement, and stressed the importance of succesion planning in large enterprises, especially those which are family-run.

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