Posted by: John Elliott | February 22, 2011

BP deal is both a victory and a test for Mukesh Ambani

Feel sorry for Anil Ambani, the debt-strapped head of the Reliance ADA group (ADAG). He has just seen his elder brother Mukesh sign up with BP for a natural gas exploration and marketing deal that will bring at least $7.2bn, and maybe as much as $20bn, into Mukesh Ambani’s already financially-strong Reliance Industries’ (RIL).

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BP is to buy a 30% stake in RIL’s extensive Indian off-shore natural gas fields. Subject to government approval, the deal will generate India’s biggest inflow of foreign direct investment, comparable only with a yet-to-happen $12bn steelworks planned by Posco of Korea.

It will provide RIL with BP’s much-needed skills in deep water oil and gas exploration, where RIL has had technical problems, and help the British company to emerge from the miseries of last year’s Gulf of Mexico environmental disaster.

It will also give Mukesh Ambani (left) funds to reduce RIL’s already small debt burden and to go for fresh investments – and it also gives him an opportunity to prove he is a steady joint venture partner.

But perhaps most significantly, it makes it clear that Mukesh is the winner in what has been a long-running feud between the brothers. Anil Ambani (below) must now realise that, fight and strive as he might, he has no chance of keeping up with his elder brother, who is the world’s fourth richest man with wealth of approaching $30bn, let alone overtaking or beating him.

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Anil Ambani’s problems extend far beyond $4bn-plus debt that is centred on his Reliance Communications mobile phone business. Last week he made a highly publicised visit to India’s Central Bureau of Investigation to be questioned about possible involvement in an ongoing multi-billion dollar telecom licence fraud case that has widespread political and corporate ramifications. His companies’ share prices have been hammered on Indian stock exchanges.

He is also failing to push ahead effectively with various power and other infrastructure projects, despite $16bn credits signed up at end of last year from China and the US to support power equipment purchases and maintenance.

He is six months late opening Delhi’s Airport Express railway that he holds as a franchise from the highly successful public sector Delhi Metro Railway Corporation. The Express is now scheduled to start services this Wednesday. It is the metro corporation’s first serious late completion, and the six-month delay runs counter to the excellent record of completion-on-time that has been attached to the Reliance corporate name for decades.

Brothers split

The two brothers split the Reliance group in 2005, three years after the death of Dhirubhai Ambani, their father and the group’s founder, who combined entrepreneurial brilliance with deft handling of government relationships. They had a long and bitter row that was led by Anil, who felt he was being elbowed out of his share of the combined business by his ruthless brother. The row continued after the split, mainly over gas from fields controlled by Mukesh Ambani, and was only settled last year.

Mukesh Ambani’s most successful business areas are oil and gas exploration and refining, textiles, and petro chemicals. He has been less successful with retail stores, petroleum retailing, and special economic zones but is expanding into telecoms, financial services, the media and other areas.

Anil Ambani has had most success in financial services, where he has a $24bn mutual fund, India’s largest, but has been facing tough competition with telecoms. Last year he had hoped to clear the telecom debt by floating mobile towers into another company, and selling 26% of the main business to the UAE’s Etisalat. But these interdependent deals collapsed, partly because of high valuations.

That says much about the differences between the two brothers. Before the split, Anil Ambani, who has a short attention span and likes to fix problems quickly, was the group’s financial deal-maker and was in charge of corporate communications.

His elder brother was the focussed project manager committed to producing quality and delivery on time. He only failed to do so when he entered new consumer-oriented areas, where he had little or no experience. He would never have allowed Delhi’s airport railway to open late and must now be regarding the delay as one of several examples where Anil Ambani’s actions have weakened the Reliance brand.

The markets will now wonder how RIL will use BP’s billions of dollars. One rumour likely to be revived is that Mukesh Ambani will buy out his younger brother’s telecoms business, which he founded before the split and gave up reluctantly.

Mukesh’s first big partnership

The BP agreement is also significant because it is Mukesh Ambani’s first major partnership. He has mostly shied away from joint ventures, preferring to buy-in managerial and technical expertise. He has also been avoided by some potential partners because he has an extremely tough reputation. Consequently, RIL has often not been seen as a wise choice for companies seeking co-operative joint ventures and investment partners in India.

The BP deal is his latest, and by far the most successful, of a series of attempts to establish international oil and gas links. RIL failed last year with a $2bn bid for a Canadian oil sands business and with a $14.5bn attempt to buy Lyondell Basell, a US petrochemicals company. But it did buy stakes in three US shale gas joint ventures

RIL also has some older oil and gas link-ups for individual fields with companies such as Hardy Oil, Niko, BG, and (since 2009) BP. A small financial investment by Chevron in an RIL company in 2006 failed to lead to a closer relationship and Chevron sold out.

In retail, companies like Marks and Spencer’s have tie-ups for specialist stores, and there is also a new and surprising investment in India’s Oberoi hotel group.

So while the BP deal shows that Mukesh Ambani has beaten his younger brother as a consistently successful businessman, it also opens him up to new international scrutiny by those who will be wondering how BP will fare in such a partnership.

 


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Responses

  1. Could you leave Ambani’s? They are just a business man and nothing else.
    Let them do or fix their deals. Who bothers? It bores us now.

    Yes, I would like you to cover cricket worldcup. It will be fun to have a write-up from you .

    Let us make life little more lively….

  2. Interesting analysis. I agree with Sharat that the structure of the BP deal is what is really worth watching. And since I have a longish memory and suspect that the leopard never changes its spots, I hope BP will be mindful of another proverb about needing to sup with the devil with a long spoon… You are spot on in drawing attention to the fact that there will now be a great deal more international scrutiny on the entire Mukesh Ambani group.

  3. I’d be interested to know what the terms of the BP deal are and hope someone eventually does clarify what the investment is, beyond the abstract, i.e whether BP is investing in RIL through purchase of shares, whether it is a new joint venture for exploration, or whether BP is taking a stake in existing fields.

    It is my understanding that the Krishna Godavari gas find which I presume are the fields BP is investing in, is subject to pricing fixed by the government of India, rather than one which is purely market based, though I appreciate that price discovery will be based on some formula using market prices. I am surprised that an international energy major would subject itself to what can be arbitrary behaviour at times by the Indian government and probably pricing which will inevitably be below global market prices, given that investment amounts are typically very large for the energy industry.

    Still I suppose BP have enough experience dealing with governments who act in an arbitrary manner, given their extensive pressure in Russia and the number of problems they have had dealing with the Kremlin.

    Mukesh Ambani may indeed look like he is ahead of his sibling just now (actually he always has, even prior to their agreement to split the business) but I have to say the story had a long way to play out yet, and I would hesitate to say that any war has been won or count his younger brother out just yet.


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