Canadian Funds Vying For Jio's Infra Assets

Krishna V Kurup of Reuters reports, Global investors in talks to invest in India's Reliance Jio infra investment trusts:

Global investors are in talks with Reliance Industries Ltd (RIL) to invest in two infrastructure investment trusts set up to own Reliance Jio’s tower and fiber assets, the Economic Times newspaper reported on Tuesday, citing people aware of the matter.

Reliance, once dependent on its industrial businesses, reshaped the Indian telecoms industry when it launched its Jio telecoms unit in 2016, taking on rivals such as Bharti Airtel and Vodafone Idea with its cut-throat pricing.

Canadian pension funds CPPIB, Ontario Municipal Employees' Retirement System (OMERS), British Columbia Pension Corporation (BCPC assets managed by BCI), sovereign wealth fund Abu Dhabi Investment Authority (ADIA), investment firms Mubadala and Singapore's GIC, and Germany's Allianz SE are among the potential investors, the newspaper reported here.

Earlier this month, Reliance transferred its fiber and tower undertakings to separate companies to move liabilities worth 1.07 trillion rupees ($15.33 billion) out of Jio’s balance sheet.

Reliance aims to get at least five investors on board, with some joining the conglomerate’s board as co-sponsors, the report added.

Reliance, OMERS, BCPC, Mubadala, GIC and Allianz did not immediately respond to Reuters’ requests for comments, while CPPIB and ADIA declined to comment.

The Economic Times article goes into a lot more detail on the two infrastructure investment trusts (InvITs) and provides a background on the deal. It also states that some of the potential investors such as ADIA, Brookfield, and CPPIB may come on board as co-sponsors by deploying larger cheques.

The proceeds from the co-sponsors will help Reliance cut 1.07 trillion rupees ($15.33 billion) out of Jio’s balance sheet:

Based on the initial discussions, Reliance would want to extinguish most of the existing liabilities through this exercise and retain around $2 billion (Rs 14,000 crore) of debt in the tower and fibre SPVs, said analysts closely tracking the conglomerate. Reliance will continue to run and operate these assets.

The fibre unit is being valued at $23.84 billion (Rs 1,66,880 crore) and the tower asset at $5.27 billion (Rs 36,890 crore) using fair market valuations by three independent valuers. The tower SPV has 173,000 towers ready or in development with Jio as the anchor tenant. Jio also has contracted for 50% of fibre pairs.

Pinakin Parekh, an analyst at JP Morgan said: “The InviT has effectively allowed RIL to replace $710 billion (Rs 71,000 crore) of external debt with very long term (20-year) money and thereby remove any refinancing need on this amount of debt. Secondly, it also gives more balance sheet flex and allows for RIL to further increase spending across their consumer business if they choose to do so.”

Also worth noting:

Reliance is using its recent Brookfield deal as the template for these as well. In March, the Canadian investor bought the loss-making East-West gas pipeline, a private company of RIL chairman Mukesh Ambani for Rs 13,000 crore. Brookfield will come on board these InvITs but Reliance wants to engage with other global investors as well and build long-term relationships.

The target set of investors include long-only capital of at least 10 years. “This is meant for pension or SWFs. It does not match the returns profile of traditional private equity,” said an investment banker following this transaction closely.

InvITs are trusts that manage income-generating infrastructure assets, typically offering investors regular yield and a liquid method of investing in infrastructure projects. An InvIT will help the infrastructure investor create liquidity and take some money off the table for RIL, while also providing a yield product to investors. Typically, analysts estimate that the steady cash-flow generating infrastructure business should yield a 12-13% internal rate of return (IRR), excluding leverage.

An IRR of 12-13% excluding leverage might not sound like a lot but it's double the return of what you can find in the developed world.

This helps explain why BCI, OMERS, CPPIB and some of the world's largest sovereign wealth funds all want a piece of this deal. It's highly scalable and offers attractive long-term returns.

More interesting, you're seeing a transformational shift in focus at Canada's large pensions away from pricey deals in developed markets to more potentially lucrative deals in emerging markets, especially India.

The fact that Brookfield is looking to be a co-sponsor of this deal reassures me that it's a great deal for all parties.

Below, watch Mukesh Ambani's speech at Reliance Jio AGM 2018. As one of the India's largest exporters, Jio accounts for 8 percent of India's total merchandise exports with a value of Rs 147,755 crore and access to markets in 108 countries.

Amazingly, Jio recently crossed 300 million users. Very impressive company run by a very impressive businessman. Not surprisingly, he's one of the richest people in Asia.