Is Reliance acquiring a company in which you own shares good news or bad?

Indian conglomerate Reliance Industries has used a deft acquisition strategy for its diversification spree over the last decade from its previous avatar of being largely an energy company to having a finger in multiple pies.

It has bought scores of companies across both side of the private and public listed space to enter a new sector or bolster its existing business—be it in retail, telecom, media and other sectors.

If media reports are anything to go by, Reliance is now close to making a binding bid for the UK’s Walgreens Boots, a step forward to sealing its biggest buy, along with American alternative investment major Apollo Global.

That said, it also has had its shares of failures or forgettable episodes. This includes a ferocious battle with Amazon to take over Future Retail and related group companies and make itself the undisputed king of physical retail in the country.

Indeed, its acquisition-led growth strategy of the last 10-15 years is in sharp contrast to its previous self where it largely built its mainstay energy and petrochemical business organically.

One clear theme behind many and arguably a majority of the acquisitions it has executed is that the targets were struggling, either financially or were facing a challenge to scale up despite being profitable. Many were in dire straits and finding a home under India’s biggest company was a lifeline.

It is difficult to gauge the fate of the private companies that Reliance has acquired over the years. But we can look at the state of affairs of the listed companies to draw some picture.

Common Story

In particular, we looked at what happened to a set of over half a dozen listed companies acquired by Reliance Industries. These include companies like Network18 Media Investments, TV18 Broadcast, Just Dial, Alok Industries, Sterling & Wilson, Hathway Cable, Den Networks, Hathway Bhawani Cabletel and GTPL Hathway.

Out of these, a few were related deals. For instance, the Network18 transaction also brought in TV18 under the Reliance stable. The Hathway Cable deal also tagged along smaller listed units Hathway Bhawani and GTPL Hathway.

Then again, all of these are not majority stake deals. For instance, Reliance bought Alok Industries along with JM Financial ARC. In the case of Sterling & Wilson, Shapoorji Pallonji Group remains a co-promoter.

Let’s begin with Network18, which was acquired a decade ago. In that transaction, Network18 Group acquired a string of regional language news channels, besides general entertainment TV channels under Eenadu Group, in a deal backed with debt from Reliance.

Interestingly, Reliance had also acquired Eenadu without formally announcing it and in effect lent Network18’s then-promoters to part-finance the transaction to buy the media assets it owned itself. Two years later, it moved in to buy a majority stake in Network18.

Both Network18 and TV18 stock had hit the upper circuit in January 2012 when the Reliance deal was initially disclosed. If we compare their current market price with that time, the share price of Network18 has doubled while that of TV18 has also risen around 66%. But the good news stops there. The BSE 500 index has rocketed four-fold during the same period!

To be fair, Network18 and TV18 have been at least a low returns gambit for shareholders even though they have vastly underperformed the broader market. Shareholders of other companies were not so lucky!

Take the two key cable companies. Hathway and Den Network are down 40-55% since Reliance bought into them. The BSE 500 has risen 50% in the same period.

When Reliance announced a deal for Just Dial, the classifieds company was trading at nearly Rs 1,100 a share. Reliance made an open offer at Rs 1,022 a share. The company has lost a third of its value since then, while the BSE 500 is marginally in the green compared to its level then.

Sterling & Wilson, in which Reliance picked up a 40% stake, has seen its share price crumble by a fourth as against  a 10% decline in the broader stock index.

Outliers

But it’s not been a one-way street. There are a few outliers in the Reliance stable that have managed to grow and reward their shareholders, albeit starting as a penny stock.

For instance, Alok Industries, a textile company jointly acquired by Reliance and JM Financial through bankruptcy proceedings, was trading at under Rs 3 a share when the deal was struck. It has risen 8-10 times over the last two years.

Hathway Bhawani Cabletel, which remains a penny stock, had a similar run.

GTPL Hathway, another associate of Hathway, has doubled since the Reliance deal was announced in October 2018, outperforming the BSE 500 index two-fold.

The Bottom Line

Numbers show that a majority of stocks that have had a touch of Reliance have fared poorly on their own or when compared to the broader market.

But this could also be due to the fact that these stocks didn’t have much of a life even without it. For instance, one can argue that the cable companies were anyway going down with the advent of OTT businesses and Reliance’s own Jio broadband and associated television entertainment distribution business.

On the other hand, those that were trading as penny stocks have had a good run.

So, if Reliance is buying a company that is already in the dumps, hang on, it could be a multi-bagger. But if it is buying an already mature company, read this piece before making the next move!