Wednesday, July 29, 2009

Lights Go Out in New Delhi as Billionaire Ambani Brothers Feud

By Abhay Singh 

July 29 (Bloomberg) -- About 50 kilometers (31 miles) east of New Delhi, along a rutted dirt track through fields of corn and barley, lies an empty plot of land where a power plant was supposed to have stood, pumping electricity to alleviate blackouts in India’s capital.

Instead, there are rows of freshly planted saplings, two rusting corrugated metal sheds and a sign on one of them reading, “Reliance Energy Generation Ltd.”

The plant is four years late and a victim of a corporate feud between India’s richest resident billionaires, Mukesh Ambani, 52, and his brother Anil, 50. The two split the Reliance group in 2005 following a fight for control, three years after their father and the company’s founder, Dhirubhai Ambani, died without leaving a will. The conflict has persisted with a legal spat over supply of gas from Mukesh’s company that Anil’s plant needs.

“The loser is not just the brothers, but the whole country,” said Walter Rossini, who manages $283 million in an India fund at Aletti Gestielle in Milan. Power shortages impede development in India as more than 400 million lack electricity and supply falls short of peak demand by 16.6 percent, the World Bank said in June.

In the four years since the split, the feud has led to stalled projects, a court battle and a scuttled merger that may benefit a rival. In the case of the North India power plant, Anil claims his brother is refusing to honor an agreement that fixed the price, quantity and tenure of gas supply needed to start generating electricity.

Mukesh Ambani declined to comment for this story through his spokesman. Anil didn’t respond to questions sent by e-mail.

‘Monopolistic’ Producer

At a shareholder meeting yesterday, Anil directly attacked his brother’s business, Reliance Industries Ltd., India’s biggest company by market value, as a “monopolistic gas producer” that is going back on its word for the sake of greed.

“It is unfortunate that Reliance Industries has tried every trick in the book and apparently several outside the book to back out of its solemn, legal and contractual obligations,” he said.

The differing styles of the brothers -- who live under the same roof with their mother, Kokilaben -- were once seen as complementary. Mukesh was the traditional tycoon who helped build the company’s oil refinery, and Anil the financial wizard who steered the sale of a 100-year bond in the U.S.

Divisions have grown between Mukesh, who owns a cricket team, and Anil, who is funding movies for Steven Spielberg’s DreamWorks SKG and is married to a former Bollywood actress.

‘Bruising Egos’

“Both brothers have big, bruising egos,” said Nigel Nicholson, a professor at London Business School and co-author of “Family Wars: Classic Conflicts in Family Business and How to Deal with Them” (Kogan Page, 288 pages, $24.75). “Mukesh is very much the traditionalist, wanting to build a big industrial empire. Anil is highly political, wanting to go off and do his own thing.”

The clash is spurring investors to take positions in both brothers’ companies to cover themselves. The combined market value of their listed businesses grew fivefold to 5.2 trillion rupees ($108 billion) since they separated.

“Not knowing what will be the legal outcome, I prefer to hedge between the two,” said Aletti Gestielle’s Rossini, explaining his decision to own both Mukesh’s Reliance Industries and Anil’s Reliance Natural Resources Ltd., the parties on either side of the gas dispute.

Father’s Death

The first murmurs of the discord surfaced five months after their father died. In December 2002, Anil didn’t attend the unveiling of a mobile phone venture led by Mukesh. In July 2004, Reliance Industries’ directors approved a proposal to give Mukesh power to overrule Anil’s decisions, bringing the division to a head.

Under the 2005 agreement to split the Reliance group, Mukesh kept the petrochemicals, oil and gas units along with the flagship company, Reliance Industries. Anil got newer businesses such as power, telecommunications, financial services and entertainment. Both retained rights to the Reliance name.

In October 2007, Anil’s side of the business complained to the Indian markets regulator that Reliance Industries was trying to stall the initial public offering of the younger brother’s Reliance Power Ltd.

Merger Blocked

Nine months later, Anil’s mobile phone services company, Reliance Communications Ltd., called off merger talks with South Africa’s MTN Group Ltd. after Mukesh’s Reliance Industries threatened to block the sale if it wasn’t given the option to buy shares in Reliance Communications first. The clause is part of agreements the two brothers signed when they divided the business, said a senior official at Reliance Industries, who declined to be identified because the gas dispute is still in court.

The official also said the company’s move to bar the MTN merger was retaliation for steps it believed Anil’s group took to worsen the gas conflict.

Last year, Mukesh bought the Mumbai Indians cricket team in the Indian Premier League, the country’s biggest sporting franchise, and was seen at stadiums supporting his side. Anil, who is married to former Bollywood film star Tina Munim, announced an $825 million plan July 15 to fund Spielberg’s DreamWorks after its split with Paramount Pictures.

‘Image Management’

“Mukesh is trying to show he’s not a boring technocrat,” said Hamish McDonald, the Sydney-based author of “The Polyester Prince: The Rise of Dhirubhai Ambani” (Allen & Unwin, 296 pages, out of print), an unauthorized biography of their father. “There is a bit of image management going on, on both sides.”

The natural gas at the center of the latest dispute was discovered by Reliance Industries off the eastern coast of India in 2002, before the brothers separated. About a fourth of the power plant’s planned 8,000-megawatt capacity was meant for New Delhi, Anil told the Press Trust of India in August 2006. The city’s residents confront 8-hour-long power cuts that shut down air conditioners and fans in 45 degrees Celsius (113 degrees Fahrenheit) summer heat.

On June 15, Anil’s Reliance Natural won a case in the Bombay High Court, asking Reliance Industries to honor the 2005 family agreement, under which it was to supply 28 million cubic meters of gas a day at $2.34 per million British thermal units for 17 years. Reliance Industries shares fell the most in five months the day of the High Court ruling, while Anil’s company jumped 24 percent.

Court Battle

The dispute over the gas supply contract is scheduled to be heard in the Supreme Court, the country’s highest judicial body, on Sept. 1. Its decision can’t be appealed.

India’s oil ministry has become party to the case in the Supreme Court. Oil Minister Murli Deora said it is “unfortunate” that companies owned by the Ambani brothers sought to divide up the gas, a “national property.”

“It really doesn’t belong to them, but to the people of India,” Deora said by telephone from New Delhi on July 21.

At yesterday’s meeting for Reliance Natural shareholders, Anil criticized the oil ministry for interfering in a commercial dispute.

“This bogey of sovereign ownership is being raised with the sole purpose of attempting to bail out Reliance Industries and help them renege on their contractual commitments,” Anil Ambani said.

If Anil’s Reliance Natural loses the case in the Supreme Court, it will cast doubt over the entire 2005 separation agreement between the two brothers, said a person familiar with Anil’s case who declined to be identified because the matter is yet to be decided by the courts. The 2005 agreement has an indemnity clause, under which Anil can seek compensation if he can prove damages in court, said a person close to Reliance Industries who wouldn’t be identified because he wasn’t authorized to speak publicly on the matter.

‘Disturbs Investors’

“The new developments we hear about disturbs investors,” said Juno Madan, who manages $500 million of Indian stocks at New York-based Brahma Management Ltd., including shares of Reliance Industries and Reliance Communications. “They really should bring the feud to a close or it will affect them negatively.”

The men’s father, Dhirubhai, who was the son of a school teacher, founded Reliance using money earned during a stint in Aden, Yemen, where he worked at a gas station and sold petroleum lubricants. Back in India, Dhirubhai began trading yarn and spices, going on to make textiles, manufacture petrochemicals and refine oil.

Fortunes Shrank

The feud has begun to hurt the brothers’ deals. Anil’s inability to pursue a transaction with South Africa’s MTN proved to be billionaire Sunil Mittal’s gain. Mittal’s company, Bharti Airtel Ltd., Anil’s chief rival in the Indian cell-phone market, resumed talks with MTN when negotiations with Reliance Communications fell through. Mittal had unsuccessfully tried to strike a deal with MTN last year before Reliance Communications.

“If they drag on the fight too long, it might come to haunt them,” Madan said. “In this case it was Bharti that took advantage of it. Tomorrow it will be some other company.”

The global recession saw Mukesh’s fortune shrink to $20.8 billion in 2008 from $49 billion in 2007, according to the Forbes India rich list. Anil’s wealth contracted to $12.5 billion from $45 billion over the same period.

Mukesh, who lives with his family on separate floors to Anil’s family in Sea Wind tower in south Mumbai, is building a new $2 billion, 27-story tower, some 10 kilometers from Sea Wind on Altamount Road.

In February, the brothers were seen together welcoming guests at the 75th-birthday party of their mother, sparking rumors in the Indian media of reconciliation. The mother, who brokered the 2005 agreement, may be the only one keeping the feud in check, McDonald said.

“It’s become quite a heated internecine battle,” he said. “It’s not going to be patched over easily.”
(Source: Bloomberg)

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