Mukesh Ambani's succession plan needs three superstar businesses

Asia’s richest man has promised to accelerate what he claims will be a “momentous leadership transition” to the next generation. Just how Mukesh Ambani will carve up his $217 billion empire is still under wraps, but one thing is clear: The eagerly anticipated corporate succession will be underpinned by the emergence of at least three superstar businesses, each of which will aim for a very large share of profit in its particular industry.

A clean transfer of wealth is important to the 64-year-old Indian tycoon, who was embroiled in a bitter inheritance dispute with his younger brother after their father died in 2002 without a will. To avoid any such unpleasantness, one idea under consideration is to put the group’s flagship Reliance Industries Ltd. under the control of a trust-like structure, Bloomberg News reported in November. Ambani, along with wife Nita, 59, and their three children — twins Akash and Isha, 30, and their younger sibling Anant, 26 — would be on its board.

Having the family jointly oversee the whole may be a superior option to dividing up the existing oil refining and petrochemicals, telecom and retail assets. That’s because Reliance is currently in the middle of a very expensive switch to clean fuels by investing across the entire value chain of solar, batteries and hydrogen, something that no other traditional energy company has yet attempted. As Sanford C. Bernstein analyst Neil Beveridge puts it, “If Reliance can pull this off, then the value creation and earnings potential will be substantial.”

Cost of capital will hold the key to this ambitious makeover. Just as steady cash flows from refining made it possible for Reliance to incubate India’s leading telecom from scratch, profits from digital businesses and retail may allow the next generation of leaders to replace hydrocarbons--the Ambani family’s traditional source of wealth--with green energy over the next decade.

Mobile internet. Retail. New energy. All three are strong candidates for superstardom, defined by McKinsey & Co. as the top 10% of companies capturing 80% of positive economic profit. Research has shown that the very low interest rates of the past decade have played a role in enabling the rise of these “winner take all” firms. In developed economies like the U.S., the advantage for the market leader became more pronounced as benchmark borrowing costs hit the zero lower bound. Even if the age of ultra-loose financial conditions is now over, Reliance’s balance sheet, which Ambani made free of net debt two years ago, can easily withstand a fresh round of leveraged expansion.

The billionaire’s road to dominance is perhaps the clearest in telecom. An adverse trifecta of high 4G investment, intense price competition and exorbitant claims by the government depressed the return on capital employed in the Indian telecom sector to 3% from 8% five years ago. Expect that drag to lift now as operators raise tariffs, boosting the industry’s annual earnings(1) to more than 1 trillion rupees ($13 billion) by March 2023, a 40% jump in two years, according to Crisil, an affiliate of S&P Global Inc. Given its strategic partnerships, including an $87 Android-based smartphone custom-built for it by Alphabet Inc.’s Google, Reliance’s Jio Platforms Ltd. is in a strong position to benefit from improved pricing and explosive growth in data demand.

Retail, however, may prove a harder nut to crack. Reliance is stitching up an alliance of neighborhood shops, which will take orders via the popular WhatsApp chat service owned by Meta Platforms Inc. (formerly known as Facebook Inc.). But the crux of Ambani’s plan to dominate Indian commerce was to buy the assets of Future Retail Ltd., a debt-laden Indian retailer flirting with bankruptcy. Its 16 million square feet of store space would have tagged on nicely to Reliance’s own 37 million square feet. However, Amazon.com Inc., which lent rescue funds to Future’s founder on the condition that the stores won’t be sold to Reliance, is going all out to block the acquisition using legal proceedings.

If in retail the competition is going to be largely from Amazon, in new energy, Ambani will go head to head with rival Indian tycoon Gautam Adani, who wants to be the world’s largest renewables producer by 2030 and has vowed to invest $70 billion to realize that ambition. Ambani has made a more immediate commitment of $10 billion over three years, but has already demonstrated the seriousness of his intention with six deals in the clean energy space in as many months.

No large corporate succession is without risks. With superstars, the biggest threat is of a drastic reordering of the relationship between the state and successful private firms. But the risk of such a Chinese-style shock is low in India. With some luck, the next generation of the Ambani family is going to inherit not one or two but at least three well-oiled wealth machines. And hopefully no ownership disputes.