RCom-GTL deal: Getting the asset call right

While the Reliance Communications (RCom) deal to sell its tower assets, currently under its subsidiary Reliance Infratel, to GTL Infra will get the company some much-needed cash and reduce debt, current valuations have already priced in the upside, according to analysts.

The Street has been positive about the asset sales news, pushing up the RCom and GTL Infra stock by 43 per cent and 34 per cent from their respective monthly lows. The RCom stock surged nearly five per cent, while the GTL Infra scrip rose four per cent to end at Rs 201 and Rs 47 on Monday.

Improving numbers
The cash-stock deal will involve the transfer of RCom’s tower assets (50,000 towers) to GTL, with the merged entity expected to command an enterprise value of Rs 50,000 crore. In return, GTL will pay RCom about Rs 15,000 crore in cash and issue new shares to RCom shareholders.
 

STILL EXPENSIVE
FY11E	FY11E	FY12E
Net sales	23,959	26,116
% change	8.30	9.00
Ebitda margin (%)	34.20	34.10
Net profit	2,715	3,172
P/E (x)	15.83	13.49
*Change is y-o-y                                        Source: Edelweiss

Analysts believe the deal — at roughly Rs 60 lakh a tower — is at a premium to recent deal valuations of Rs 40-50 lakh and is, thus, a good deal for RCom. Further, the company’s debt pile of Rs 34,000 crore will nearly halve after the transaction, with debt-to-equity level reducing to about 1.5.

Though the deal will reduce interest (the company paid about Rs 1,000 crore in 2009-10), depreciation and workforce costs, an HSBC report says the transaction is marginally dilutive in terms of earnings per share, considering tower rentals of Rs 27,000 per tower per month.

More competition?
Given that RCom will get cash on its books and the fact that it has already reduced its international rates, will the competitive scenario worsen? Analysts say there is likely to be a selective lowering of prices as players want to be in the top three-four positions as far as net additions are concerned.

Companies are looking at outright asset sales (as in the case of RCom) or listing of such joint ventures (like Indus) at a later date as they want to monetise assets to pay for 3G or excess spectrum charges later on.

Says KPMG’s National Telecom Head Romal Shetty: “There will be selective cuts, but we will not see the intensity observed over the last one year.” Analysts maintain companies will continue to look at volumes rather than margins and their profitability will improve as consolidation kicks in over the next 24-30 months.

Premium valuations
Thus far, the debt overhang and the intense price war were key hurdles for RCom in getting better valuations than peers. Though the deal is a positive, Edelweiss believes the stock has got re-rated significantly in the recent past and trades at FY10 enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) of 6.7 times, which is at a 17 per cent premium to Bharti’s 5.7 times and Idea’s 4.6 times.