RCom: Deleveraging boost from tower deal

Should help improve operational metrics investments

Reliance Communications (RCom) signed a non-binding term sheet with Tillman Global Holdings and TPG for sale of its tower assets and related infrastructure in a deal estimated at Rs 22,000-23,000 crore. The company is looking at spinning off its tower asset business into a separate special purpose vehicle to be owned by the Tillman and TPG. The acquires are also evaluating purchase of RCom's inter-city and intra-city optic fibre assets, which will be an independent transaction. The fibre assets deal is expected to be Rs 6,000-7,000 crore. While the deal is a positive, the stock lost 3.1 per cent to close at Rs 81 a share underperforming the broader markets, which were down by about a per cent. The key reason for the stock's fall is the deal is at a discount to valuations of Rs 25,000-30,000 crore, which the company was seeking six months ago.

Analysts, however, say the deal is in line with the current valuations of the sector. The RCom tower sale pegs the enterprise value per tower for the 45,000-tower portfolio at Rs 49 lakh, which is about the same that American Tower Company paid for Viom India's 42,000 towers. Analysts say the 40 per cent valuation discount (Rs 80 lakh per tower) to sole listed telecom tower company Bharti Infratel, which has 87,000 towers and three anchor tenants, is justified.

RCom indicated it would use the proceeds (Rs 30,000 crore from two deals) to retire its debt of Rs 42,000 crore; after the transaction, it would be left with Rs 12,000 crore debt. The company paid interest costs of Rs 2,755 crore in FY15 and this should fall to Rs 800 crore if the debt reduction takes place. Net debt to Ebitda (including recent spectrum payouts), which is about six times, should come down by half to more manageable levels after the deal, expected to be concluded in mid-January. Operating costs, though, will increase on account of lease rentals. The details are not known yet, but analysts estimate the expenses to be much lower than the savings on interest cost front. "If 100 per cent of the tower assets are sold, the deal would be 47 per cent and 13 per cent PAT-accretive in F17 and F18, respectively, because of lower interest and depreciation expenses," said Morgan Stanley's analysts who have an overweight on the stock.

While this is positive, the company's operating metrics as well as investments have been lagging peers for many quarters. In the September quarter, for instance, its India revenues grew only 0.4 per cent, while Idea and Bharti reported wireless business revenue growth of 14.7 percent and 8.1 per cent, respectively, compared to the year-ago period. Consequently, RCom has been losing market share to its larger peers. The lower debt, however, will help the firm improve its investments in network investments and 4G, which have been much below its larger peers.

Analysts advise investors to await the completion of the deleveraging process and improvement in operational metrics before considering any investment in the stock.