RCom: Tower deal to cut debt, more cash required

Remaining businesses will need to generate healthy cash flow for servicing the residual debt

The Reliance Communications (Rcom)’s stock gained 2.6 per cent after the company announced it was selling majority stake in its telecom tower subsidiary, Reliance Infratel, to Canada-based asset manager Brookfield for Rs 11,000 crore. RCom, however, will retain 49 per cent stake in this business to be monetised at a later date, given the potential for growth. The firm expects to gain from significant growth in tenancies due to proliferation of 4G networks and accelerated trend in data consumption.

Given the enterprise value (EV) of Rs 21,500 crore, the valuation of the deal on an EV per tower basis is fair at about Rs 49.7 lakh, in line with the American Tower Company (ATC)-Viom Networks deal signed last year.

This follows last month’s merger of RCom’s wireless assets with those of Aircel. As in the current transaction where it is retaining 49 per cent, RCom will have 50 per cent stake in the merged wireless entity.

Both these are expected to bring down total debt of Rs 42,000 crore by Rs 25,000 crore. RCom, which will be left with a debt of Rs 17,000 crore, had indicated after the tower deal, the net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) levels would be far lower than the 5.56 times level as of March and it will be in-line with the industry. An analyst with a domestic brokerage, however, says it will still not be easy for the residual businesses to service the remaining debt.

However, if RCom is able to monetise more assets fast, it should help. The company, for now, is also looking to monetise its real estate assets for Rs 5,000 crore by March next year, which should bring down the debt to Rs 12,000 crore. Likewise, plans are afoot to sell other assets.

After the last two transactions, RCom will be left with undersea cable business, fibre optic network, data centres, enterprise business, DTH among others. RCom has indicated it did not need major capital infusion, especially in the telecom business after the merger with Aircel and Shyam Sistema, as well as the spectrum sharing with Reliance Jio.

While the debt reduction moves are positive, for RCom shareholders to benefit on the whole, it is necessary the wireless and tower businesses, under the new structure, deliver strong performance. This is because, markets tend to value stake in businesses held by any company at a discount to intrinsic value (Grasim trades at a discount despite having majority stake in UltraTech). So, for the sum-of-the-part valuation of RCom to go up, these two and other businesses will have to deliver well to create value.

Analysts will keep an eye on these to review their call on the stock. More than half the analysts tracking the stock have a ‘sell’ rating prior to the Friday’s announcement.