Post-GTL deal failure, RCom turns to PE consortium

Also talks to other firms; valuation differences an issue.

After the failiure of the proposed deal with GTL over its telecom tower business, Reliance Communications (RCom) has begun talks with a consortium of two to three private equity (PE) funds who may pick up a 51 per cent stake in the said business.

The PE players could also bring in in a tower company as a partner in the consortium.

The company has also sounded out two other operating tower companies in India, in case they wish to acquire the tower business. With 50,000 towers, the company has been valued at Rs 30,000 crore, based on the valuation of Rs 60 lakh for each tower.

If either deal gets through, RCom expects to get a cash infusion of around Rs 15,000 crore.

RCom and GTL had yesterday called off a $11-billion (Rs 51,000 crore) deal to merge their telecom tower assets (n Rcom's case, it was formally a merger with Reliance Infratel, its tower subsidiary). The deal could have created an independent tower company with over 80,000 towers.

RCom had prepared a plan to clean its burgeoning debt through two key deals, this one and the sale of 26 per cent equity in the company, probably to Etisalat. Its total debt is Rs 33,000 crore and it had expected to reduce this by at least half.

Competing tower companies who are looking at acquisitions say they find the valuation of RCom's towers much higher than the market rate. "Most of the deals in the tower business of a similar tenancy have happened at Rs 50 lakh a tower, so we do not see the valuation as attractive," said the CEO of a leading tower company.

Sources close to the aborted deal say it fell through primarily because GTL was unable to raise enough cash. "RCom wanted to reduce its debt by transferring it to GTL and also get some cash. But GTL was unable to take so much debt on the books of the merged entity or pay as much cash as it had promised earlier. Instead, it was willing to offer RCom more equity in the merged entity. So, there was a gap in their interests" said a source closely monitoring the deal.

The counters of the deal included GTL and its promoters taking a 50.1 per cent stake, with 30,000 towers, in the merged entity, with the rest being with the Ambanis, who had 50,000 towers. GTL would take over a substantial portion of the debt in the merged entity, as well as pay some in cash to RCom.

"The cash infusion would have led to a significant improvement in RCom's leverage ratios, with the net debt-equity ratio in FY11 falling to 0.1x (from 0.6x)," said a report by Karvy Stock Broking.