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Reliance Communications (RCOM)
Telecom
Any tower sale deal would offer just value realization and not value creation.
Recent press reports indicate that RCOM is in talks with three bidders for the company’s
tower assets residing in the Reliance Infratel subsidiary. We note that RITL towers have
very little external tenancy and hence headline deal valuation (or speculative news flow
on the same) would reflect the tower lease terms that RCOM agrees to in the
transaction. It’s a sale-and-lease-back transaction, essentially – a high/low tower sale
valuation would reflect the high/low lease rentals agreed upon. Reiterate SELL.
The news – RCOM in talks with three bidders for the sale of towers
Press reports indicate that RCOM has shortlisted three bidders for the sale of its telecom tower
assets. Two of the bidders, as per the press report, are American Tower Company and Viom
Networks. The press report also indicates bids in the range of Rs3.9-4.5 mn per tower for a tower
base of 54,000 towers with an average tenancy of 1.1, held in the Reliance Infratel subsidiary,
94.5% owned by RCOM. Note that RCOM had indicated a tower base of 48,139 and a tenancy of
1.7 at end-August 2009 in its DRHP filed in Sep 2009. We believe that the lower tenancy as
reported in the press indicates the ‘full-rental equivalent tenancy (FRET)’ on RITL towers –
essentially, a CDMA player also leasing a GSM tenancy on the same tower (or a 2G players leasing
a 3G tenancy) does not pay full-rentals for the 2nd tenancy – it only pays an additional loading
charge, in the range of 5-20% of the base rental. With a bulk of RITL’s towers hosting both RCOM
CDMA and GSM tenants and marginal external tenancy, a FRET of 1.1 sounds reasonable.
The good – RCOM gets some much-needed cash infusion
At nearly 5X net debt to TTM EBITDA as at end-Dec 2010, RCOM has a stretched balance sheet.
The need to refinance maturing debt and heavy interest payment burden has impacted the
company’s ability to target wireless revenue share improvement (thought network investments and
price interventions) aggressively. Not just that, initial porting data suggests that RCOM has been
the worst-hit – a clear reflection of the perceived poor network quality that RCOM offers. Under
various scenarios that we evaluate in Exhibit 1, RCOM’s net debt to EBITDA (FY2012E) can get
reduced to 2.1-2.8X post the tower sale transaction.
The bad – it’s not value creation, it’s just value realization
Press reports assign a transaction value of Rs3.9-4.5 mn EV/tower, we find this expensive
considering a 1.1 average tenancy. However, we believe that such a transaction is possible if
RCOM agrees to a higher-than-market pricing in the sale-and-lease-back transaction (which is
what such deals are, fundamentally). Our scenario analysis (see Exhibit 1) suggests a post-deal fair
value of Rs76-79/share for RCOM if the transaction is done at 8XFY2012E EBITDA and Rs90-
95/share, if at 10X. Retain SELL; TP Rs90.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
Any tower sale deal would offer just value realization and not value creation.
Recent press reports indicate that RCOM is in talks with three bidders for the company’s
tower assets residing in the Reliance Infratel subsidiary. We note that RITL towers have
very little external tenancy and hence headline deal valuation (or speculative news flow
on the same) would reflect the tower lease terms that RCOM agrees to in the
transaction. It’s a sale-and-lease-back transaction, essentially – a high/low tower sale
valuation would reflect the high/low lease rentals agreed upon. Reiterate SELL.
The news – RCOM in talks with three bidders for the sale of towers
Press reports indicate that RCOM has shortlisted three bidders for the sale of its telecom tower
assets. Two of the bidders, as per the press report, are American Tower Company and Viom
Networks. The press report also indicates bids in the range of Rs3.9-4.5 mn per tower for a tower
base of 54,000 towers with an average tenancy of 1.1, held in the Reliance Infratel subsidiary,
94.5% owned by RCOM. Note that RCOM had indicated a tower base of 48,139 and a tenancy of
1.7 at end-August 2009 in its DRHP filed in Sep 2009. We believe that the lower tenancy as
reported in the press indicates the ‘full-rental equivalent tenancy (FRET)’ on RITL towers –
essentially, a CDMA player also leasing a GSM tenancy on the same tower (or a 2G players leasing
a 3G tenancy) does not pay full-rentals for the 2nd tenancy – it only pays an additional loading
charge, in the range of 5-20% of the base rental. With a bulk of RITL’s towers hosting both RCOM
CDMA and GSM tenants and marginal external tenancy, a FRET of 1.1 sounds reasonable.
The good – RCOM gets some much-needed cash infusion
At nearly 5X net debt to TTM EBITDA as at end-Dec 2010, RCOM has a stretched balance sheet.
The need to refinance maturing debt and heavy interest payment burden has impacted the
company’s ability to target wireless revenue share improvement (thought network investments and
price interventions) aggressively. Not just that, initial porting data suggests that RCOM has been
the worst-hit – a clear reflection of the perceived poor network quality that RCOM offers. Under
various scenarios that we evaluate in Exhibit 1, RCOM’s net debt to EBITDA (FY2012E) can get
reduced to 2.1-2.8X post the tower sale transaction.
Press reports assign a transaction value of Rs3.9-4.5 mn EV/tower, we find this expensive
considering a 1.1 average tenancy. However, we believe that such a transaction is possible if
RCOM agrees to a higher-than-market pricing in the sale-and-lease-back transaction (which is
what such deals are, fundamentally). Our scenario analysis (see Exhibit 1) suggests a post-deal fair
value of Rs76-79/share for RCOM if the transaction is done at 8XFY2012E EBITDA and Rs90-
95/share, if at 10X. Retain SELL; TP Rs90.
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