Update on RCOM’s submarine cable assets’ IPO :: Nomura research,

Preliminary submarine cable prospectus released on 5th July
RCOM released the preliminary prospectus for the listing of its cable
assets as a business trust in Singapore last week. At this stage the
pricing hasn’t been determined, but press articles indicate a pricing
range of USD1.09-1.32 per unit, with an implied market cap of USD1.27-
1.54bn. The prospectus states a payout of at least 90% of distributable
free cash in dividends and projects USc12.5 for FY13F. This implies a
9.5%-11.5% yield at the offer price indicated as per press, which is
attractive vs the average telco yield of 6-7% across the region. However,
this pricing range also implies a listing EV/EBITDA of ~10-12x FY13F
(on pro-forma EBITDA forecast of USD131mn with no debt at end of
FY12F). Hence, we recommend some caution, and also given the lack of
clarity/ inconsistency around group strategy, a ~10% yield alone may not
be enough to entice many investors. We are, in general, positive on
submarine cable businesses given their inherent cash/margin potential,
but we don’t have enough comparables/ details to assess the merits of
this transaction yet. (Source: Reliance’s GTI Said to Offer Up to 11%
Yield in Singapore, Bloomberg, July 9 2012).

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Positive catalyst, but only the first step to deleveraging
A listing of its submarine cables assets could be a positive catalyst for
RCOM given its many attempts to monetize its various assets. However,
if we assume a 65% divestment in cables (or roughly US$1bn proceeds
based on price indicated by press), and these proceeds are used to
reduce debt at RCOM level, gearing still remains high at close to 5x on
our estimates.
Key highlights from the preliminary prospectus
 RCOM has created the Global Telecommunications Infrastructure
Trust (GTI Trust), which now owns the submarine cable assets. This
trust released the preliminary prospectus for an IPO listing in
Singapore.
 Total number of units after the IPO is expected to be 1,163mn and
RCOM could potentially look to divest 55-65%, we understand, based
on press reports, which highlight a price range of USD1.09-1.32 per
unit. This implies a market cap in the range of USD1.27-1.54bn.
 As per the prospectus, the trust expects to at least distribute 90% of
cash flows to unit holders. For FY13F, USc12.5 per unit is estimated to
be distributed. This implies a yield in the range of 9.5-11.5%, based on
above mentioned unit price range. However, these are preliminary
estimates at this stage and are also subject to actual performance of
the company (share price).
 As per pro forma statements, GTI Trust has no debt as on March
2012. This would imply a FY13F EV/EBITDA multiple of 10-12x (based
on FY13F pro forma projections provided in the prospectus). This
compares to the current regional average of 6-7x.


We believe a 55-65% divestiture could reduce RCOM’s debt levels by
USD700mn-1bn. RCOM’s net debt at the end of March quarter stood
at USD6.5bn, with net debt-to-EBTIDA of 5.5x. If we assume USD1bn
in proceeds were to used to lower debt, we estimate net debt to
EBITDA could fall close to 5x.