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Reliance Jio gives RCom a second lease of life

Saturday, 8 June 2013 - 9:56am IST | Place: Mumbai | Agency: dna

Rs 12,000 crore deal for lifetime sharing of towers their second, after one for inter-city optic fibre signed in April.

A day after the annual general meeting of Reliance Industries, where chairman Mukesh Ambani vowed a disruptive 4G launch next year, the group’s telecom arm, Reliance Jio Infocomm, on Friday signed a Rs 12,000 crore deal ($2.2 billion) with Reliance Communications (RCom) to lease 45,000 tower sites for the rollout.

RCom currently owns around 52,000 tower sites, both on-ground and rooftop-based.

This is the second deal between Reliance Jio and RCom since Mukesh Ambani exited the telecom business in 2005 following differences with brother Anil.

The first one, for leasing 1.2 lakh km of RCom’s intercity optic fibre at a one-time upfront cost of Rs 1,200 crore, was signed in April, with the companies indicating several future deals would follow.

A third deal, for leasing RCom’s intracity fibre, is expected to be announced before December.

The latest deal is for lifetime (14-17 years) use of the RCom towers – for which payment would be staggered in monthly or quarterly instalments of Rs 14,000-20,000 apiece.

It also provides for joint working arrangements to set up additional towers at new locations according to Reliance Jio’s need.

Meanwhile, Reliance Jio will start setting up network infrastructure and acquiring equipment from vendors, whose deals have been finalised and begin setting up the same at RCom’s sites.

Reliance Jio is expected to become an active tenant on RCom’s towers within the next one or two quarters – about the same time when Reliance Jio is expected to also start active usage of RCom’s leased intercity fibre.

The tower deal, together with the earlier intercity fibre deal and the intracity fibre deal to follow, is seen as a huge positive for RCom, which is reeling under enormous debt and has been trying to hive off its tower business for the past three years, in vain, due to low valuation.

As of March 31, it had debt totalling Rs 38,753 crore, with net debt/Ebitda (earnings before interest, tax, depreciation and amortisation) of 6.5.

“This deal is broadly on the expected lines and is a positive for RCom as it opens a new source of revenue for them. Since April 2, when the fibre optic network sharing deal was announced, RCom shares have gained ~87% from Rs 63.3 on April 2 to Rs 118 on June 6 on wide speculation of this kind of deal coming in. We continue to remain Neutral on the stock as of now and wait for clarity on the nature of payments, rentals, etc,” Ankita Somani of Angel Broking said in a note.

Vinay Jaising and Vanessa A D’souza of Morgan Stanley has said as much in April, “Four more possible deals could cut RCom’s debt by Rs 7,700 crore more – nearly halving net debt/Ebitda and allaying our key concern. We see attractive valuation with limited downside.”

The four deals would be for RCom’s 70,000 km of domestic intracity fibre along with 1.15 million buildings wired; 22,000 km of US-based fibre; 65,000 km of sub-sea cable; and 50,000 towers running at low utilisation rates.

“We estimate total replacement cost at $8.25 billion. If RCom receives a further Rs 7,700 crore in the next two years, its net debt/Ebitda would go down from 5.3x in F13e to 2.9x by F16e. Upside to F15e earnings is 27%,” the Morgan Stanley analysts had said in a note.

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