GTL-Rel Infratel merger plans called off post due diligence

Two months after the Rs50,000 crore merger talks between Reliance Infratel and GTL Infrastructure was announced, the parleys have been ‘timed out’ — the two companies let non-binding discussions die with the deadline set of August 31.

A deal would have created the world’s largest independent telecom infrastructure company, neither owned nor controlled by any telecom operator.

Sources said the two could get into talks once again for an infrastructure deal structured differently.

“RCom is now engaged in discussions with certain other strategic and financial investors, to pursue a similar transaction aimed at significant reduction in the company’s debt and unlocking of value for our shareholders from the passive infrastructure and related assets in its 95% owned subsidiary, Reliance Infratel,” a company spokesperson said.

RCom said further announcements on this will be made in due course, but did not reveal the companies with whom talks were on.

GTL Infrastructure said the non-binding term sheet signed by both parties on June 27 expired on August 31 and both parties neither extended the term sheet nor entered into a definitive transaction agreement. “Therefore the contemplated merger would not take place,” GTL said.

Even as neither RCom nor GTL commented on why they couldn’t conclude a deal, but sources close to the development said the time was too short to complete the complex transaction.
One of the hurdles cited was that of the deal not being to able offer good value to RCom’s minority shareholders.

Another source said raising money for the transaction may have been an issue, but an investment banker counters this, saying funds were already tied up.

Sachin Salgaonkar, Piyush Mubayi and Paras Mehta, analysts with Goldman Sachs in a note to clients on Monday said the decision to call off the deal could have been taken “after the due diligence done by GTL on Reliance Infratel’s towers”.

The trio has listed many reasons for the transaction failing, including GTL being unable to raise the required capital; debtors not comfortable on moving the debt on Reliance Infratel’s books to the proposed merged entity’s books; the original proposed valuation of $11 billion appearing unfavourable after due diligence etc.

“We do not rule out both parties potentially entering into discussions again (based on revised terms) in the coming months,” Salgaonkar, Mubayi and Mehta wrote.

Reena Verma Bhasin, analyst with BofA Merrill Lynch, said in a note the failure may “revive investor concerns about the seriousness of RCom’s balance-sheet deleveraging plans.”    

Bhasin said RCom’s tower monetisation plans through a public issue and mergers & acquisitions “appear fraught with execution and valuation risks”.

“Based on our interactions with GTL, it seems unlikely to us that deal-financing was a major bottleneck,” Bhasin said. “The balance-sheet risks remain high despite hopes of a white knight.”
In June, RCom had said in a statement that the deal with GTL would be executed through demerger of Reliance Infratel’s tower assets into GTL Infrastructure.

It was projected as the largest domestic M&A deal. The company said the proposal would result in substantial unlocking of value through cash infusion to RCom, which would in turn reduce its gross debt, improve leverage ratios and enhance financial flexibility.

Meanwhile, Reliance Infratel was proposing an initial public offering of its equity shares, depending on the market conditions. It has already filed a draft red herring prospectus with the Securities and Exchange Board of India (Sebi).

If the deal with GTL would have closed, the merged entity would have over 80,000 towers and more than 125,000 tenancies from across 10 telcos — RCom, Aircel, Etisalat, MTS, Uninor, Videocon Mobile, Tata Teleservices, Vodafone and S Tel. Currently, Reliance Infra has 50,000 towers, and GTL around 32,000.