Analysts see tower deal a booster signal for RCom

RCom’s decision to merge its tower business with GTL is widely believed to be positive for the firm’s financial health as well as street performance.

The telco’s stock price has already surged about 45% over the last 30 days, influenced largely by the talk of bonhomie between RIL and ADAG.

RCom announced a deal to sell off its tower arm Reliance Infratel to GTL Infrastructure. Though the structure of the deal and the share swap ratio are not yet announced, the entity will be an independent firm not held by any single company.

RCom has not yet disclosed the exact quantum of cash coming into the company as part of the transaction.

However, analysts Abbas Merchant and Archit Singhal of broking firm Jaypee Research have valued the deal at Rs 25,000-30,000 crore based on the Aircel-GTL tower deal in January this year.

“Taking benchmark of the Aircel-GTL deal, in which GTL Infra paid Aircel Rs 8,400 crore for 17,500 towers at a value of Rs 48 lakh per tower, Reliance Infratel has a better tenancy ratio of around 1.6x and hence may command a premium, giving it a value of Rs 50-60 lakh per tower. With 50,000 towers, it is expected to command a valuation of Rs 25,000-30,000 crore,” Merchant and Singhal wrote in a note to clients on Monday.

The merged tower company will become the largest independent tower company with over 80,000 towers (50,000 towers from Reliance Infratel and 30,000 towers from GTL Infrastructure) behind Indus Towers (a combined entity of Bharti, Vodafone and Idea) which has 100,000 towers.

“We believe this is a significant positive catalyst for RCom and positive for RCom’s shareholders, as it sets the company up for focused execution of its access and wholesale businesses. It also gives the power to RCom shareholders to continue to participate in the towers growth story in India through a significantly improved, much larger and focused vehicle,” Shubham Majumder of Macquarie Research wrote in a note to clients on Monday.

Analysts see a slew of financial benefits for the firm.
According to Majumder, the proposed deal will have five key financial implications on RCom such as a cash inflow of Rs 18,000 crore to deleverage balance sheet, an annual interest cost saving of Rs 1,600 crore, an annual employee cost saving of Rs 300 crore, tower company demerger excluding the fibre optic cable networks to result in depreciation reducing by Rs 675 crore per annum and annualised tower rental payout of Rs 2,500 crore as new outflow.

On the flipside, market observers believe the financial benefits ofthe deal will help RCom maintain its aggressive posture in pricing, implying even lesser average revenue per user —- a negative for the entire sector.

“RITL (Reliance Infratel) tower sale deal to GTL is positive for RCom in at least two ways —- higher-than-expected valuations and part-cash nature of the deal, and cash infusion de-leverages RCom’s balance sheet, increasing its ability to slug it out in the competitive dogfight in the sector; this is of course, negative news for the sector,” Rohit Chordia, Kawaljeet Saluja and Vineet Thodge of Kotak Institutional Equities Research wrote in a note to clients on Monday.

Others, like Alok Shende, founder of Ascentius Consulting, a Mumbai-based research firm on telecom and IT sectors, however, believe a large tower firm will ensure constancy of price.

“The merger between GTL and RCom’s tower business will create a behemoth that will significantly alter the industry structure. Owing to the increasing consolidation, 2G, 3G and BWA service providers will have lesser choice and equally lesser negotiating power on the tenancy rentals and because of which there will also be a higher floor on how low the prices for voice calls will go further,” said Shende.