Reliance Comm, GTL Infra shares up after tower deal

Shares in Reliance Communications rose as much as 6.4% today after India's No 2 cellular carrier announced an agreement yesterday to offload its telecoms towers to GTL Infrastructure in a deal that a source said would decrease its debt by about $3.9 billion.

The combined operations would have an enterprise value of over $11 billion and would own more than 80,000 towers, with more than 125,000 tenancies from over 10 operators, Reliance Communications said.

The deal prompted Macquarie to raise its rating on Reliance Comm to "outperform" from "underperform", making it the brokerage's only positive pick in a crowded Indian telecoms sector that is locked in a fierce battle for customers.

GTL Infrastructure shares were up as much as 9%, and were the most active major counter on the two main exchanges, while Reliance Comm was the third most active on the Bombay Stock Exchange.

Exact terms were not disclosed, but the deal will result in Reliance Comm, controlled by billionaire Anil Ambani, reducing its debt by 180 billion rupees ($3.9 billion), a person with direct knowledge of the matter said.

Reliance Comm's debt before the deal stood at about 330 billion rupees, including the cost to finance its recent third-generation (3G) spectrum licences.

"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," Macquarie analyst Shubham Majumder said in a note.

Macquarie lifted its earnings per share forecasts for Reliance Comm by 9% and 8%, respectively, in the financial years ending in March 2011 and 2012.

Reliance Comm shareholders will receive shares in GTL Infrastructure as part of the deal, although the swap ratio has not yet been finalised.

"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," Macquarie said.

Reliance Comm is continuing with its effort to sell a 26% stake in itself. So far, only Abu Dhabi's Etisalat has publicly acknowledged that it is considering a deal with Reliance Comm.

"While the announced deals would help in strengthening the balance sheet, RCOM's key challenge is to profitably grow its revenues," Deutsche Bank analysts wrote in a research note.

India's 15-player cellular industry is fiercely competitive, with carriers engaged in a margin-crushing tariff war and burdened with the expense of 3G licences that cost far more than expected in a recent government auction.

Shares in Reliance Comm are up by 37.6% since the start of June, far outperforming the 4.3% gain in the Sensex.

Under the terms of yesterday's deal, GTL Infrastructure chairman Manoj Tirodkar would own 30% to 35% of the combined tower business and Ambani's Reliance ADA Group would own 26%, with shareholders in the two firms holding the remainder, sources with direct knowledge of the matter said.

Spinning off tower holdings into an independent firm is intended to make it easier to attract rival carriers as tenants. The combined tower operations of Reliance Comm and GTL Infrastructure would be the largest telecoms infrastructure firm in the world not controlled by a carrier, Reliance Comm said India is the world's fastest-growing cellular market and with 600 million users is the second largest, after China. (US$1=46.15 rupees)