RCom's asset sale at lower valuations

Deal will help it focus on the remaining business

The Reliance Communications (RCom) stock surged nearly 32 per cent after the firm announced that it is reducing its debt by Rs 25,000 crore over the next three months by selling assets, which will help it exit the strategic debt restructuring process. 

The company, which had a debt of Rs 45,000 crore at the end of October, will sell its telecom towers, fibre network and other assets. It will also monetise its 125-acre real estate at the Dhirubhai Ambani Knowledge City, pegged at Rs 25,000 crore. The special purpose vehicle, which will be holding the real estate assets, will take on a debt of Rs 10,000 crore with no recourse to RCom.

The company is also looking at equity infusion from strategic partners into what will be left after it parts with its real estate and Indian mobility assets. These are the Indian and global enterprise businesses that include data centres and undersea cable network. The new RCom, as Chairman Anil Ambani calls it, is projected to have a debt of Rs 6,000 crore. 
 

According to the company, the enterprise value of these businesses is pegged at Rs 15,000 crore, based on valuation done by Credit Suisse. While the debt reduction plan signals easing of a big overhang, it also reflects a sharp fall in valuations of the various assets that the company is selling.

First, the tower assets. The last deal the firm had announced was for sale of its tower assets (51 per cent stake) to Brookfield for Rs 11,000 crore, pegging the total cash value for that asset with 43,000 towers at Rs 21,500 crore.

Analysts peg the enterprise value (including a debt of Rs 11,000 crore) of Reliance Infratel, in which RCom has a 90.5 per cent stake, at Rs 23,000 crore. However, the deal needs to be looked at in conjunction of the RCom-Aircel merger and given that additional tenancies (leading to higher revenue and profit) would not have materialised, the deal value would have come down.

As far as the spectrum assets are concerned, RCom has 222 MHz of spectrum, of which 70 per cent is liberalised (most of it in 800 MHz and 2,100 MHz bands). Given the last auction price, this, according to analysts at Goldman Sachs, could be valued at $1.7 billion (Rs 11,000 crore). Total value of all spectrum for the balance of the validity period is estimated at about Rs 19,000 crore. Finally, the inter- and intra-city fibre network. 

Analysts peg the pan-India network of fibre at Rs 4,500 crore.

Put together, the total value of the assets were much more than the Rs 25,000 crore the firm is estimating it would be able to garner. The lower valuation is a sign of the worsening operational situation of the company, brought about both by its own lack of execution as also the cut-throat competition from newbie Reliance Jio. RCom’s revenue market share has declined from 14 per cent at end-FY08 to 3 per cent now.

Despite the deal, investors have to be cautious about taking any exposure to the new RCom, given earlier deal announcements did not materialise, while the operational situation has worsened. More importantly, the finer details of the asset sale plan are not known and an independent bid evaluation committee is overseeing on how the assets will be sold. Also, a few unsecured creditors also have to agree. All these could have a bearing on the asset sale plan and value.