RCom's missed opportunities

The past couple of days have been a mixed bag for Reliance Communications (RCom). On Monday, the company missed paying interest on bonds — its first such failure. The price of the $300 million of 6.5 per cent securities on which the company owed the interest payment has slid to a record low of 39.4 cents, according to prices compiled by Bloomberg.

A day later, however, it was good news once again for the telecom firm. A dozen Indian and overseas companies are reportedly “vying for” a 51 per cent stake in the company’s non-wireless assets. This should ideally be good news for RCom, though it’s anybody’s guess why these dozen-odd companies didn’t show such enthusiasm earlier.

Lenders must be keeping their fingers crossed as the company’s asset-sale-to-reduce-debt theme has played out for quite some time with negligible results. RCom has repeatedly in the past failed to monetise its capabilities in the optic fibre network fully. Its discussions with institutional and private equity players to sell the non-wireless businesses, particularly undersea networks and the optic fibre, reached a dead end every single time. Plans to list RCom’s tower arm did not come to fruition either, while an earlier deal that would merge the tower business with a rival’s also collapsed.

In any case, proposed sales of other businesses have also been talked about for years, and they have simply been delayed to the point where RCom is in no position to drive a hard bargain with potential buyers.

The same thing happened in May this year when the company came out with its first-ever yearly loss of Rs 1,283 crore (for FY17). The losses, coupled with a high debt of around Rs 45,000 crore as on March 2017, prompted banks to raise a red flag. To make matters worse, rating agencies downgraded RCom and the stock tanked. “Good news” came from the lenders, which granted a "standstill" till December 2018 on the debt. In return, RCom promised two crucial deals — merger of the wireless business with Aircel and a 51 per cent stake sale in Reliance Infratel to Brookfield Infrastructure Partners. As things emerged, both the deals fell through.

RCom’s latest debt repayment plan envisages raising Rs 27,000 crore through sales of assets and lenders converting Rs 7,100 crore loans into 51 per cent equity. Besides, the company said it would raise an additional Rs 10,000 crore through sale of some of its prime properties. RCom said that lenders should be “happy and thrilled” with the new plan.

Lenders, however, are not showing any signs of elation as they see no reason why they should agree to pay a steep premium to the company’s current traded price. The company’s market capitalisation has dropped by a quarter since a strategic debt restructuring (SDR) scheme was announced on June 2, and this would surely impact the conversion price. Its plan to monetise real estate could also be challenging as the company has been planning sell its prime real estate in Delhi for over three years now but has found few takers.

RCom is also hoping that it will be able to rake in Rs 14,000 crore from its spectrum sale though the value of the spectrum is Rs 26,000 crore. However, analysts say there is already a huge oversupply of spectrum — after all, Telenor and Tata Teleservices gave their spectrum virtually free to Bharti Airtel.
 

While it is true that Reliance Jio did add to the telecom industry’s misery, the fact also is RCom was steadily losing ground even before Jio’s entry. It was hurt by its continued reliance on antiquated code division multiple access technology to run its mobile services.

Probably, the RCom management refused to see the writing on the wall. For example, in 2014, when its debt was already Rs 35,000 crore, the company talked about aggressive participation in the 2015-2016 spectrum auctions to launch 4G services. At the same time, it promised to cut its debt to under Rs 20,000 crore in the next 24 months.

This tale of grandiose statements started much earlier. Even as the debts kept piling on, RCom’s penchant for growth at any cost became evident from a presentation in May 2008 when it rolled out the GSM-EDGE telecom infrastructure. “Each tower installation needs diesel generators — and all the generators combined produce the energy that can power an entire country like Kenya. The fibre optic cables that connect these towers can go around the whole Earth multiple times. And the towers themselves, if stacked one on top of the other, will be 40 times as tall as the Eiffel tower,” the presentation said. In the heady days of these tall claims, what the company perhaps failed to ask is where is the money coming from. By 2011, this trajectory of massive pre-emptive capital expenditure forced the firm into a debt trap — raising fresh debt to repay old debt.

One hopes the latest debt repayment plan submitted by the company to lenders succeeds, finally. Given the scale of its debt and frequent collapse of its turnaround plans, RCom seems to have only one alternative: Exit completely.