 "As Reliance group shrinks, questions emerge")
The Anil Ambani-led Reliance group’s asset-sale plan to pare debt gained momentum in the past month as Reliance Communications announced its plans to sell a majority stake in its telecom tower venture and Reliance Infrastructure’s divestment of its power transmission assets.
Once completed, the transactions could fetch upwards of Rs 13,000 crore, which will be utilised to retire the group’s debt that stood at over Rs 143,000 crore at the end of the last financial year.
The divestment is a part of the group’s mammoth asset monetisation drive which, it hopes, will generate over Rs 50,000 crore.
However, the devil lies in the detail, analysts and consultants add, and what is crucial for the group is to complete these deals and unlock the projected cash flows.
The drive began in December 2013 when the group sold its multiplex business to Carnival Cinemas for Rs 700 crore. Since then, the group has managed to close deals worth Rs 9,622 crore.
Amongst all group companies, the one laden with the heaviest debt is Reliance Communications, or RCom (see Reducing the burden).
The sale of its tower business was delayed when talks with Tillman Global Holdings and TPG Asia, announced in December 2015, failed. In October 2016, RCom signed a non-binding agreement to sell 51 per cent in the telecom tower business to Brookfield Infrastructure Group for an upfront cash payment of Rs 11,000 crore.
“It is a non-binding agreement and the value being stated is at a premium compared to other recent tower deals, leaving room for some doubt. It is important to see if this deal reaches completion,” says an analyst from a domestic brokerage who does not want to be identified.
More measures are in the offing. In September, RCom announced the merger of its wireless assets with those of Aircel into a new entity, which would result in RCom transferring Rs 14,000 crore of debt to this new company.
RCom had also entered into a spectrum-sharing agreement with Mukesh Ambani’s Reliance Jio in April. “What we have accomplished is a virtual merger between RJio and RCom,” Anil Ambani said at the company’s annual general meeting. The deal has resulted in both companies sharing spectrum, network, fibre and towers, which has done away with the need for major capex for RCom.
Revenue concerns
These deals will pare RCom’s debt from Rs 42,000 crore to Rs 17,000 crore. RCom will be left with data centres, optic fibre network, and other telecom infrastructure.
Considering that a large part of the operating profit came from the wireless and telecom tower business, analysts say the remaining businesses would need to scale up to service the rest of the debt comfortably.
RCom’s fibre optic network could also be sold and add another Rs 7,000-8,000 crore to its coffers.
The next big contributor to the group’s indebtedness is Reliance Infrastructure. Its plans to sell road assets to foreign buyers haven’t fructified, and now the company plans to divest these assets through an infrastructure investment trusts. The enterprise value of these assets is pegged upwards of Rs 8,000 crore.
The sale of RInfra’s cement business to Birla Corp for Rs 4,800 crore was completed in August.
In November 2015, RInfra agreed to sell a 49 per cent stake for Rs 3,500 crore in its electricity generation and distribution business in Mumbai and adjoining areas to Canadian pension fund Public Sector Pension Investment Board. This business will be transferred to a special purpose vehicle that will also take over Rs 8,000 crore of RInfra’s debt.
The deal is pending closure over clarity on tariff orders. In October, RInfra also announced the sale of three power transmission assets to Adani Power for Rs 2,000 crore.
Mergers and acquisitions in India, specifically in capital-intensive sectors like infrastructure, energy and telecom, have historically taken a long time to complete. It is crucial for the group to survive and grow in the time period that these deals take to fructify, say analysts.
The sunshine sector
Defence is the group’s new focus area. RInfra acquired Pipavav Defence, now renamed Reliance Defence and Engineering, in January. RInfra CEO Lalit Jalan had told Business Standard in an earlier interview, “Defence will be our growth driver as we strongly believe it is a sunrise sector.”
Reliance has 27 industrial licences in defence areas across aerospace, navy and land systems. The group is also forming partnerships with global defence players. In September, it announced a joint venture with Dassault Aviation of France, the maker of Rafale fighters and Falcon business jets. This JV is expected to be a key player in executing offsets obligations, as a part of India’s purchase agreement for 36 Rafale fighter jets valued at ^7.87 billion or Rs 59,000 crore.
It has also forged partnerships with Rafael of Israel, Antonov of Ukraine, Abu Dhabi Ship Building of UAE and Saab of Sweden.
“The group seems to be going in the right direction (with the asset sale). Surely, there is an opportunity in defence. Completion of the current deals will be important that goes without saying, but execution for new businesses is also key,” says Harish HV, partner at Grant Thornton.
Shifting focus
The other two businesses — finance and power — look best placed to aid the group’s planned debt clean-up and the next leg of strategy.
“Reliance Power is well placed in terms of financial parameters to embark on expansion. The concern is there is no concrete plan on expansion yet,” says Anuj Upadhyay, analyst with Emkay Research.
Reliance Capital has already seen a significant amount of activity as it roped in Japan’s Nippon in both mutual funds and life insurance businesses. The company raised a little more than Rs 4,100 crore through this divestment to Nippon and used the money to bring down the group’s overall debt.
Reliance Capital CEO Sam Ghosh plans to look at more options of divestment. “The commercial finance business is growing steadily; we could consider inducting a private equity investor, any other partner or even a stake sale after 12-18 months. We also intend to gradually exit from all small proprietary equity investments held by the company to lighten the balance sheet,” he says.
Bankers and investors are looking at how soon Reliance group will be able to close the deals. “The group’s deals are taking a long time. So completion is the key and post completion of planned asset sales, one has to look at whether the group will be left with enough to service the remaining debt,” says a consultant with a corporate restructuring firm.
Once completed, the transactions could fetch upwards of Rs 13,000 crore, which will be utilised to retire the group’s debt that stood at over Rs 143,000 crore at the end of the last financial year.
The divestment is a part of the group’s mammoth asset monetisation drive which, it hopes, will generate over Rs 50,000 crore.
However, the devil lies in the detail, analysts and consultants add, and what is crucial for the group is to complete these deals and unlock the projected cash flows.
The drive began in December 2013 when the group sold its multiplex business to Carnival Cinemas for Rs 700 crore. Since then, the group has managed to close deals worth Rs 9,622 crore.
Amongst all group companies, the one laden with the heaviest debt is Reliance Communications, or RCom (see Reducing the burden).
The sale of its tower business was delayed when talks with Tillman Global Holdings and TPG Asia, announced in December 2015, failed. In October 2016, RCom signed a non-binding agreement to sell 51 per cent in the telecom tower business to Brookfield Infrastructure Group for an upfront cash payment of Rs 11,000 crore.
“It is a non-binding agreement and the value being stated is at a premium compared to other recent tower deals, leaving room for some doubt. It is important to see if this deal reaches completion,” says an analyst from a domestic brokerage who does not want to be identified.
More measures are in the offing. In September, RCom announced the merger of its wireless assets with those of Aircel into a new entity, which would result in RCom transferring Rs 14,000 crore of debt to this new company.
RCom had also entered into a spectrum-sharing agreement with Mukesh Ambani’s Reliance Jio in April. “What we have accomplished is a virtual merger between RJio and RCom,” Anil Ambani said at the company’s annual general meeting. The deal has resulted in both companies sharing spectrum, network, fibre and towers, which has done away with the need for major capex for RCom.
Revenue concerns
These deals will pare RCom’s debt from Rs 42,000 crore to Rs 17,000 crore. RCom will be left with data centres, optic fibre network, and other telecom infrastructure.
Considering that a large part of the operating profit came from the wireless and telecom tower business, analysts say the remaining businesses would need to scale up to service the rest of the debt comfortably.
RCom’s fibre optic network could also be sold and add another Rs 7,000-8,000 crore to its coffers.
The next big contributor to the group’s indebtedness is Reliance Infrastructure. Its plans to sell road assets to foreign buyers haven’t fructified, and now the company plans to divest these assets through an infrastructure investment trusts. The enterprise value of these assets is pegged upwards of Rs 8,000 crore.
The sale of RInfra’s cement business to Birla Corp for Rs 4,800 crore was completed in August.
In November 2015, RInfra agreed to sell a 49 per cent stake for Rs 3,500 crore in its electricity generation and distribution business in Mumbai and adjoining areas to Canadian pension fund Public Sector Pension Investment Board. This business will be transferred to a special purpose vehicle that will also take over Rs 8,000 crore of RInfra’s debt.
The deal is pending closure over clarity on tariff orders. In October, RInfra also announced the sale of three power transmission assets to Adani Power for Rs 2,000 crore.
Mergers and acquisitions in India, specifically in capital-intensive sectors like infrastructure, energy and telecom, have historically taken a long time to complete. It is crucial for the group to survive and grow in the time period that these deals take to fructify, say analysts.
The sunshine sector
Defence is the group’s new focus area. RInfra acquired Pipavav Defence, now renamed Reliance Defence and Engineering, in January. RInfra CEO Lalit Jalan had told Business Standard in an earlier interview, “Defence will be our growth driver as we strongly believe it is a sunrise sector.”
Reliance has 27 industrial licences in defence areas across aerospace, navy and land systems. The group is also forming partnerships with global defence players. In September, it announced a joint venture with Dassault Aviation of France, the maker of Rafale fighters and Falcon business jets. This JV is expected to be a key player in executing offsets obligations, as a part of India’s purchase agreement for 36 Rafale fighter jets valued at ^7.87 billion or Rs 59,000 crore.
It has also forged partnerships with Rafael of Israel, Antonov of Ukraine, Abu Dhabi Ship Building of UAE and Saab of Sweden.
“The group seems to be going in the right direction (with the asset sale). Surely, there is an opportunity in defence. Completion of the current deals will be important that goes without saying, but execution for new businesses is also key,” says Harish HV, partner at Grant Thornton.
Shifting focus
The other two businesses — finance and power — look best placed to aid the group’s planned debt clean-up and the next leg of strategy.
“Reliance Power is well placed in terms of financial parameters to embark on expansion. The concern is there is no concrete plan on expansion yet,” says Anuj Upadhyay, analyst with Emkay Research.
Reliance Capital has already seen a significant amount of activity as it roped in Japan’s Nippon in both mutual funds and life insurance businesses. The company raised a little more than Rs 4,100 crore through this divestment to Nippon and used the money to bring down the group’s overall debt.
Reliance Capital CEO Sam Ghosh plans to look at more options of divestment. “The commercial finance business is growing steadily; we could consider inducting a private equity investor, any other partner or even a stake sale after 12-18 months. We also intend to gradually exit from all small proprietary equity investments held by the company to lighten the balance sheet,” he says.
Bankers and investors are looking at how soon Reliance group will be able to close the deals. “The group’s deals are taking a long time. So completion is the key and post completion of planned asset sales, one has to look at whether the group will be left with enough to service the remaining debt,” says a consultant with a corporate restructuring firm.