RCom readies blueprint to revive telecom fortunes

[Editor: One thing I would like to mention here: don't depend on rating agencies and brokerage houses's "MOTIVATED UPGRADES", for your stock picking decisions!! You must remember, how some years back, Kotak Securities downgraded Reliance Industries Ltd only to see a spurt in the stock price. CLSA downgraded Vedanta Ltd, the stock is moving up everyday. Lot of downgrades were seen in Unitech Ltd (Rs.5.65), but the stock gave more than 50% return in the last few days. Recently, JSW Energy Ltd was seen downgraded to hold from buy, the stock touched Rs.85.95 yesterday. Also, how can we forget a series of downgrades by rating agencies on BHEL, the stock is now up more than 30%, from those prices. 

And at the end S P Tulsiyan said, after the results of Punjab National Bank Ltd, that he would not touch the PSBs in the next two quarters; only to recommend a buy on SBI a couple of weeks later - - pointing out how fickle are their decisions or how treacherous they can be while recommending stocks to the gullible investors/traders. 

Anyway, Reliance Communications Ltd has repeatedly said that it expects to cut down debt by 75% through merger of MTS, Aircel and sales of mobile towers. So, I feel there is no reason to be apprehensive about the company. Therefore, I again reiterate a buy on the shares of reliance communications Ltd at the CMP of Rs.47.20 for a target of Rs.72. This stock is to be bought and kept holding for some days; like your fixed deposits to get some wonderful returns. ]

MUMBAI, JUNE 7: Reliance Communications (RCom) may be a ‘trouble zone’ for the Anil Ambani-led Group, but the company has prepared a blueprint to revive its fortunes.

The plan includes sale of its tower assets, merging its wireless business with Aircel, and migrating from CDMA-based 2G services to 4G services. All of this is aimed at reducing its debt pile and expected to be completed within the next few months.

Tower asset sale

To start with, RCom has ended the exclusive nature of discussions with private equity firm Tillman Global Holdings LLC to sell its tower assets. The Anil Ambani-backed telecom firm has extended the discussions to at least two or three other interested bidders. In December, RCom had inked an agreement to sell its tower assets to private equity firms TPG and Tillman Global. The companies had entered into an exclusivity agreement till January 15. The exclusivity was then further extended.

However, differences over valuation forced RCom to look beyond Tillman. In order to improve the valuation, the tower deal will now happen only after RCom seals the merger of its wireless business with Aircel.

RCom wants to sell its 44,000 telecom towers to pare debt, which stands at ₹40,479 crore. The company hopes to get about ₹20,000-22,000 crore from the sale of tower assets. Of the balance ₹20,000 crore debt, RCom plans to transfer ₹14,000 crore to the newly created company post the merger with Aircel.

The merged entity will be owned jointly by RCom and Aircel. RCom will carve out its wireless mobile business and transfer the same to the new entity.

The enterprise business – which includes the international cable unit and the fixed line infrastructure within the country – will continue to be under RCom.

Post the merger with Aircel, expected to happen by end-June, the new entity is estimated to have a combined market share of 13 per cent in terms of the overall industry revenue.

Debt transfer

EBITDA of the new company is expected to be around ₹5,000-6,500 crore and the overall debt will be close to ₹28,000 crore. Aircel, which has nearly ₹18,000-20,000 crore of debt on its books, will transfer ₹14,000 crore to the new entity.

The balance debt will be settled by Aircel prior to the merger. Aircel has already sold its 4G spectrum to Airtel for nearly ₹4,000 crore. Once the merger with Aircel is done, RCom hopes to get better valuation for its tower assets riding on higher tenancy ratio and brighter prospects in the wireless business, especially 4G services.

RCom has already begun shutting down its CDMA-based 2G network by migrating subscribers to 4G services. Here too, the company is ensuring its focus on high-quality consumers.

End of CDMA services

Over the next few months, RCom will shut down CDMA networks across the country. The company has done a deal with Mukesh Ambani-backed Reliance Industries to share and trade 4G network and spectrum.

This, along with the spectrum from Aircel, will be enough for RCom’s wireless business to challenge Idea Cellular’s (the no. 3mobile operator in the country), according to senior company executives.

Analysts tracking the telecom sector said that though the plan looks good on paper, the actual outcome will depend on how soon Anil Ambani closes the sale of tower assets. “RCom’s tower asset has been on the block for a while. Fresh round of talks began in December but there seems to be a gap in expected valuation and what buyers are ready to offer. Hence the uncertainty continues,” said an analyst on conditions of anonymity.

But the company insists there are no delays. Senior executives said negotiations for the tower sale started only six months back, at a time when similar deals in the industry have taken 2-3 years.

Courtesy: The Hindu Business Line