RCom deleveraging fails to impress investors

Reliance Communications Ltd (RCom) said it has signed a binding agreement with Brookfield Infrastructure Group to sell its tower assets.

It will receive an upfront payment of Rs11,000 crore, besides ‘B’ class non-voting shares in the tower company.

These shares will provide “49% future economic upside from the business, based on certain conditions”, the company said in a statement.

The long pending sale failed to cheer both stock market investors and credit rating agencies.

RCom’s market capitalization has risen by around Rs200 crore since the deal was announced. This is no more than a drop in the ocean, considering that the company’s market capitalization had fallen by around Rs13,000 crore so far this year.

Investors seem to be ruling out any major upside from the 49% holding through non-voting shares. The value of the retained stake depends on the conditions set by Brookfield, which are currently unknown.

According to an analyst with a domestic institutional brokerage, “It is evident investors aren’t factoring in an upside from the retained stake; after all, RCom’s market value hasn’t changed dramatically and still is only around Rs8,900 crore.”

As the things stand, i.e. assuming that the Rs11,000 crore valuation for a 51% stake is fair, RCom’s towers have been valued at around $74,000 each. This is understandably at a huge discount to Bharti Infratel Ltd, whose towers are valued at around $100,000. One of RCom’s large tenants, Reliance Jio Infocomm Ltd, is reported to have contracted rentals that are considerably lower than market rates. As such, profitability and return ratios of RCom’s tower assets are likely to be lower than peers.

It’s also important to note that credit rating agency Moody’s Investors Service has retained its cautious view on RCom’s debt. “RCom’s B1 corporate family and senior secured ratings remain on review for downgrade despite signing a binding agreement with Brookfield Infrastructure in relation to the sale of RCom’s tower assets,” Moody’s said on Thursday.

As the rating agency points out, there are still a number of imponderables. The wireless entity that will emerge after the proposed merger with Aircel is expected to be heavily indebted.

Operationally, the wireless business is expected to be among the worst hit as big boys Jio and Bharti Airtel fight it out by lowering tariffs. It also remains to be seen whether the retained business—including undersea cables—will be able to service the debt that remains on the company’s books.

An RCom investor’s best bet is that the firm’s books are adequately spruced up to make it a suitable match for an acquirer such as Jio. And even if that happens, it’s far from a foregone conclusion that RCom investors will get a good deal.