Aurum Deal of the Month – December 2016

Reliance Communications (RCOM) has signed a term sheet with Brookfield Infrastructure Group for the sale of its tower assets and related infrastructure.

The Transaction

Currently, the tower portfolio and fibre business is housed in Reliance Infratel Limited (RITL). The tower assets of RCOM will be transferred from RITL on a going concern basis to form a separate special purpose vehicle (SPV). Brookfield will hold 51% stake in the SPV. RCOM would receive an upfront payment of INR 110 billion from the proposed transaction and would continue to have 49% stake in the SPV. RCOM would also continue to be the anchor tenant on these towers under a long term Master Service Agreement MSA with Brookfield. Brookfield has already completed the due diligence and the definitive agreement is expected to be signed in before the end of 2016. Post the execution of definitive agreement, RCOM would seek the necessary approvals, including the lenders. It could take five to six months after the final deal is signed for the transaction to be completed.

RCOM has a portfolio of 43,400 towers, with a tenancy ratio of 1.92x. It is the country’s third-largest tower company behind Bharti Infratel and Indus Towers. RCOM owns 96% equity in RITL. Minority and institutional investors such as George Soros’ Quantum (M), NSR Partners, Galleon, HSBC Daisy Investment (Mauritius), Drawbridge Towers, Investment Partners B (Mauritius) own the remainder.

Indicative Structure – Post Transaction

aurum deal december

RITL reported FY16 EBITDA of INR 19 billion. The deal values the tower assets of RCom at over INR 215 billion, which implies an EV/EBITDA of approximately 11x. The valuation of INR 4.95 million per tower seems to be apt.

In a similar large tower deal last year, American Tower Corporation acquired 51% stake in India’s Viom Networks for INR 76 billion in cash besides taking on debt, valuing Viom at around INR 210 billion, or 11 times its annualised EBITDA and INR 4.9 million per tower.

RCOM

RCOM has been trying for a while to monetise its tower assets. In 2015, it had announced that the Sanjiv Ahuja-led Tillman Global Holdings backed by private equity player TPG had signed a non-binding pact to buy its tower assets for around INR 215 billion. But TPG pulled out subsequently over valuation differences.

At the end of Q1 FY17, RCOM had a total debt of INR 420 billion which includes deferred spectrum liabilities. RCOM has previously announced a deal to merge its mobile operations with Aircel to create a new company where it will hold a 50% stake. RCOM will transfer INR 200 billion of debt to the merged entity which will hold the mobile operations of RCOM and Aircel. The tower deal will reduce the debt by a further INR 110 billion.

Brookfield

Brookfield is listed on the New York and Toronto exchanges and has an AUM of USD 250 billion. It has invested USD 2 billion in India since 2009-10. It had acquired some road assets from Gammon Infrastructure Projects Ltd in August last year and bought a majority stake in a string of industrial parks in Delhi-NCR from Unitech in 2014 in large-sized transactions. In July, Brookfield tied up with State Bank of India to invest as much as INR 70 billion in stressed assets. It has also sealed another large transaction in the real estate space to buy an asset from Hiranandani Group for around USD 1 billion, the single-biggest realty deal in the country to date.

Brookfield is expected to continue betting big on India with an investment of USD 2 billion over the next 2-3 years to buyout upscale offices and commercial towers, stranded roads, power and utilities infrastructure.

Conclusion

RCOM has continued to struggle in India mobile business with its growth lagging the growth trajectory of its peers. The management focus on improving balance sheet health would potentially help stabilise the business. The Aircel merger will also definitely strengthen its comparative position.

We believe that the fact, that RCOM continues to hold 49% stake in the business signals that RCom sees considerable potential upside to be enjoyed by remaining invested in the towers business. Significant growth in tenancies expected as a result of the increasing coverage of 4G telecom services in the country. The market also believed that the deal was a positive for RCOM. The company’s shares closed 2.57 % higher on BSE on the day of announcement.

The transaction also brings into focus the emerging buyout opportunities for stressed assets in India. Large conglomerates are increasingly focussing on their core businesses and divesting non-core assets. Thanks to tightening of norms related to restructuring of assets, and greater power provided to lenders to recover dues, promoters have been forced to consider selling distressed assets and subsidiaries to retire some of their debt.

The top deals of 2016 include the sale of controlling stake in Essar Oil to PJSC Rosneft Oil Co by the heavily indebted Essar group, and UltraTech Cement Ltd’s acquisition of Jaypee Group’s cement assets. The number of buyout transactions is expected to go up in the coming years. The depressed rupee, trading at record low vs the USD, will also encourage foreign investors to buy more Indian assets.

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.

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