RCom board endorses 26% stake sale idea

Weeks after the Ambani brothers reworked their family settlement, younger brother Anil Ambani has decided to go ahead with the sale of stake in his telecom business.

The Reliance Communications board approved on Sunday, in principle, the sale of up to 26 per cent stake in the country's second largest mobile services company to a strategic or private equity investor.

Without providing any timeline, the company also said in a statement that the board had approved pursuing other appropriate strategic combinations and consolidation opportunities.

At the end of March, the promoters -- Anil Ambani, his family members and several group companies -- held 67.58 per cent in RCom.

Possibilities open

The twin mandates open up various possibilities for the company, with the United Arab Emirates' Etisalat saying it was looking at picking up stake in Indian telecom operators.

Etisalat owns a 26 per cent stake in DB Reality-promoted Swan Telecom.

The present norms restrict a shareholder's ability to hold more than 10 per cent stake in two telecom companies operating in the same circle.

Reliance and Etisalat have an existing relationship in the form of a memorandum of understanding for sharing telecom towers.

Investment bankers said Vivendi and AT&T could also be potential suitors, as they are scouting for opportunities in India.

In addition, RCom chairman Anil Ambani is expected to be in South Africa this week, raising prospects of fresh talks with MTN, the South African telecom company.

A few days earlier, MTN had, however, said it was is not in talks with RCom.

In 2008, RCom had aborted plans for a share swap deal with MTN, as it would have resulted in a dilution of promoter holding.

Under the terms of the Ambani family settlement, the brothers had the right of first refusal in case one of them wanted to sell stake in a venture.

However, this roadblock was removed a fortnight earlier, as the brothers, Mukesh and Anil, dropped the provision, along with an end to the non-compete clause.

In the wake of the revised deal, the market had been speculating an imminent stake sale in RCom, which had debt of almost Rs 20,000 crore (Rs 200 billion) at the end of March and would need additional capital to roll out third-generation and WiMax services.

It has recently paid spectrum fees of Rs 8,585 crore (Rs 85.85 billion) for winning the rights to offer 3G services in 13 circles. This payment is a combination of debt and equity.

Diverse options

Analysts said the company had various options to raise resources. One, it could monetise the telecom services play as a whole, by roping in strategic investors.

Alternatively, it could split the telecom services into CDMA and GSM, and get partners in both or in one of these. The third option was to rope in a partner for the tower assets.

Reliance Infratel, a wholly-owned subsidiary of RCom, has around 50,000 towers and might attract a valuation of about 25,000 crore (Rs 250 billion).

Last week, amid reports of stake sale, RCom indicated it had received proposals for stake sale. "The company has been receiving various proposals from time to time from reputed international telecom companies, expressing interest in acquiring a strategic equity stake in Reliance Communications. We evaluate such proposals, in line with the policy to enhance overall shareholder value," it had said in a stock exchange filing.

Based on present market capitalisation of Rs 34,706 crore (Rs 347.06 billion), a 26 per cent stake sale would fetch over Rs 9,000 crore (Rs 90 billion).

The company said in a statement that the investment would be at a premium. If the valuation of the company was to be done at its book value -- around Rs 52,164 crore (Rs 521.64 billion) -- the stake sale could generate Rs 13,562 crore (Rs 135.62 billion).

Injection needed

"It will be tough to calculate, as the deal value will be highly negotiable. It will be interesting to see the deal terms, as telecom is not on top of the list of investors and the sector has been going through a lot of pain," said Jagannadham Thunuguntla, Equity Head at SMC Capital, a brokerage firm.

Market players said the company could use the fresh equity to repay some loans, its balance sheet being highly leveraged.

A report by CLSA said after 3G expenses, Reliance's net debt is four times its Ebitda (earnings before interest, depreciation, taxes and amortisation) level, largely increasing the gearing of the company.

"It is a Catch 22 situation, as the company needs money but valuations in the market have declined for the sector as a whole. So, the timing will be crucial," an analyst added.

The deal could also mark the beginning of the oft-predicted phase of consolidation in Indian telecom, which has 14 players fighting for a share of the pie. Amid falling rates, revenue for most operators is under pressure.

"This deal is the first step towards consolidation. In the 12-15 months, we could see more such deals," said Thunuguntla.

The share price of RCom has been rallying in the past few days with speculation on a possible stake sale. The stock went up by 2.25 per cent on Friday, to close at Rs 168 a share.