Gone with the deal: What RCom has lost

The country's third largest telecom company, Reliance Communications, had hoped to clean the burgeoning debt on its books through two key deals -- the sale of its tower assets to GTL and the sale of 26 per cent equity in the company to, probably, Etilasat, to which it has never denied it was talking.

But with the tower asset sale being called off, RCom now has to wait for a new plan before it can reduce its staggering Rs 33,000-crore (Rs 330-billion) debt, which would have been reduced by over half (Rs 18,000 crore or Rs 180 billion) if the tower deal would have gone through.

The company's debt increased after it paid Rs 8,585 crore (Rs 85.85 billion) towards 3G spectrum fee.

With a net debt of around four times its Ebitda (earnings before interest, taxes, depreciation and amortisation), analysts say its gearing is very high and if the deal went through, it could have reduced to no more than two times.

"The cash infusion would have led to a significant improvement in RCom's leverage ratios, with the net debt-equity ratio in FY11 falling to 0.1x (from 0.6x)," said a report by Karvy Stock Broking.

What has added to the worry is the fact that the Etilasat deal might, if it at all happens with RCom, take much more time than expected due to various regulatory issues.

Etilasat already has a substantial stake in Swan Telecom and cannot pick up more than 10 per cent in a competing telco, by the rules.

But if it walks out from Swan Telecom, it will lose the substantial investment it has already made.

It is believed that Etisalat has been approaching the government on whether companies can give back their spectrum and get back the Rs 1,450 crore (Rs 14.5 billion) they had paid for the 2G spectrum, so that it can cut its losses.

The government, however, has been steadfast on its policy that no money will be returned if a company decides to give back its licence.

So, if this deal falls through, RCom could be deeper in trouble. Especially as it comes when the company is making substantial investments in 3G operations, which analysts contend won't make money for at least the next four to five years.     

Analysts say any euphoria created by the possible deal is now gone.

"When the deal was announced, markets gave a thumbs-up because it expected the debt burden issue was being addressed," said Jagannadham Thunuguntla, Equity Head, SMC Capital.

The deal could have also improved the cash situation of the company, showing a downward trend.

"Operating cash flows of Rs 1,390 crore (Rs 13.9 billion) compare unfavourably with an average quarterly level of Rs 2,200 crore (Rs 22 billion) seen in FY10.

"Any further deterioration would threaten its capex guidance (prediction) of Rs 3,000 crore (Rs 30 billion)," said a report by stock broking firm IndiaInfoline.

The company has recently posted its first quarter results, which were well below street estimates, with a a massive 84 per cent fall in its net profit. 

Added to troubles like reducing margins in the form of average revenue per user, the company's minutes on network grew at a dismal one per cent, while that of other services grew at 10-12 per cent.

While many analysts were disappointed with its first-quarter results, the only silver lining was that its stake sale plans might ring in cash into its balance sheet and give it much-needed financial flexibility.

Analysts say the deal could have failed because GTL was unable to raise the required capital, and also the original proposed valuation of $11 billion could have looked unfavourable on examination.

"The company has been trying to sell stake in the company as well as its tower assets. These are not easy to sell. They have been trying to create value but nothing has happened," said an analyst from an international broking firm.

However, stock brokers do mention that as going by statements from both companies, it could also be assumed that both GTL and Reliance Communications could look at an alternative transaction structure which would be favourable to both the parties.

Analysts maintain the markets have considered the possibility of this deal not going through as well.

"Given the lack of clarity on funding by GTL and unavailability for stock/cash swap for the proposed merger, we believe the market has adopted a wait and watch approach. We do not rule out both parties potentially entering into discussions with revised terms in the coming months," said a report by Goldman Sachs.