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Big Deal - RCOM merges tower assets with GTL Infrastructure

July 15, 2010
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In what is being considered as one of the biggest domestic merger and acquisition deals in recent years, Reliance Communications (RCOM), India's second largest mobile operator, has agreed to sell its telecom tower assets to independent telecom tower company GTL Infrastructure Limited for $11 billion. The sale only includes RCOM's passive infrastructure and not its 200,000 km, pan-Indian optic fibre capacity and related assets.

The transaction is expected to close in six months. According to company officials, the deal has been structured in a manner that ensures the neutrality of the tower company so as to attract additional tenancies from 2G, 3G and BWA players.The new entity will, therefore, not be controlled or owned by any telecom operator. Indus Towers is the largest tower company in India with 100,000 towers, owned by Bharti Airtel, Vodafone Essar and Idea Cellular.

The combined entity is being pegged as the world's largest independent telecom tower company with 80,000 towers (GTL Infrastructure has 30,000 towers while Reliance Infratel has 50,000 towers), and more than 125,000 tenancies from over 10 operators. RCOM will be its largest tenant while the other tenants will include Aircel, Etisalat DB Telecom, MTS, Uninor Telecom, Videocon Mobile, Tata Teleservices Limited, Vodafone Essar and S Tel.

"Based on developments in the Indian telecom sector and the likely future demand for telecom infrastructure from 14 players in 2G as well as the winners in the recent 3G and BWA auctions, the merged entity is expected to derive substantially higher tenancy ratios, apart from scale benefits and operational synergies," noted a media statement by RCOM and GTL Infrastructure.

Though the final structure of the new entity is yet to take shape, the chairman of GTL Infrastructure, Manoj Tirodkar, will in all probability own 30 to 35 per cent of the combined tower business while the Anil Ambani-led Reliance ADA Group will own 26 per cent. Shareholders of the two firms will jointly hold the remaining stake.

Meanwhile, industry experts believe that the transaction will help RCOM reduce its debt by more than half as it prepares to roll out high speed 3G services.
Twice earlier, debt-heavy RCOM had planned to spin off its 95 per cent-owned telecom infrastructure arm, Reliance Infratel, through an initial public offering.
However, adverse market conditions forced it to call off the plans.

The details of the cash flow into RCOM, and the share swap ratios will be finalised in the coming months. Analysts say that the deal will help RCOM reduce its debt by Rs 180 billion. The debt before the deal stood at about Rs 330 billion, including the cost to finance its recent 3G spectrum licences.

It is a well-known fact in the industry that RCOM is eager to get the huge debt off its books. The deal will help the company reduce its debt to Rs 150 billion. If RCOM manages to sell 26 per cent stake to a strategic investor, especially with companies like Vivendi, MTN, Etisalat and AT&T showing interest, the operator could well be a debt-free company.

While RCOM's shareholders will benefit from the company's reduced debt burden and a stake in the new tower entity, for GTL Infrastructure, the deal is a positive leg-up. In just two decades, not only has GTL emerged as a leading telecom infrastructure player in the country but it also stands to become the largest independent telecom tower provider in the world with the merging of its tower business.

For the deal to go through, GTL Infrastructure will be raising money through a combination of equity and debt.For the equity part, it is in talks with private equity investors including Blackstone, while the debt component is reportedly being organised by Standard Chartered Bank and SBI Capital Markets.

Both analysts and the stock markets have given it their thumbs-up. Macquarie Capital Securities has raised its rating on RCOM to "outperform" from "underperform" after the announcement of the tower business merger.

Overall, the deal favours both sides. It gives the shareholders of RCOM and GTL Infrastructure the opportunity to continue to participate in the towers' growth story through a much larger and focused vehicle.

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