RCOM sells Towers

A smart and timely move to reduce its debt burden…

Reliance Communication (RCOM) has decided to sell its tower unit, Reliance Infratel, to two P/E firms; Tillman and TPG. The deal is yet to be finalized and the last word is yet to be written on it. But the big news, probably, is that the company which once disrupted telecom in India is finally trying to get its act together.

More than a decade back when Reliance Communication launched its service in India, it was disruptive in more ways than one. Firstly, it was a full-fledged all-India CDMA service. At that point of time the predominant service providers like Bharti, Hutch (not yet Vodafone) and Birla AT&T were all into GSM services. The RCOM service back then was a game-changer in terms of the quality of its service, its competitive pricing, and its advancements in data. Then things changed…

 What changed for RCOM?

 In 2005, the Reliance group split into the ADAG and the MDAG groups. RCOM came under the ADAG banner along with Reliance Infra and Reliance Capital. Those were the heady days of easy money, ECBs and FCCBs. With massive expansion plans, RCOM went into a fund raising spree even as its service standards faltered and it started losing market share to competition. The entry of Vodafone in 2007 and the ramping up by Idea around the same period ensured that RCOM ended up being the fourth largest player in the telecom sweepstakes. The problem was that the company was finding it difficult to service its debt burden with its dwindling cash flows.

Using towers to pare debt…

The impending launch of Reliance Jio by the MDAG group and its larger benefit to the ADAG group has changed the pitch for RCOM. The numbers from the towers business are staggering. The sale of towers itself is going to help RCOM raise close to Rs.22,000 crore. The sale of its fiber optic network will likely fetch RCOM another Rs.8,000 crore. The current debt position of RCOM is around Rs.40,000 crore. Therefore the proceeds from this sale will help RCOM retire close to 75% of its outstanding debt. This will reduce the annual interest outgo for RCOM to just Rs.600 crore per annum.

Why this is so important…

Currently, Bharti is struggling with its African telecom assets. The Big-3 is likely to invest close to $4.5 billion each on additional spectrum. This will substantially increase their debt burden. There is another angle to this. With the Fed likely to hike rates, the dollar will only get stronger. If RCOM can use these proceeds to retire its dollar denominated debt, it will emerge much fitter and slimmer. With launch of Jio it could finally be Advantage RCOM! ©

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