Reliance Communications, one of the leading telecom operators in India, is in the midst of exclusive negotiations with a consortium of private equity players, including Blackstone and Carlyle, to sell its tower unit, according to media reports in India.
Quoting source familiar with the talks, the Times of India reported that a deal is likely to happen by December.
“The transaction is expected to value the tower asset in excess of $3.5 billion, making it India’s largest private equity deal to date,” the Times reported. “Blackstone is likely to be the lead investor in the buyout transaction for which discussions were now advanced. Anil Ambani-controlled RCom may conclude a tower-sharing deal with his elder brother Mukesh Ambani-owned Reliance Infotel ahead of the tower unit sale, which could buoy the PE investors.”
The tower-sharing deal with Reliance Infotel may also help increase the valuation of RCom’s tower unit. The deal will also strengthen the tenancy ratio of the company’s tower unit which was 1.7 (with a total of 58,000 towers) in fiscal year 2010-11. Viom Networks currently has the highest tenancy ratio among India’s telecom tower companyies (2.35 as per FY 2010-11 data on voice and data estimates).
RCom’s decision to do away with the tower unit is related to its debt, which was more than $7 billion as of June. If the tower unit is sold for about $4 billion, that would help the company reduce its debt by half.
Reuters, while quoting sources, said in a report that RCom has sought $5 billion for a 95% stake in its tower unit but that potential bidders have found that price too high.
The telecom tower sector is already laboring under huge debt in India. According to another news report in the Times of India, the outstanding debt of the tower sector is about $20 billion.
The tower sector’s finances “first went awry after the arrest of the then telecom minister, A. Raja, and corporate officials who were accused of paying bribes to secure scarce second-generation licences. The debt accumulated after the third-generation spectrum payouts queered the pitch further,” the Times reported.
Rising operational costs, diesel pilferage and taxes have also contributed to the state of the telecom industry’s finances and affected the ability of companies to raise cash from investors.
With an estimated 353,813 telecom towers, the tower sector is expected to grow at 20% during the next five years as per India Telecom Online data. The growth has been necessitated by the rollout of 3G services and expected launch of 4G in the coming year. The increased rural penetration strategy will also drive growth.
Also, the RCom deal is not the only one that is in news. There have been reports of discussions between IT biggies, including Infosys, Wipro and IBM, and Indus Tower for a contract in the range of $500 million to $600 million.
Indus Tower is a joint venture by Bharti Airtel, Idea Cellular and Vodafone. It owns 109,073 towers and has a tenancy ratio of 1.78.
Other tower companies operating in the sector include American Towers (8000 towers, 1.8 tenancy ratio), Bharti Infratel (33,042 towers, 1.66 tenancy ratio), BSNL (45,000 towers), GTL Infra (33,681 towers, 1.33 tenancy ratio), MTNL (2017 towers) and Viom Networks (40,000 towers, 2.35 tenancy ratio).
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