Analysts upgrade RCom after tower deal

MUMBAI, INDIA: Reliance Communications' deal to sell its telecom towers will help India's No. 2 mobile operator cut its debut by more than half to about $3.9 billion, a source said, in a move that triggered broker upgrades in a cut-throat sector.

Carriers in India's cellular market, the world's fastest-growing, with more than 600 million users, have been shedding their tower businesses and renting capacity to cut costs.

The deal prompted Macquarie to raise its rating on Reliance Comm to "outperform" from "underperform", making it the brokerage's only positive pick in a crowded Indian telecoms sector that is locked in a fierce battle for customers.

Controlled by billionaire Anil Ambani, Reliance Comm had flagged a deal in its tower unit, and also plans to sell up to a 26 per cent stake in itself, after India sold licences for 3G wireless services at a price far higher than expected.

On Sunday, Reliance Comm agreed to offload its telecoms towers to GTL Infrastructure and said the combined operations would have an enterprise value of over $11 billion and own more than 80,000 towers.

GTL Infrastructure shares rose as much as 9 per cent, and were the most active major counter in Mumbai.

Exact terms were not disclosed, but the deal will see Reliance Comm reduce its debt by 180 billion rupees ($3.9 billion), a person with direct knowledge of the matter said.

"I think that the stock has reached a level from where further upside is limited. Most positives are already priced in," said R. K. Gupta, managing director of Taurus Mutual Fund.

Reliance Comm's debt before the deal stood at about 330 billion rupees, including the cost to finance its recent third-generation (3G) spectrum licences.

"We believe this is a significant positive catalyst for RCom and positive for RCom's shareholders, as it sets the company up for focused execution of its access and wholesale businesses," Macquarie analyst Shubham Majumder said in a note.

Macquarie lifted its earnings per share forecasts for Reliance Comm by 9 per cent and 8 per cent, respectively, in the financial years ending in March 2011 and 2012.

Reliance Comm shareholders will receive shares in GTL Infrastructure. The swap ratio has not yet been finalized.

"It also gives the power to RCOM shareholders to continue to participate in the towers growth story in India through a significantly improved, much larger and focused vehicle," Macquarie said.

Karvy Stock Broking also upgraded its rating on Reliance Comm, to "market performer" from "under performer."

The deal values the towers of Reliance Comm's Reliance Infratel unit at 7 million rupees each, a 46 per cent premium to the 4.8 million rupee per tower valuation in GTL Infrastructure's recent acquisition of towers from carrier Aircel, Karvy wroe.

India's 15-player cellular industry is fiercely competitive, with carriers engaged in a margin-crushing tariff war.

In search of investor

Several potential suitors cited in media reports based on unnamed sources have denied being in talks with Reliance Comm. So far, only Abu Dhabi's Etisalat ETEL.AD has acknowledged that it is considering a deal with Reliance Comm.

Shares in Reliance Comm are up 39 per cent in June, far outperforming the 5.0 per cent gain in the Sensex .BSESN.

Anil Ambani has been in dealmaking mode since ending a pact last month with his long-estranged brother, Mukesh Ambani, that forbade the two from competing on the other's turf. That pact had enabled Mukesh Ambani, the world's fourth-richest man, to assert a right of first refusal two years ago that blocked a deal between Reliance Comm and South Africa's MTN.

The brothers have been mending fences, and on Friday agreed to a renegotiated gas supply deal, resolving a dispute that had been at the heart of their feud.

Under the terms of Sunday's deal, GTL Infrastructure Chairman Manoj Tirodkar would own 30 to 35 per cent of the combined tower business and Anil Ambani's Reliance ADA Group would own 26 per cent, with shareholders in the two firms holding the remainder, sources with direct knowledge of the matter said.

Spinning off tower holdings into an independent firm is intended to make it easier to attract rival carriers as tenants. The combined tower operations of Reliance Comm and GTL Infrastructure would be the largest telecoms infrastructure firm in the world not controlled by a carrier, Reliance Comm said.

Rival Indus Towers - jointly owned by Indian cellular heavyweights Bharti Airtel, Vodafone Essar and Idea Cellular - has more than 100,000 telecom towers and says it is the largest tower company in the world.