Buy Reliance Communications - GTL Tower deal cancellation - Elara Capital

• Reliance Communications
• Rating : Buy
• Target Price : INR196
• Upside : 20%
• CMP : INR163 (as on 6 September 2010)

GTL Tower deal cancellation

Today morning, GTL informed exchanges that the non-binding agreement ("Term-sheet") signed by GTL and RCom to merge Reliance Infratel tower assets into GTL has expired without the completion of the deal. Both companies offered no reasons for the same. In a communication to the media, RCom mentioned that it is now engaged with other strategic partners or financial investors to pursue a similar transaction aimed at a significant reduction in debt and unlocking of value for RCom shareholders from this passive infrastructure business.

Negative for RCom in Short-term

The failure of the transaction is definitely a negative for RCom given the fact that the company already has a stretched balance sheet with INR~330bn gross debt and it is trading at 3.3x net-debt/EBITDA of FY11E. The company was expecting a ~INR150bn cash flow from this transaction, resulting in ~50% debt reduction. We anticipated, that this deleveraging of the balance sheet in the short-term would have given the company some fire-power to compete aggressively in forthcoming MNP implementation and 3G launch.

Maintain our Buy Rating with a reduced TP of INR196

As RCom has communicated, it would look for alternatives for raising money, we believe it could be either through sale of its tower business to other potential suitors (possibly American Tower, or Quippo) or it would raise capital through the strategic stake sale (the company board has already approved up to a 26% strategic sale). We also do not rule out both parties potentially entering into a discussion again with a modified term-sheet. The issue in contention for GTL could be the premium valuation of the tower business (20% premium to what the market was ascribing). In any scenario, the failure of the deal is a negative for RCom share-holders in the short-term, but given the fact that both parties have mutually agreed to cancel the deal, the severity of the impact should be limited. We maintain our Buy rating but have reduced TP to INR196 as we factored the tower business valuation as 7xEBITDA (from prior 8xEBITDA) as it would be difficult to get premium pricing for tower business.

Source : Equity Bulls

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