Indian telecom services provider Reliance Communications (RCom) has sold a 5% stake in the unit that owns its telecom towers to a group of institutional investors at a price that was sharply above what the market expected.
The price tag of Rs14 billion ($337.5 million) values the entire unit at $6.75 billion and sets a powerful benchmark for a planned initial public offering that, according to RCom’s chairman, will take place “in the near future”. The listing, he said yesterday, will give investors “another attractive opportunity to participate in India’s incredible telecom growth”.
Macquarie analyst Shubham Majumder, who is responsible for the most aggressive estimate on the street, had put the fair value of the towers unit, known as Reliance Telecom Infrastructure Limited (RTIL), at about $4.45 billion. Investors have now shown they are willing to pay a lot more to capture the expected growth within the telecom infrastructure sector, which Majumder refers to as “the hottest asset class”.
Valuations have been driven higher by recent M&A activity in the sector, including the takeovers of US-based Global Telecom Partner by a consortium led by two Macquarie infrastructure units and of UK-based National Grid Wireless (NGW) by Arqiva, which is another Macquarie-owned unit. Both targets are dedicated owners and operators of telecom infrastructure, including communication towers, and among the leaders in their respective markets.
“Our strategy to create a separate company for infrastructure business has resulted in tremendous unlocking of value for RCom’s shareholders,” chairman Anil Ambani says in a written statement. “RTIL, as an independent telecom infrastructure provider, has significant growth potential and is on track to become the leading player in India.”
Not surprisingly RCom’s share price reacted positively to the announcement of the sale, which came in the mid-afternoon India time, rising as much as 3.5% to a record high of Rs586.90 before finishing the day with a 2.1% gain at Rs579.30. Bharti Airtel, whose 100%-owned tower business is about 2.5 times the size of RCom’s in terms of the number of towers, also jumped on the news, closing 1.4% higher at Rs895.85 after being up 2.1% intraday.
According to a release issued by RCom, the selling price translates into Rs135 per RCom share, or close to a quarter of its current share price.
The sale was done through a private placement, which attracted over $2 billion of demand. The shares were placed with seven international investors who weren’t disclosed but are believed to be well-known, top-quality names. The release says they came from Asia, Europe and the US. JPMorgan was the exclusive financial adviser to the company on the transaction.
As of April 10 this year, RTIL had 13,849 telecom towers in its portfolio which it leases to RCom and external wireless operators under long-term contracts. The nationwide tower network already spans all of India’s 23 telecom regions, or “circles,” but the number of tower units is literally increasing every day. The plan is to build about 23,000 new towers in the current fiscal year, which runs until March 2008. Each of these towers has an initial capacity to host the equipment of four telecom operators.
The attraction to investors is that once this business gets past its current aggressive expansion and investment phase it will be a “huge cashflow driver,” a source familiar with the company says, noting that it offers a way for India’s many mobile operators not to have to fork out the massive capital expenditures needed to build the towers themselves as they expand coverage.
RCom transferred all of its telecom towers and some related infrastructure into wholly-owned RTIL in January this year with the aim of eventually spinning it off for a separate listing.
”This is the first of a series of initiatives we will be taking to remain asset-light, and enhance our competitiveness, ultimately leading to unlocking of further value for the benefit of our 2 million shareholders”, Ambani said at the time of the board’s approval of the asset transfer.
Yesterday’s release also noted that the company may sell part of the RTIL unit to a strategic buyer. This first sale will result in capital gains of about $280 million for RCom.
The valuation implied by the stake sale translates into an enterprise value per tower of about $487,000, which compares with the acquisition of Global Tower Partner from US private equity firm Blackstone at an EV/tower of approximately $542,000 and of NGW at an EV/tower of $467,000.
According to a recent research note by Macquarie’s Majumder, the US is one of few markets where tower businesses have been successful, which makes GTP a good valuation comparable. However, the US tower market is relatively mature, with average occupancy already reaching 2.5 times and wireless penetration at 77%. In the UK wireless penetration is already above 100%.
By comparison, Indian tower companies are seen to have “huge growth potential with low current population coverage coupled with high sharing potential,” the report notes.
Majumder projects tower requirements in India will grow at a CAGR of 42% over the next three years, while revenues and profits are set to grow at even faster rates with improvement in tenancy rates.
Source : Finance Asia