A June agreement between Reliance Communications (RComm) and GTL Infrastructure (GTL Infra) to merge the former?s telecom tower business, Reliance Infratel, with GTL Infra has fallen through, jeopardising RComm?s chances to slash its debt, and tripping both firms? plans to create the world?s largest telecom infrastructure company. While RComm has said it is in discussions with other players for a similar deal, a GTL Infra official said the deal could still be revived, albeit in a different structure.
The original plan ? to create a joint venture firm worth Rs 50,000 crore commanding 25% market share ? was called off after the companies could not come to a definitive agreement on the deal within the exclusivity period that ended August 31.
In statements to the exchanges, both firms declined to give reasons for the inability to reach an agreement.
The structure would have helped RComm reduce its debt by about Rs 18,000 crore. The company has around Rs 33,000 crore in debt, including the $1.8 billion (about Rs 8,200 crore) it raised to pay for 3G spectrum.
In a statement to the exchanges, GTL Infrastructure said: ?The non-binding term sheet signed by both parties dated June 27, 2010 expired on August 31, 2010. Subsequently, despite efforts, both parties have neither extended the term sheet nor entered into any definitive transaction agreements as envisaged therein. Consequently, the process of merger as originally contemplated, would not take place.?
RComm said it was talking to certain other strategic and financial investors to pursue a similar transaction aimed at a significant reduction in the company’s debt and unlocking of value for its shareholders from the passive infrastructure and related assets in subsidiary Reliance Infratel where it holds 95%. ?An appropriate further announcement will be made in due course. Owing to the provisions of mutual confidentiality agreements, RComm cannot provide any comment on the reasons for the inability to conclude a transaction with GTL Infrastructure Ltd,? it added. Shares of RComm closed marginally down by 0.31% at Rs 163 and GTL Infrastructure was up by 0.8% at Rs 45 on the Bombay Stock Exchange.
RComm could also explore an option to go ahead with an initial public offer (IPO) as it had already filed a DRHP (draft red herring prospectus) in Sept 2009 and had received Sebi approval for it in January this year. RComm can exercise the IPO option until January 2011. The firm is also seeking a possibility of raising funds by through the qualified institutional placement route for about 15% of the subscribed equity shares of the company, Rcomm had said in its annual report for the year 2009-10. The firm would seek board approval for the same and raise funds in one or more tranches.
An official from GTL Infrastructure, on condition of anonymity, said that certain agreements were not in favour of minority shareholders and that the second structure which the firm wanted to initiate could not reach a consensus till August 31. ?We had agreed to attain certain milestones (agreements) based on the information during these two months which could not be achieved and the exclusivity period for talks was not extended. There is a possibility that the talks could be revived with a fresh deal structure later,? he added.
According to the non-binding agreement, Rcomm chairman Anil Ambani would have owned a 26% stake in the combined entity, GTL Infrastructure founder and chairman Manoj Tirodkar would have owned close to 30% and the rest owned by the shareholders of the two companies. Goldman Sachs analyst Sachin Salgaonkar said in a report the deal possibly couldn’t go through due to either/or, GTLI was unable to raise the required capital; the debtors were not comfortable on moving the debt on Reliance Infratel?s books to the proposed merged entity?s books; and the original proposed valuation of an enterprise value (EV) of $11 billion (implying EV/tower of $133,000) appearing unfavourable after due-diligence.
?Given the lack of clarity on funding by GTLI and the unavailability of the stock/cash swap for the proposed merger, we believe the market was adopting a wait-and-watch approach. We do not rule out both parties potentially entering into discussions again (based on revised terms) in the coming months,? he added. However, investment bankers rule out any funding issues on GTL Infra’s side. Standard Chartered Bank and SBI Caps had underwritten the deal, committing close to $4 billion.
