Reliance Communications’ (RCom) impending deal for tower asset sale would lower its consol. debt by a significant ~60%. Added upside will be the potential sale of its fibre assets. Moreover, RCom’s growing number of deals with Reliance Jio is unlocking the value of embedded assets while reciprocal benefits in infrastructure and spectrum sharing will fuel a data business ramp-up. Our revised TP of R90 (from R75) implies a R22,700 crore EV for the tower assets. With the imminent long-awaited deleveraging and potential for added upsides, we upgrade the stock to O-PF from U-PF.
Reliance Communications recently announced the signing of a term sheet with Tillman and TPG for the sale and leaseback of its ~43,400 towers held by its 95% subsidiary, Reliance Infratel. While this is non-binding, the deal appears inevitable given RCom’s compulsions to deleverage and the quality of the assets. We value RCom’s tower assets at 9.5x Sep-17CL EV/Ebitda implying an EV of R22,700 crore and EV/tower of R5.2 million, a ~35% discount to Bharti Infratel, which partly reflects RCom’s 22% lower Ebitda/tower. If the deal valuation for towers is higher, besides the planned sale of inter-city and intra-city fibre assets, the aggregate deleveraging for RCom in the base and upside case will be significant at 60-80% and gearing will fall sharply to 1.4x to 2.5x net debt to Ebitda.
Given RCom’s deleveraging efforts, led by tower asset sale and potential benefits of reciprocal infrastructure and spectrum-sharing deals with Reliance Jio, it looks set to see multiple improvements.