Reliance Communications (RCOM) to sell Reliance Infratel tower company

Anil Ambani’s Reliance Communications, one of the largest telecom operators in the country, has decided to sell its stake in tower subsidiary Reliance Infratel to pay off its substantial debt.

“The Board [of RCOM] has approved taking the process to the next stage of detailed due diligence, etc., with a view to completing such a potential transaction at the earliest,” a statement by the firm said.

RCOM is one of the most indebted telecom operators in the country, primarily due to heavy investments it did in creating new towers and expanding its network, launching GSM and 3G services etc. over the last three years.

Its debt has zoomed from less than Rs 10,000 crore in March 2008 to more than Rs 32,000 crore in March this year, including loans to pay the Rs 8,600 crore 3G spectrum fee last year.

Going by the company’s January 2010 indications of a valuation of Rs 50,000 crore for the firm, the sale could easily wipe-out RCOM’s debt and give it some spare cash. However, investors may balk at the price and push it down to around Rs 30,000 crore — or about Rs 50-60 lakhs per tower.

RCOM noted that Reliance Infratel has been informing it of “formal indicative offers from several interested parties” for the acquisition of RCOM’s controlling interest in Reliance Infratel.

Though hinted at earlier, RCOM never went ahead with such a sale till now because of what are expected to be concerns over valuation and the poor state of the markets for last three years. Infratel had plans for an IPO and also tried to merge itself with GTL infrastructure in its previous efforts at raising cash.

Now, however, RCOM is almost at the end of its big bucks expansion programs and is in a consolidation mode. It cut down its capital expenditure — creation of assets such as towers — by a huge proportion during the last financial year itself.

In comparison to its Rs 32,000 crore debt, it had a revenue of Rs. 23,108 crore and a net profit of Rs. 1,346 crore. One of the biggest drags on the company’s earnings has been the interest charges that it has to pay on its mountainous debt.

Against a profit of around Rs 2,600 crore from its operations during last year, it had to fork out almost Rs 1,100 crore as interest for the various loans, bringing down pre-tax profits to just around Rs 1,500 crore.

Infratel is the earliest tower company in India. After RCOM showed the way, other operators such as Bharti and Idea have also spun off their tower businesses. The biggest tower company in India is Indus Towers — which accounts for nearly half of India’s 3 lakh plus telecom towers and accounts for most of the installations of India’s top three GSM operators.