The deal is positive for both RCom and RIL. RCom can utilize and monetize its extensive network reach. And importantly, it can deliver its balance sheet further (total debt: $7 billion), says Nomura Equity Research
Reliance Communications (RCom) and Reliance Industries (RIL) announced a tower-sharing deal for an “aggregate value” of over $2 billion for 45,000 towers over the lifetime of the agreement, which could be over 10-15 years, according to a report by Nomura Equity Research.
The exact details aren’t available, but according to Nomura this value is predominately for annual leasing revenues, and not the pass-through. Hence, the bottomline impact could be larger than the topline.
Assuming per-tower build cost of $60,000-$70,000 in India, this deal implies RCom is recovering more than 50% of the total build cost of 45,000 towers (ignoring the impact of time value), the brokerage points out.
For RCom, the interest expense in FY13 was Rs25 billion, or $450 million. If RCom collects leasing revenues on all its towers, it should be able to collect around $200mn per annum, as per Nomura’s estimate (45,000 towers @ $600/month rent @ 60% margin, although rentals could arguably be substantially lower than market rates).
According to Nomura, the deal is positive for both RCom and RIL. It further states that RCom can utilize and monetize its extensive network reach (both recently entered into an inter-city fibre sharing deal too). And importantly, it can deliver its balance sheet further (total debt: $7 billion). RIL can also accelerate its wireless/4G rollout.
On RCom, the stock has re-rated significantly year-to-date, largely on news flow so far. Fundamentally, Nomura has always flagged RCom’s extensive network reach in India and internationally, but it has been difficult to ascribe a proper value to it, given high gearing levels and inconsistent execution. “This deal could provide better financial visibility and we will reassess our forecasts pending further analysis,” Nomura said.
“For Indian telcos overall, seeing another viable competitor emerge with extensive coverage, spectrum and capital is hardly good news over the medium term. RIL may or may not be aggressive in the near-term, but the loss of incremental market share for the incumbents becomes a large risk,” Nomura said in its concluding remark.
Mr Murthy and his protégé Nandan Nilekani have always been clever about managing their image. Consider this anecdote of 2005, just two years after the Narayana Murthy Committee had submitted its report to the Securities & Exchange Board of India
NR Narayana Murthy’s return as executive chairman is seen as so positive for Infosys that any talk about the serious breach of good governance norms in the manner of his return, or the appointment of his son, is seen as needless criticism. Well, Mr Murthy and his protégé Nandan Nilekani have always been clever about managing their image. Consider this anecdote of 2005, just two years after the Narayana Murthy committee had submitted its report to the Securities & Exchange Board of India (SEBI). Janardhan Kothari of Kolkata, wrote to me expressing his ‘shock’ and ‘surprise’ that NRN Murthy, as an independent director of NDTV Limited had not attended a single board meeting in his first year. I forwarded the email to Mr Murthy asking if it were true. His response: “That is right. I am guilty. I had told them that my diary gets full a year in advance. I do not cancel appointments once made. That is why I could not attend the meetings. This year, I have attended all the meetings.”
This candour hides the fact that this is a complete violation of the corporate governance code, which places enormous responsibility on independent directors. Couldn’t Mr Murthy have joined the NDTV board a year later? Well, because NDTV was going public and having Mr Murthy on the board before its initial public offering (IPO) would help it extract a good premium from investors. NDTV repaid this debt in full when Mr Murthy was under serious attack from a vengeful HD Deve Gowda (during his son HD Kumarswamy's regime in Karnataka).