Stock Review: Reliance Communications

INVESTORS in Reliance Communications, or RCOM, may have to wait a little longer to see a leaner balance sheet in terms of lower debt burden. The company on Monday told stock exchanges that it will not be able to conclude the merger between its telecom tower arm and GTL Infrastructure (GIL).

   In the last week of June, RCOM had initiated talks to create a 50,000-crore strong telecom tower company by merging Reliance Infratel with GIL. The deal was aimed at lowering RCOM's existing debt by half to about 14,000 crore.

   Now that the deal has been called off, this may not happen any time soon. Non of the parties have mentioned the reasons for calling off the deal. But some experts feel that the longer due diligence process and higher deal size may have impacted the merger talks.

   At least in the short run, the development deals a blow to RCOM's plans to cut its debt exposure. The stock of the second-largest listed telecom company in the country had gained as much as 40% in a month before the deal talks began. However, since then it has lost over 13% after the company reported a lacklustre performance in the June quarter.

   The scrip further fell marginally on Monday after the deal was called off even as the broader market witnessed a rally. In a press release, RCOM mentioned that it would continue similar merger proposals with the other interested parties. Its tower arm has also filed for an initial public offer (IPO). This reflects RCOM's immediate necessity to raise funds. The company's total debt has shot up sequentially by 34% to 33,216 crore in the June quarter following its successful bidding in the 3G auction. The company would require more funds to roll out and expand its 3G services. This may not be easy given that its debt-to-equity ratio is close to 1.

   GIL investors may breath easy now that the deal has been called off. Though the deal would have more than doubled its existing telecom tower capacity of 30,000, it would have caused a significant equity dilution. This would have further impacted its per share parameters since the company had posted operating losses in the previous two years. GIL has plans to add another 20,000 towers in the next three years.

   At Monday's close of 162.9, RCOM's enterprise value is nearly nine times its operating profit before depreciation (EBITDA). This is lower than Bharti (10 times) and Idea Cellular (9.5 times). The discount largely reflects the concern over RCOM's future prospects relative to its peers.