Reliance Infratel demerger from RCom into GTIL Infrastructure

Reliance Communications announced it has approval to demerge its tower business Reliance Infratel (RITL) into GTL Infrastructure Ltd. (GTLI). The combined entity will have over 80,000 towers and has EV of US$ 11 bn, implying an EV/tower of US$133k. Optic fibre assets, owned by RITL, are not a part of the transaction and these assets remain with RCOM.The implied EV of the RITL tower business is US$ 8.8 bn, which implies an EV/EBITDA of 7.5x based on our FY11E Infratel EBITDA estimates.

The Changing Valuation of Telecom Tower and Infrastructure in India in the past 3 years is as below,

Post this transaction, the combined entity will have close to 82,000 towers, making it the second largest tower company in India. RCOM mentioned that the combined entity would have more than 125K tenancies (we believe most of them are RCOM CDMA and GSM tenancies) and potential to add another 75k tenancies.

Anil Ambani’s Telecom Plans – So far he has been an under performer in Telecom. His latest attempt is to get some debt out of the Balance Sheet by divesting Reliance Infratel. Improve Valuations for Reliance Communications and get a Global Wireless Player to be strategic investor on the lines of SingTel in Bharti Airtel. Stabilize current operations and then look for Global Growth.

Where is the Money for GTLI – ? There is currently limited clarity on how GTLI is going to fund this transaction. We believe
the company would likely dilute its equity and also potentially raise further debt given its weaker balance sheet (net debt/equity of 2.15X at end of FY10). Stay tuned for updates.