Infratel demerger to make RCom financially flexible

Reliance Communications plans to demerge its tower business -- Reliance Infratel. The demerger, via a combination of cash and stock, will facilitate consolidation in the telecom space, enhance Reliance Communications' financial flexibility, and aid fast, low cost network rollout. The company is in advanced discussions with domestic and international strategic players for the same.

In an interview with CNBC-TV18, SP Tulsian of sptulsian.com reacted to the development.

What did you make of this announcement?
In fact I take this as a preparation of handing over the ownership of RCom maybe initially to start with 26 per cent and eventually giving the complete control to the strategic investor which will come in the first stage with 26 per cent stake. Second point I see is that maybe Reliance Infratel could be retained by ADAG seeing that as a good business opportunity maybe in the form of the fixed rentals.

But the best part is that the whole RCom balance sheet which is heavily leveraged partly because of Reliance Infratel will get deleveraged to a great extent. The cash that will come in the books of RCom can further get used to make payments for 3G licences which they have acquired to the extent of about Rs8,000 crore and to fund the other capex plan.

So the whole process looks to be making the RCom the financially flexible company which must be the condition of the prospective buyer of that 26 per cent which they have been repeatedly confirming and even today they have reiterated that 26 per cent stake sale in RCom is very much on the cards.

The press release also says that the leverage ratios are going to improve post this deal, post the restructuring etc so you are saying this should be seen as a thumbs up from the markets?
Obviously because ultimately probably RCom was not getting the proper valuations even with Reliance Infratel remaining in the same company in one basket. Because of the high leverage probably by making them or putting this stake into separate baskets maybe the valuations of RCom can be taken combined at about Rs250 per share that is the talk going on. If they put the value of Reliance Infratel post the demerger and RCom probably that can give you a valuation of Rs250. So obviously this is a value enhancement for RCom or maybe for RCom shareholders.

In the fine print of the press release they have written that it is a demerger and/or value creating options subject to all approvals. Do you think the demerger is probably or perhaps the most value accretive option to go in for – what could be the other options?
Ultimately it has to be demerger because if you make a slump sale it will attract the tax liability. So to start with save on the taxes it has to be demerger, the entire shareholding in the Reliance Infratel will be to the same set of shareholders and then those shares will get transferred. So this demerger move is mainly to take the tax benefit and not to attract the tax liability, and nothing else.