Ambani Brothers seal a Rs 1200 cr deal ~ elder taking advantage of the weaker younger
This is how I see it !
What is Anil Ambani’s Reliance Communications (RC) getting from Mukesh Ambani’s Reliance Jio Infocom (RJI)other than Rs 1200 as a one time upfront payment to use the former’s 120000 route km fibre optic cable network to role out the latter’s 4G Plans !?
Ah! the Promise that RC can in the future also use the fibre optic network of RJI when build ~ like I can stay in your house now and I promise you can stay in mine if and when I build it !
RC has been under the scanner for it’s role in the 2G Telcom Scam and the Debt Overhang of Rs 37000+ crs is adding to the Valuation woes with the Share Price @ Rs 64 against a FY 12 Book of @ Rs 178
RC has been trying in vain to sell it’s Telecom Tower Business to reduce debt ~ it’s likely that Big Brother may come to the rescue here too ! ~ It’s not getting the price of Rs 30000 crs + it wants for the 50000 Towers Infrastructure ~ It now is ready to rent it at significantly below market rates just to improve cash flows
Clearly Mukesh Ambani’s Reliance Group is a winner in the deal ~ but cannot confirm this for Anil Ambani’s RC as I feel he has simply negotiated weakly from a position of weakness ~ the upfront payment of Rs 1200 crs hardly dents the huge debt ~some time ago it was negotiating a deal for Rs 10000 crs with Etilisat for Connectivity and for Tower Rentals and that too for a Definite Period ! ~ Why could it not negotiate the same with RJI !? ~ those cash flows would have helped reduce debt significantly
Of course ,however, if the Towers are sold for Rs 25000 crs,now that would spark some real life into RC !
Methinks RC should finally be sold off to the Big Brother Group ! ~ now that would be breaking news and RC would race from Rs 64 towards it’s Book Value of Rs 178 ! ~ that’s if the book value is established as genuine ! and Big Brother pays for the 2G and 3G GSM and CDMA Telecom Licenses capitalised by RC~ FY 12 shows a Consolidated Networth of Rs 36721 crs with Equity of Rs 1032 crs of FV Rs 5 and a Total Long Term Debt of Rs 32705 crs ~ This Total Capital Employed of @ Rs 70000 crs is matched by Net Block of Rs 71478 crs of which Tangibles are Rs 43551 crs (incl Plant & Machinery of Rs 41163 crs) and Intangibles are Rs 22901 crs which largely is the Entry Fee for Telecom Licences of Rs 22386 crs (Gross Rs 28047 crs) ~ Capital WIP is Rs 5026 crs
Interestingly RC has capitalised in the past the Indefeasible Connectivity Rights of Rs 1668 crs which are reflected at a Net of Rs 81 crs at 31/3/2012 ~ Therefore even the Rs 1200 crs that RJI will give will be capitalised
So if One removes the Intangibles from the Book Value Computation the BV drops sharply below Rs 70 ~ the share price hovers below this currently
RC may not fall much from the current Rs 64 as RJI has resurrected it in a a way ~ However any strong move towards Rs 100 and past it can only be if RC is sold outright to Mukesh Ambani Group or at least the Tower Infrastructure is sold off to it for Rs 25000 crs + ~ There are strong pointers of either happening !
RC is therefore ,I daresay, a Contingent Buy ! ~ not suited for those who are not aggressive risk takers though !
Time to ‘Jio’ and take RC with Soda !? ~ the risk is the Soda may be Flat and not provide the expected Fizz !
Added on Monday,April 8,2013
RC has just announced a deal with Batelco of Bahrain for selling 80% of it’s stake in subsidiary Reliance Globalcom for Rs 6000 crs with an option to sell the remaining 20% stake after a year
It also is planning to sell it’s DTH Business for Rs 2000 crs to the Sun Group
So if it also announces,as is widely speculated,that it is selling the largely remaining Tangibles ,Transmission Towers ,to Big Brother’s Reliance Group as opined above,it’s Fixed Assets will largely be only the Intangibles of the Telecom Licenses of over Rs 22000 crs which cannot be transferred or realised but have to be written off over the years ~ Of course it does have a fibre optic network in place which it set up years ago at a fraction of the Rs 12000 crs it would cost to set up today
So even if RC becomes Debt Free,it may just have it’s highly competitive 2G and 3G and CDMA Mobile Business Operations as a survival crutch but will also have to contend with serious legal issues it is facing in the 2G Spectrum Scam ~ Perhaps that’s a hurdle in selling off RC to Big Brother’s Reliance Group
Whatever ! ~ remains to be seen if Transmission Towers indeed are sold off and whether the Market accepts then that the Networth is well represented by the Intangibles and thus rerates RC and moves it’s share price past Rs 100
Whatever ! RC,as stated earlier, is unlikely to see much downside from current Rs 65 levels