Canadian private investment firm Brookfield Infrastructure Partners has inked the second-biggest private equity deal ever in India by buying the telecom tower business of Reliance Communications Ltd (RCOM) for Rs 11,000 ($1.6 billion) in cash.
The two had signed a non-binding term sheet for the deal in October.
As per the agreement, RCOM’s telecom towers housed under Reliance Infratel Ltd will be demerged into a separate company that will be 100% owned and independently managed by Brookfield Infrastructure. This will create the second-largest independent and operator-neutral towers company in India.
RCOM will receive Class B non-voting shares in the new tower company, providing 49% future economic upside in the firm, based on certain conditions. It will also enjoy certain information and other rights, but will not be involved in the management and operations of the tower firm.
RCOM and Reliance Jio, the telecom arm of Reliance Industries Ltd, will continue as major long-term tenants of the new tower company, along with other existing telecom operators.
It did not share more details on the structure of the deal.
RCOM held around 91% of Reliance Infratel while the remaining stake is held by billionaire investor George Soros' Quantum, PE firm New Silk Route (NSR) and other investors. RCOM also owned preference shares of Reliance Infratel.
The quantum of money that will be paid to these other private investors from this transaction was not made public.
NSR had invested Rs 83 crore in Reliance Infratel in 2007 to pick up a 0.3% stake in the company, valuing the tower company at over Rs 26,500 crore.
Although the structure of the latest transaction with Brookfield has not been made public, if the PE firm is buying RCOM’s 51% stake in the business or 90.5% for Rs 11,000 crore, in both cases it has valued the firm at a lower level than at which it attracted PE funding and NSR may be exiting its almost decade-old-bet with a loss.
An email query to NSR did not immediately elicit a response.
RCOM said it will use the upfront cash payment of Rs 11,000 crore solely to reduce its debt. The already announced combination of RCOM’s wireless business with Aircel and the monetisation of the tower business will together reduce RCOM’s overall debt by Rs 31,000 crore ($4.6 billion), or nearly 70% of existing debt.
RCOM will continue to hold a 50% stake in the wireless business combination with Aircel and the 49% future economic upside in the towers business, and will monetise these assets in the future to further substantially reduce its overall debt, it said on Wednesday.
Ambit, SBI Capital Markets and UBS Securities India are acting as financial advisers and Herbert Smith Freehills LLP and JSA Law are acting as legal advisers to RCOM for the transaction.
This is the second-biggest private equity transaction ever in the country, behind Temasek’s $2 billion investment in Bharti Telecom in 2007. Temasek exited Bharti Telecom, a key shareholder of Bharti Airtel Ltd, early this year, at a loss.
RCOM's tower business and valuation
Last December, RCOM entered into an initial agreement with private equity investors Tillman Global Holdings and TPG Asia to sell its tower assetsand other related infrastructure across the country.
US-based investment firm Tillman Global, founded by telecom veteran and former CEO of Orange SA Sanjiv Ahuja, and TPG Asia were also looking to acquire RCOM's nationwide inter-city optic fibre assets, in a separate and independent transaction.
At that time, the specified assets were to be transferred from Reliance Infratel to a separate SPV, which was to be completely owned by TPG and Tillman.
However, TPG walked away from the deal after RCCOM declined to accept the valuation of Rs 13,000 crore to Rs 15,000 crore for the tower business. RCOM was seeking a valuation of Rs 21,500 for the assets, The Economic Times had reported earlier.
RCOM has been trying to sell its tower business to reduce debt. It had invited proposal from investments banks to monetise assets of its tower unit in May 2015.
At that time, the telecom operator owned around 45,200 towers with 120,000 kms of intra- and inter-city fiber laid out. Reliance Infratel is the country's third-largest tower company behind Bharti Infratel and Indus Towers.
A year ago, in another large tower deal, NYSE-listed American Tower Corporation (ATC) bought a 51% stake in telecom tower firm Viom Networks Ltd for Rs 7,635 crore ($1.2 billion) in cash. Viom, co-promoted by Tata Group's privately held communications arm Tata Teleservices Ltd and the Kanoria family of SREI Infrastructure Finance Ltd, counted several private investors, many of whom had backed the Kanorias in their tower firm Quippo Telecom Infrastructure.
Viom was created as part of a merger between Quippo and Tata Teleservices' tower unit in 2009.
Meanwhile, for RCOM this would mark a back-to-back transaction to chop off debt. In September, RCOM announced a merger with Aircel to create a Rs 65,000 crore entity, in a transaction that would reduce its debt by Rs 20,000 crore.
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