GTL Infrastructure Ltd’s cash and stock buyout of Reliance Infratel Ltd’s tower infrastructure business will lead to a huge dilution in its equity capital. Mint had reported that Reliance Infratel’s 50,000 towers have been valued at Rs59 lakh a tower for the deal. This results in an enterprise value of Rs29,500 crore.
A report by Anand Rathi Securities states that the cash portion of the deal is likely to be Rs16,000 crore. This is the amount GTL Infrastructure can raise through fresh borrowings, based on its ability to service the debt with the consolidated entity’s profit, the analysts add. The balance Rs13,500 crore will be paid by issuing shares of GTL to shareholders of Reliance Infratel.
Also See Equity Gains (Graphic)
Based on the current share price of Rs47.20 each, 28.6 million shares would have to be issued. GTL currently has 9.57 million outstanding shares, which means that its equity base would go up by around four times.
It’s important that private equity (PE) and strategic investors are brought in, because if all of the newly issued shares remain with shareholders of Reliance Infratel, Anil Ambani and persons acting in concert will own around 48% in the merged entity.
According to a report by IIFL Research, “If RCom’s (Reliance Communications Ltd) current shareholders, particularly the promoters, hold the majority of GTL Infratel, then the company would not be perceived to be a neutral company, and this would obstruct efforts to raise its tenancy.”
On the other hand, IIFL analysts have calculated that the merged company needs to raise $1.7 billion (Rs7,922 crore) from new investors to contain the shareholding in the merged company of the current Reliance Infratel shareholders at 50% or less. While raising funds of this magnitude would not be an easy task, maintaining neutrality of the merged entity is critical.
The markets, of course, are already pricing in benefits from the tower deal as well as the subsequent plan to sell a 26% stake in RCom to a strategic investor. Assuming a value of Rs59 lakh per tower for the passive infrastructure business, the remaining businesses are valued at an enterprise value to Ebitda (earnings before interest, taxes, depreciation and amortization) valuation of around eight times fiscal 2011 earnings, based on Anand Rathi’s estimates.
This represents a 12% premium to Bharti Airtel Ltd’s valuation (including Zain Group). Of course, if the strategic stake sale happens at a significant premium to the current market price, the premium to Bharti is justified.
Graphic by Yogesh Kumar/Mint
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