RCom needs to raise funds

RCom needs to raise funds
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First Published: Wed, Dec 16 2009. 12 35 AM IST

Updated: Wed, Dec 16 2009. 12 35 AM IST
Reliance Communications Ltd (RCom) has denied the news report that it is in talks to sell its undersea fibre optic network and US network businesses (FLAG) to raise funds. Analysts, too, are expressing surprise that FLAG could be on the block.
Having said that, it does look like the company’s options for raising funds are limited. According to an analyst who did not want to be identified, the company’s plan to raise funds through a qualified institutional placement hasn’t worked out, and it may not be interested in issuing shares at current prices since that would involve relatively high dilution. The company’s shares have fallen by about 42% in the past three months on concerns about the intense tariff war in the industry.
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Meanwhile, the company is already loaded with debt. It reported a gross debt of Rs25,467 crore for September and cash and cash equivalents of Rs4,387 crore. But some analysts point out this may not be the total debt burden, since the balance sheet also reflects unusually high current liabilities of Rs22,421 crore. Over time, the current liabilities could become real debt. These high liabilities would constrain the company’s ability to raise fresh loans.
And the current cash equivalents may not be sufficient to take care of the capital expenditure related to its existing services as well as bid for 3G licences. One is tempted to believe that there may be some truth in the rumour about the FLAG sale. But as one analyst points out, it would be difficult to be buyers for a minority stake. There would certainly be takers for a controlling stake, but then such a move would be seen as a desperate measure, especially since the company has been rather bullish about the prospects of the global business.
What makes things worse for the company is that while its financing position continues to be tight, business fundamentals have become much worse with the increasing intensification of the tariff war. The price competition in the voice segment has extended to the roaming space as well as short messaging service. This will put free cash flow generation under immense pressure for RCom, which is a relatively new entrant in the GSM space. The firm may well have to resort to a drastic measure such as selling a large part of its business to strengthen its financial position.
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First Published: Wed, Dec 16 2009. 12 35 AM IST