In early July, when Reliance Jio Infocomm Ltd announced Jio GigaFiber, its fibre-to-the-home broadband service, shares of cable and broadband service providers corrected sharply. Hathway Cable and Datacom Ltd, for one, lost one-fourth of its value in just two trading sessions. However, Hathway investors had something to cheer about on Wednesday with the company’s shares rising nearly 10% following reports that Reliance Industries Ltd (RIL) may buy the multiple system operator (MSO) to speed up the commercial launch of Jio GigaFiber.
Given the recent developments, the Hathway promoters may be tempted to take the offer. According to The Economic Times, the deal between RIL and Hathway could be at a valuation of ₹ 2,500 crore, which is at a 9% premium to the MSO’s current market capitalization.
But, if Hathway shareholders expect the moon, they might be disappointed.
Hathway’s enterprise value is at ₹ 4,000 crore, or about 11 times its Ebitda (earnings before interest, tax, depreciation and amortization). It has fairly high debt of ₹ 1,700 crore, or nearly fives times its Ebitda. Besides, the company’s average revenue per user (Arpu), too, has fallen from around ₹ 740 to ₹ 690 in the quarter ended June 2018, and is expected to remain under pressure with Jio GigaFiber breathing down its neck.
The only silver lining is that Hathway has maintained its Ebitda margin of around 43% in the broadband business, despite falling Arpu.
To ease the burden on its balance sheet, the Hathway promoters have infused fresh equity of ₹ 100 crore this year.
Taking on the might of RIL in broadband services will, however, require further investments, alongside the ability to sacrifice near-term revenues and profits. Needless to say, a deal with RIL will ease pressures. From RIL’s point of view, its broadband roll-out has been slower than what investors had hoped for, and any help it can get with last mile connectivity will be a welcome move.
Given that Hathway boasts 5.5 million home passes, or the number of households it can provide connections to in a service area, it can potentially help solve Jio’s challenge with last-mile connectivity.
According to an analyst at a domestic institutional brokerage firm, local cable operators will obviously be threatened by Jio GigaFiber’s launch, but RIL may also be forced to get into separate deals with them.
Earlier news reports had hinted that RIL may acquire another MSO Den Networks Ltd, but the deal did not materialize.