The markets’ main worry is the funding constraints the company is likely to face. RCom is in the midst of a nationwide network roll-out on the GSM platform, which entails a large funding requirement. It also needs funds for the auction of 3G licences. The original plan was to monetize assets such as its tower infrastructure, which would help fund its expansion plans. The company even hived off its tower infrastructure into a separate company called Reliance Infratel Ltd. But its plans to list it came unstuck because of the crash in the markets. This, coupled with the credit crunch, has come as a double whammy for the company. According to a report by HSBC, funding constraints have resulted in the company scaling back on its GSM plans.

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According to the red herring prospectus filed by Reliance Infratel, the company had planned to deploy at least 60,000 towers in the current fiscal year. RCom has now revised the target to 48,000 towers. The company’s statement that capital expenditure would peak this fiscal and would be lower in the next couple of years is also seen being as a result of funding constraints.

In this backdrop, it’s easy to see why RCom is reported to be looking for a strategic investor. Any stake purchase will bring in much-needed capital, especially if the company gets a valuation similar to or greater than what Tata Teleservices Ltd managed when it brought in NTT DoCoMo Inc. as a partner. But the important question is which strategic investor would have ready access to such large funds and would be willing to come in as a smaller partner in RCom, since the promoters are said to be keen on retaining their majority stake.

Another news story that got the markets excited this week was that RCom is planning to buy back its foreign currency convertible bonds (FCCBs), which are trading at a discount of about 35% to face value. FCCBs worth $1 billion (Rs4,850 crore) are outstanding and their value would be even higher if one were to include the accrued interest. But these bonds are trading at a discount to face value, and the assumption is that RCom would use cash worth approximately $650 million to clear the debt of $1 billion and thereby save a substantial sum. Even if the company were able to save this entire sum, that would amount to a gain of just Rs8.3 on a per-share basis. But note that the price of the bonds will rise when RCom starts buying them and they won’t trade at a discount for long. At best, only a small portion of the bonds can be bought back at a discount.

Keeping this in mind, the $2 billion accretion to RCom’s market value in the past five trading sessions looks overdone.