Reliance Communications to sell stake in tower business

Reliance Communications (RCOM) plans to sell another 5% stake in its wireless tower business in the second such transaction in this calendar year. JP Morgan, which advised RCOM in the last transaction announced in July this year, invited bids from financial investors last week amidst indications that the deal will be bigger than the previous one, which fetched a value of $6.75 billion for the tower business.

Reliance wants the business to be valued at about $9 billion. It believes that the profitability of the tower business will increase as tenants increase. For instance, the roll-out of RCOM’s GSM business in 16 circles will be considered another tenant. The introduction of 3G and WiMax next year will give opportunities for further tenancies. The bidders are likely to be financial investors such as hedge funds and institutional firms. Reliance Communications spokesperson declined comment on the issue. The wireless tower business is witnessing frenetic activity as companies begin to see immense benefits in spinning off the asset and are either listing it separately, or selling a small stake to investors at a premium.

A wireless tower enables smooth passage of signals across a wide expanse of territory and is crucial in helping telecom companies achieve penetration. Big telecom companies own thousands of towers, but it need not always be on their books. The companies can spin off the tower business and lease space on them to other telecom companies, their competitors.

The tower business becomes an independent company with its own revenue stream and a relatively stable business model.

The telecom operators benefit as they get much-needed cash from such a spin-off for their operations. Their shareholders also benefit from an increase in share price and market capitalisation. Companies with no major infrastructure to boast of can ride piggyback on those with towers after paying rental and other pass-through charges.

Reliance Communications has spun off its business earlier this year and sold a 5% stake to investors such as Fortress Capital, HSBC Principal Investors, GLG Capital, Quantum Fund, New Silk Route Advisors, Galleon Group and DA Capital.

Other telecom companies have quickly followed suit. Bharti Airtel, the country’s largest wireless services provider, has announced the spin off of its business. The firm is also in talks with Vodafone and Idea Cellular to create a single mega business. Spice Telecom has decided to sell the business while Tata Teleservices wants to sell a substantial stake.

A tower business needs to have at least two tenants in order to be profitable.

RTIL now has Reliance Communications’ CDMA business as one of its major clients. Its other tenant is Reliance Telecom which runs GSM services in the seven circles. A third tenant will be added when RCOM rolls out GSM services in the remaining 16 circles. It has already got a licence and is waiting for spectrum to be allocated.