Anil Ambani's Reliance Communications (RCOM) raised Rs61 billion ($1.017 billion) on Wednesday via an accelerated qualified institutional placement (QIP) and warrants issue.
The deal, led by CLSA and JPMorgan, represents the largest ever equity deal by a private sector Indian corporate in rupee terms.
On the surface its success seems surprising given the number of times RCOM has tried and failed to raise equity over the past few years in an effort to bring down its high leverage ratios.
However, the current deal was extremely well timed. It has not only ridden on the back of post election euphoria, which has lifted the entire Indian stock market, but has also taken advantage of investor expectation for further rapprochement between the Ambani brothers in the telecoms sector.
The 338 million share QIP placement was built around one large anchor order. But having gone out with a $500 million base deal size, the leads quickly decided to exercise an upsize option to $800 million after attracting around $2 billion in demand.
Final pricing at Rs142.14 per share represented a 6.1% discount to the stock's close on June 24 and a 5% discount to its floor price of Rs149.61. The QIP portion of the deal equates to around 38 days trading volume and 16.4% of the company's enlarged share capital.
About 50 investors participated in the deal but the allocation policy was tight with five investors allocated $450 million in stock. Bankers said they comprised a mix of US long-only and sovereign wealth funds from the Middle East and Asia. Roughly 90% of the deal went to international accounts.
Alongside the QIP, the company’s promoters (the ADAG Group, owned by Anil Ambani) are subscribing to 86.7 million warrants at Rs150 per share, raising a further Rs13 billion. Prior to the offering, ADAG held 68% of RCOM.
Valuation
RCOM’s share price closed on Wednesday at Rs151.45 per share, up 0.07% on the day. Year-to-date, the stock is up 16.9%, slightly underperforming the S&P BSE Sensex Index, which is up 19.5% over the same period.
However, it has rocketed 29.2% since early May when it became clear that business friendly Narendra Modi and his BJP party were going to win India’s general election. This has pushed RCOM’s valuation up to 31 times consensus 2015 earnings estimates, according to Bloomberg.
At this level, RCOM is trading at a premium to bigger rivals Bharti Airtel and Idea, which are currently bid at respectively 25 times and 18.5 times 2015 estimates, according to Bloomberg. On a stand-alone basis, this premium seems to make no sense at all given that RCOM underperformed both of them in its latest quarterly results.
In the first three months to March, RCOM lost 0.5% of its market share in revenue terms year-on-year, falling to 14% compared to Bharti’s 35.1% and Idea’s 20.5%. It also underperformed the sector in terms of revenue growth, recording year-on-year growth of 2.5% for cellular revenues compared to an industry average of 10%.
Fraternal bonding
But RCOM is increasingly being viewed a telecoms play for not one, but two Ambani brothers. Having fallen out after the death of their father Dhirubhai Ambani in 2002, an escalating feud led to a break up of the family empire in 2005 through a deal brokered by their mother, Kokilaben.
Signs of a truce started to become evident in 2010 around the time Mukesh Ambani successfully acquired one of India’s 4G licenses and laid plans for the company that is now called Reliance Jio Infocomm. What he did not have, but his brother Anil did, was the infrastructure to roll it out on.
Since then, the brothers have forged three infrastructure-sharing agreements and India’s Business Standard reported on Wednesday that they are about to sign a fourth in the next few days. The first agreement, signed in April 2013, enables Reliance Jio to access RCOM’s inter-city fibre optic network.
This was followed by a second agreement in August giving it access to RCOM’s telecom towers. Then in April this year, the two signed a third agreement, giving Reliance Jio access to RCOM’s intra-city fibre optic network.
Business Standard says the fourth deal involves spectrum, enabling Reliance Jio to offer services across more bandwidth. All four deals stand to significantly boost RCOM’s revenue stream once Reliance Jio comes online as its infrastructure assets become far more productive.
New entrant’s disruptive impact
But given Reliance Jio is not scheduled to launch its first service until March next year, the big unknown for analysts and investors is what impact it will have on future earnings across the sector. Credit Suisse, which currently holds a very bearish view, recently issued a research report entitled, “Are we forgetting the lessons from history?”
This and other recent research from the bank argues that the market is underestimating the disruptive impact Reliance Jio will have on the earnings momentum of existing players. It points out that Reliance Jio has the third largest spectrum footprint and is set to bring far more capacity online than five new players did in 2009/2010, the last time there was a major structural change to the Indian telecoms sector.
And one week ago, Mukesh Ambani fleshed out those 4G plans during Reliance’s AGM. He said capex is now estimated at $11.7 billion, up from previous expectations of $10 billion, while coverage will extend across 5,000 towns and 215,000 villages.
This puts the company close to market leader, Bharti, which currently covers 5,121 towns and is also rolling out a 4G network.
The two Reliance entities have also previously stated their ambition to co-operate in other areas including sales and billing.
Debt reduction
For RCOM, the equity raising should remove a considerable overhang created by the company’s US$6.8 billion debt. Concerns about its leverage have been a red flag for investors over the past few years.
In July 2012, the company tried to address them by spinning off its subsea cable unit via a $1 billion business trust in Singapore. Despite offering a double-digit yield, the deal failed to get off the ground.
The new deal finally puts these issues to bed. As one banker said, “RCOM has now got to a stage where investors are unlikely to have any concerns about its balance sheet and this will also give it breathing space to bid in the next round of auctions.”
He added: “The Indian capital markets are well and truly back.” Viewing the positive momentum RCOM’s deal has created, investors may well be asking, “who’s next?”
Axis Bank, Edelweiss and Macquarie completed the syndicate.
