Reliance Group looks to sale of tower, road assets to ease debt

From being a Chartered Accountant to becoming Anil Ambani’s most trusted man, Amitabh Jhujhunwala has charted a meteoric rise. And yet, for the Group Managing Director and Vice-Chairman of the Anil Ambani-led Reliance Group, the next six months will perhaps be the most crucial period ever since Dhirubhai Ambani’s Reliance empire was split after a bitter feud between brothers Anil and Mukesh Ambani.

Jhujhunwala has been entrusted with the responsibility of selling a number of assets within the group in an attempt to bring down the net debt of ₹1,08,031 crore by at least 50 per cent. The asset sale is crucial to the Group’s plans to chart its next phase of growth focussed on defence, power and financial services.

Back in 2005, Reliance Group (or ADAG as it was then called) was carved out as part of a settlement between the then-warring Ambani brothers. Under this agreement, Anil was given control of Reliance Infocomm, Reliance Energy and Reliance Capital.  The day after the split was made public in June 2005, Anil announced the formation of Anil Dhirubhai Ambani Enterprises, as the holding company controlling Reliance Infocomm, Reliance Energy Limited (REL) and Reliance Capital Limited (RCL).

At a press conference, Anil said the new entity will invest about ₹2,000 crore in RCL and ₹1,000 crore in REL. What followed, over the next ten years, was an aggressive rollout of various businesses.

Reliance Power, for example, now has a strong operating portfolio of 6,000 MW, which also includes 185 MW of renewable energy, the 3,960 MW Sasan UMPP in Madhya Pradesh, the 1,200 MW Rosa power plant in Uttar Pradesh and the 600 MW plant in Butibori, Nagpur. Over the last six years Reliance Power has added, on an average,1,000 MW of power generation to the national capacity each year.

The two coal mines associated with the Sasan UMPP –– Moher and Moher-Amlohri –– produce a total of 20 million tonnes of coal, which makes Reliance Power the country’s largest private-sector coal producer.

But all this has also meant that the company has accumulated debt of ₹30,897 crore. Company executives insist that the number is not alarming. “Normally, all big power and infrastructure projects are debt-heavy projects and are financed with a 70:30 debt-equity ratio. Reliance Power has invested over ₹50,000 crore in the past six or seven years to set up the greenfield capacity of 6,000 MW. Going by this, the ₹30,000 crore debt of Reliance Power is largely in line with the financing norms of the industry,” said a company executive.

But not all of the Group’s bets have paid off. The decision to venture into the cement business and bid for infrastructure projects under the PPP route has ended up being a drain on Reliance Infrastructure (RInfra). For example, the company bid and won several road projects, but has been hampered by procedural issues and delays associated with working with various government bodies. Though these projects have been completed, the company is now looking to monetise the entire portfolio of 11 road projects worth around ₹9,000 crore. Three international bidders have been short-listed for this.

Similarly, Reliance Cement Company Private Limited, a subsidiary of Reliance Infra, had built an integrated cement capacity of 5.08 Mtpa at Maihar, Madhya Pradesh, and Kundanganj, Uttar Pradesh, and a grinding unit of 0.5 Mtpa at Butibori, Maharashtra. But with the cement business slowing down and the company finding no reason to remain invested in such a small operation, this was sold to Birla Corp for ₹4,800 crore.

The proceeds of the sale are being utilised to reduce RInfra’s debts, which stand at ₹25,000 crore. In addition to the cement plant, binding agreement has been signed between RInfra and PSP Investments (Canada) for 49 per cent sale of the Mumbai power business. The generation, transmission and distribution assets of Mumbai will be carved out into a separate SPV named Reliance Energy, whose value is pegged at approximately ₹15,000 crore. RInfra is also selling 49 per cent equity in Reliance Energy to PSP Investments for ₹3,500 crore. This transaction will reduce the ₹7,000 crore debt attached to the distribution business.

The monetisation of the three businesses –– cement, road and Mumbai power distribution –– is expected to make RInfra debt-free on a stand-alone basis by the end of the current financial year, according to company executives.

The big worry for the group, though, is the telecom business, which has run up debts of nearly ₹40,000 crore on its own. Switching from a CDMA network to GSM-based mobile service, and the acquisition of expensive 3G spectrum required the company to invest heavily on rolling out infrastructure. Attempts to sell some of its assets, including the towers and under-sea cable infrastructure, have not yielded any results so far.

A senior company executive conceded that Reliance Communication needs to “do something” about its debt, even though it is much lower than the debt levels of peers in the telecom sector. The company has prepared a blueprint to revive its fortunes.

The plan envisages a fresh attempt to sell its tower assets, merging its wireless business with Aircel, and migrating from CDMA-based 2G services to 4G services.

To start with, RCom has ended the exclusive nature of discussions with private equity firm Tillman Global Holdings LLC to sell its tower assets, largely over differences over the valuation. It has extended the discussions to at least two or three other interested bidders. To secure better valuation, the tower deal will now happen only after RCom seals the merger of its wireless business with Aircel.

RCom wants to sell its 44,000 telecom towers to pare its debt, which stands at ₹40,479 crore. The company hopes to get about ₹20,000-22,000 crore from the sale of tower assets. Of the remaining debt of ₹20,000 crore, RCom plans to transfer ₹14,000 crore to the company created by the merger with Aircel.

The merged entity will be owned jointly by RCom and Aircel. RCom will carve out its wireless mobile business and transfer the same to the new entity.

Post the merger with Aircel, which is expected to happen soon, the new entity is estimated to have a combined market share of 13 per cent in terms of the overall industry revenue.

EBITDA of the new company is expected to be around ₹5,000-6,500 crore, and the overall debt will be close to ₹28,000 crore. Aircel, which has nearly ₹18,000-20,000 crore of debt on its books, will transfer ₹14,000 crore to the new entity.

The balance debt will be settled by Aircel prior to the merger. Aircel has already sold its 4G spectrum to Airtel for nearly ₹4,000 crore. Once the merger with Aircel is done, RCom hopes to get a better valuation for its tower assets riding on higher tenancy ratio and the brighter prospects in the wireless business, especially 4G services.

RCom has already begun shutting down its CDMA-based 2G network by migrating subscribers to 4G services. Here, too, the company is retaining its focus on high-quality consumers.

Over the next few months, RCom will shut down CDMA networks across the country. The company has done a deal with Mukesh Ambani-backed Reliance Industries to share and trade 4G network and spectrum. This, along with the spectrum from Aircel, will be enough for RCom’s wireless business to challenge Idea Cellular (the No.3 mobile operator in the country), according to senior company executives.

Analysts tracking the telecom sector say that though the plan looks good on paper, the outcome will depend on how soon Anil Ambani closes the sale of the tower assets. “RCom’s tower asset has been on the block for a while. A fresh round of talks began in December, but there seems to be a gap in the expected valuation and what buyers are ready to offer. Hence the uncertainty continues,” said an analyst, speaking on condition of anonymity.

But Jhujhunwala, who is leading the asset sale talks, is well aware that he does not have more than six months to do a big-ticket sale as investors and lenders are growing impatient. The company insists there have been no delays. Senior executives said negotiations for the tower sale started only six months back, whereas similar deals in the industry have taken two to three years. Closure of the deal will not only be crucial for RCom but also for Group’s plans to exit verticals such as road construction and move into new areas including defence.

“If Reliance Infra were to grow in verticals such as road construction, cement and metro, it would require huge capital. The payback on these investments would take many years. Some of the projects require over ₹13,000 crore investments and revenues are only ₹800-1,000 crore. Therefore, we have decided to focus on defence equipment manufacturing, electricity distribution and EPC construction businesses,” said the Group executive. “In the road infrastructure business, a ₹3,000-crore investment fetches you revenues of ₹200 crore, but in the defence business, the same level of investment could earn revenues of ₹30,000 crore,” he added.

The company sees a big opportunity in the Modi government’s ‘Make in India’ programme for defence manufacturing sector, and has taken over 20 defence licences. To execute future contracts, it is setting up a 300-acre defence park in Nagpur, which will be its hub for the aerospace business. The company will make warships and intelligent body armour for the armed forces. Forty executives with domain expertise in defence production have been inducted recently. In addition, Reliance has acquired Pipapav’s ship-building capabilities in Gujarat aimed at naval contracts.

“The defence sector has relatively lower capital intensity, low gestation period (unlike roads), minimal regulatory uncertainties and the potential for superior return on equity. The opportunities in defence are expected to be ₹20 lakh crore over the next 10 years –– or ₹500 crore a day,” said the executive.