The Board of Reliance Communications has given in-principle approval for the company to dilute a 26% stake in the company (“to a financial or strategic investor at a premium to current market price”) to raise fresh cash in the company. We would view the event (fresh cash being raised at >CMP of Rs168, which is higher than our fair value of Rs140), if it happens, as positive for RCOM. However, we would also sound a note of caution on the sustained flow of risk-capital into the industry.
Positive for the stock if the dilution takes place at a price higher than CMP
25% equity dilution (fresh issuance of 711 mn shares) at Rs170-210/share will raise Rs121-149 bn for RCOM. Including 3G payout and likely incremental capex, we estimate a net debt of Rs267 bn at end-FY2011E for RCOM, implying a net-debt to EBITDA of 4X, clearly outside the comfort zone (upto 3X) for telecom companies.
We would view the event – essentially fresh equity issuance at a price greater than the CMP (Rs168/share), which is greater than our fair value of Rs140/share – if it happens, as positive for the RCOM stock from two perspectives: (1) technically, fresh capital raised at greater than premoney fair value increases the post-money fair value, and (2) potential improvement in competitive positioning as the balance sheet situation improves.
For the minority shareholders, a potential increase in the fair value of the stock aside, there is also a possibility of an open offer (for 20% of increased outstanding equity) if the fresh equity placement involved a single entity buying more than 15% stake in the company. A strategic sale could see such a scenario; however, placement to a set of PE investors may mean such a scenario does not play out.
