Financial investors focussed on sovereign wealth funds, global pension and long- only infrastructure have been named out Reliance Jio Infocomm’s efforts to monetise its pan- India optic fibre assets to deleverage its balance sheet gather momentum.
Three investment banks—Moelis, Citi and ICICI Securities—have been appointed to reach out to potential investors across the Americas, Middle East and Asia, and Australia, according to people with knowledge of the matter.
Reliance is in the process of demerging the fibre assets into a separate company which could then be monetised via a sale and leaseback or infrastructure investment trust (InvIT) structure. However, it is keen to continue as the sponsor of the InvIT and even retain a minimum 15% stake in it. In that case, the remaining 85% will be sold to five global investors. Potential investors are said to include Canada Pension Plan Investment Board (CPPIB), Caisse de Dépôt et Placement du Québec (CDPQ), Abu Dhabi Investment Authority, Qatar Investment Authority, Kuwait Investment Authority, Kingdom Holdings, Khazanah, Allianz and Macquarie among others. The valuation of the fibre assets is expected to be $6-8 billion.
The talks are still preliminary in nature and management meetings are expected to kick off in the coming weeks. The company is expecting to complete the transaction by the middle of the new financial year. The final deal contours will evolve as negotiations progress.
In January, after Q3 results, Reliance executives had spoken about demerging the fibre and tower businesses into Jio Digital Fibre Pvt Ltd and Reliance Jio Infratel Pvt Ltd, respectively. This move was a precursor to transferring fibre and tower assets into two separate firms to monetise them via a sale and leaseback or InvIT structure. Reliance Jio Infratel is expected to be sold separately to Canadian investor Brookfield.
Brookfield, along with a clutch of insurers including ICICI Prudential, family offices of Russell Mehta and Poonawalla family, is also buying East West pipeline for $2 billion and will transfer the asset into a separate InvIT, ET reported on February 11.
“The end objective will be to have different set of investors who would want to run these companies. This means that these assets go off our balance sheets, so the liabilities also go down,” RIL’s joint CFO Srikanth Venkatachari said in January.
Industry experts believe even though Singapore’s Temasek and GIC — perceivably aligned to Bharti — may not be tapped for Jio, most other longterm capital pools will be tapped. “They have different return thresholds too compared to a fund like SoftBank or a private equity fund,” said an executive whose firm has been approached.
BACKBONE TO FUTURE
Jio operates 220,000 towers and over 300,000 route kilometres of fibre. The telco, backed by a Rs 3 lakh crore capital investment, said its home broadband and enterprise service —JioGigaFiber—has seen strong customer interest across 1,400 cities. It had notched up 280.1 million subscribers at the end of Q3. Jio is the key tenant of the fibre backbone but in the future it may lease out the pipe to others as well. Incremental capital expenditure related to network infrastructure will also be made by the InvIT, which will lower Jio’s capex intensity.
“With DSL and ethernet forming 75% of current fixed-line broadband connections, a strong fibre offering by Jio could drive market-share gains,” said CLSA’s Deepti Chaturvedi and Akshat Agarwal. “Jio has reiterated target of 50 million home broadband subscribers. We estimate that 10 million subscribers at Rs 700 average revenue per user would add incremental Rs 11,000 crore to capex and Rs 3,500 crore to ebitda (13% of FY20CL ebitda) and $4.4 billion to Jio’s EV.”
According to their estimates, Jio’s net debt is at Rs 1.12 lakh crore, including Rs 21,100 crore in spectrum liabilities due to the government at December-end. The firm clocked an ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 4,053 crore in the third quarter, which annualises to over Rs 16,000 crore, putting the new entrant’s leverage ratio at around 7x.
Chairman Mukesh Ambani had announced plans to launch Jio GigaFiber at the 2018 AGM. Although timelines have not been specified, Jio is putting the fibre network in place to deliver fibre-to-the-home (FTTH) services ahead of its shift to 5G.
The Jio GigaFiber service, which will threaten existing broadband, DTH and cable TV operators, will offer a combination of services including high-speed internet access, video on demand, broadcast and IPTV, music, video conferencing and ecommerce among others, all enabled by a single connection. Using the same pipe it also seeks to provide new generation services like internet of things and home security. It has also acquired controlling stakes in Hathway and Den Networks, two of India’s largest cable TV operators, and have invested in content production directly through Viacom 18 (via TV18 Broadcast) as well as acquired non-controlling interest in several content firms.
Reliance is building this quadruple play by bundling connectivity, carriage, content and commerce to gain a higher share of consumer wallets and stickiness, comparable to that of Alibaba and Amazon. As per estimates by UBS, the consumer-centric ecosystem can generate 47% of RIL’s consolidated ebitda by FY23. However, the capital expenditure of the consumer-facing businesses is likely to remain high due to intensifying competition and hence the net debt will expand even in FY20, declining only from FY21, analysts at the Swiss investment bank have said.
Jio’s rivals are seeking to match the competition. Bharti Airtel is in talks with Vodafone Idea to create a fibre joint venture similar to their co-owned tower company, Indus Towers.