Business Standard was the first to report the likelihood of this transaction in the first week of June. Post the merger, the Manoj Tirodkar-led GTL will become the world's largest independent tower company with 82,500 towers and 125,000 tenancies from 10 operators. On top of this, there is a commitment of close to 75,000 tenancies from both RCom and Aircel over the next 10-15 years.

GTL had in January snapped up Aircel's 17,500-tower portfolio. Anil Ambani will retain a 25 per cent stake in the new entity, but entirely in his personal capacity as a strategic financial investor, a first in Reliance's history.

The combined enterprise value of Reliance Infratel and GTL Infra -- including debt and equity of the two -- is about $11 billion (Rs 50,000 crore). This includes Reliance Infratel's debt of an estimated Rs 18,000 crore. This debt will now get transferred to GTL, drastically reducing RCom's debt burden. The total debt in RCom, after the recent payment for the 3G spectrum licence, is Rs 33,000 crore.

There will be substantial value creation for the two million RCom shareholders as they will get free shares of GTL Infra. The swap ratio is being decided. "This is a classic example of a large conglomerate and a mid-size company with competence agreeing to work together in a partnership. There will be no compromise on our independence and neutrality of operations," a GTL spokesperson said.

Over the weekend, both parties agreed on a non-binding arrangement. Independent valuers and auditors will now take about two months to complete the exercise and will help finalise the swap ratio. A definitive agreement will be signed between the two parties after that. The closure of the transaction can be expected three months from then.

"Keeping in mind (that) there will be a court process in the merger, we expect the deal should conclude by November," said a person with direct knowledge of the process. People involved in the transaction told Business Standard that RCom towers, with an average tenancy of 1.7, will attract a per tower enterprise value of Rs 52-55 lakh.

This means a portfolio of 50,000 towers would translate to an enterprise value of Rs 26,000-27,500 crore for Reliance Infratel. This is a significant premium to the Aircel tower deal that saw an enterprise value of Rs 45 lakh per tower. Aircel's average tenancy was 1.2.
Reliance Infratel will retain its optic fibre cable (OFC) network and divest only the physical towers into the merged entity. People close to the development said the OFC network was independently valued at close to Rs 6,500 crore. Combining that would have become unwieldy and GTL also wanted to principally remain just a tower company.

Also, such a move would have meant the transfer of the network management centre, a critical nerve centre for all telecom companies. RCom, therefore, was unwilling to part with it.
Some people involved in the transaction said post the merger, Tirodkar's Global Group would emerge the single largest shareholder of the merged entity with 30-33 per cent holding. This will be routed through the current promoter group, which includes Global Holding Corporation and GTL Ltd.

The existing financial investors of Reliance Infratel since July 2007 -- George Soros, HSBC, Fortress Capital, New Silk, Galleon, DA Capital and GLG Capital -- may continue but their stake will get diluted.

GTL Infra, added the people quoted above, is likely to divest 10-15 per cent in favour of a strategic investor who will also bring in the needed equity. Talks are on with a clutch of strategic investors such as Saudi Telecom and global private equity investors such as Blackstone. But, such a deal is still some time away.

"What is interesting is that an Ambani has decided to divest his business and continue as a strategic financial investor. That's unprecedented in Reliance history and it also shows how the outlook towards businesses are changing," a Hong Kong-based telecom analyst with a leading foreign brokerage firm said on condition of anonymity.

TOWER POWER
* Reliance Infratel to merge its 50,000 telecom towers with GTL Infra
* Deal size: Rs 50,000 crore; via cash, stock
* Rel Infratel to retain optical fibre network
* Global Group to be the single largest shareholder of the merged entity
* Anil Ambani to invest in personal capacity, to have 24-26% stake
* New strategic partners may pick up 12-20% stake
* Management control with GTL, merged tower firm to remain neutral and independent

How will Tirodkar and GTL Infra raise the cash? Sources said the initial cash payout for GTL will be Rs 15,000 crore. This will principally be towards picking up the Rs 18,000-crore tab of Reliance Infratel's debt. GTL Infra has approached SBI Caps to help it in debt financing of close to Rs 12,000 crore. GTL Infra's promoter will also infuse Rs 3,000 crore equity. The operating cash flow of the merged entity will be used as collateral to raise the debt.

The balance amount will be made through share swaps between GTL Infra's promoter and existing shareholders of RCom. A 10-12 per cent stake dilution to a strategic investor in the short term will also assist GTL minimise the debt burden.

Standard Chartered was the exclusive financial advisor of GTL in this transaction. Post the deal, Global Group is expected to cross revenues of $2.5 billion, a total balance sheet of $12 billion and earnings before interest, taxes, depreciation and amortisation of $1.2 billion.

Business Standard