India’s Reliance Communications is seeking to raise up to $1 billion from the listing of its subsea cable unit in Singapore, according to a source. The unit is listing as a business trust to reflect its utility-like cash flows and to enable it to pay higher dividends. It is scheduled to start trading on July 23.
Global Telecommunications Infrastructure Trust (GTI Trust) is offering 55% to 65% of its total number of units at a price between $1.09 and $1.32 each, which implies a dividend yield of 9.5% to 11.5% for the fiscal year to March 2013.
The yield looks generous compared to other business trusts in Singapore and particularly versus Hong Kong-listed HKT Trust, the telecom business that was spun off from PCCW through a business trust-like structure in November last year. The latter was sold to investors at an implied 2012 yield of 9%, but after gaining 37.5% since its trading debut, the yield has dropped to about 6.8%.
Hutchison Port Holdings Trust, which raised $5.45 billion from a business trust IPO in Singapore in March last year, is trading at a forward yield of about 8.5%.
However, a high yield may be necessary to convince investors to buy into the company at a time when sentiment for IPOs is at a low and several other listing candidates in Singapore and the rest of Asia have called off or delayed their listing plans. Just a few weeks ago, Formula One decided to postpone a Singapore IPO that was expected to raise $2.5 billion to $3 billion, with the controlling shareholder opting to monetise part of its holdings through a private placement instead.
The subsea cable industry is also suffering from overcapacity following the huge build-out of global and regional networks in the late 1990s and on certain routes prices for data transmission are falling by about 20% per year, according to the a draft prospectus published late last week. GTI Trust is currently only using about 25% of its installed capacity.
This suggests that the trust is unlikely to offer much growth in the foreseeable future. However, a source close to the offering noted that demand is expected to continue to grow at a faster rate than prices are declining as new innovations and increased data traffic require greater capacity. This should enable GTI Trust to come out ahead. And the whole idea of listing as a business trust is that it will be able to pay dividends out of its cash flows, as opposed to from its accounting profit, which means the payout to investors should increase slightly each year even though the bottom line is expected to remain in the red for the next two fiscal years.
The trust is projecting pro forma revenues (based on the group structure following a pre-IPO restructuring) to increase to $287.6 million in fiscal 2013 and to $308.8 million in fiscal 2014, from $267.5 million in fiscal 2012. Total distributions (on an annualised basis) are expected to amount to $145.4 million in fiscal 2013 and $154.7 million in fiscal 2014, the draft prospectus shows. This suggests a yield of 10.1% to 12.2% for fiscal 2014.
GTI Trust hadn’t signed up any cornerstone investors prior to the launch of the roadshow yesterday, but the bookrunners have done quite a bit of early marketing and the management has also met key investors several times. Sources say there is interest primarily from long-only investors who are keen on the yield, including some sovereign wealth funds in Asia and the Middle East.
GTI Trust said in the draft prospectus that the scale of its cable network, the fact that its subsea network is wholly-owned and the high barriers of entry (high costs and a long lead time to construct new cables) will make it an attractive investment proposition. It operates four wholly-owned subsea cable systems with a total installed capacity of 15,160 gigabits per second and has an exclusive right to purchase capacity on a fifth cable system. These systems operate on six of the eight major global data traffic routes, including the Trans-Atlantic route, the intra-Asia route and the India-West route. According to the prospectus, the six routes accounted for 63% of the global data demand in 2011 with GTI Trust’s market share amounting to about 18.8%.
Backed by Anil Ambani’s Reliance Communications, GTI Trust will also be the first publically traded global telecom infrastructure-related business trust.
The trust has yet to decide exactly how much it will sell to investors, but the portion that isn't offered for sale will be retained by Reliance Communications (either through the sponsor, Reliance Globalcom, or through the trust management company, which is wholly-owned by the sponsor).
GTI Trust will use the proceeds to acquire the cable network from Reliance, which needs capital to pay down debts that amounted to about $6.5 billion at the end of March.
The base deal may comprise up to 758 million units, but there will also be a 15% greenshoe that could increase the free-float to a maximum of 75% and the total proceeds to about $1.15 billion. At the bottom of the price range and based on the sale of 55% of the trust, the deal will raise about $700 million.
About 98% of the offer will be targeted at institutional investors, while the remaining 2% will be set aside for retail investors.
The order books will remain open until Monday (July 16) and the pricing is expected at the end of the US trading that day.