Batelco Reliance GlobalCom Investment A Long Term Risk
Bahrain Telecommunications Company (Batelco) may invest in India-based Reliance Global Communications (Reliance GlobalCom) . Batelco would take a majority stake in the business, which is reportedly valued at US$1.3bn and operates one of the world's largest submarine fibre-optic cable systems. The operator's desire to reduce its dependence on its softening domestic business is laudable , but we note that investing in Reliance GlobalCom brings with it considerable long-term risks as well as significant potential upsides.
The business - previously known as FLAG Telecom - is currently owned by Reliance Communications , part of the diversified Reliance Group , and is beginning to see revenues and margins fall as competition drives down international bandwidth prices and as principal customers can choose from a broader range of service providers. Reliance's Global Enterprise Business, which includes Reliance GlobalCom , saw revenues fall to INR24.332bn (US$450.4mn) in the second quarter of its 2013 financial year, while EBITDA shrank to INR5.634bn (US$104.3mn) and the EBITDA margin fell to 23.2%.
|Q3 FY12||Q4 FY12||Q1 FY13||Q2 FY13|
|Source: Reliance Communications|
|EBITDA Margin (%)||24.2||24.2||24.1||23.2|
Notwithstanding the challenging business environment for international bandwidth, Reliance is keen to sell a large chunk of the business in order to address its substantial debt pile, much of which has been accrued through aggressive bidding in India's spectrum auctions and investment in wireless and wireline infrastructure at the local level. Reliance Communications had approximately US$6.9bn in debt, more than five times its annualised operating profit, at the end of 2012. Although its mobile services business is now the third largest in the country, it is the biggest drain on Reliance's resources.
Reliance GlobalCom's 65,000km submarine and terrestrial cable network reaches more than 2,100 businesses, 200 carriers and 2.5mn retail customers in 163 countries. Its focus is on large enterprises, multinationals and government agencies, a market in which Batelco has comparatively little experience in addressing. The Bahraini incumbent has invested in mobile and fixed broadband operations in Egypt, Jordan, Kuwait, Saudi Arabia and Yemen, which contributed 40% of annual revenues in 2012, but this achievement is being undermined by fast-contracting income from domestic operations.
In December 2012, Batelco agreed to buy Cable & Wireless Communications ' 12-market Monaco and Islands business for US$1bn, an audacious move considering the limited growth potential of so me of the operations involved. BMI believes i nvestme nt in Reliance GlobalCom would be on a different scale, with the prize being the glo bal submarine cable and supporting network of international gateways.
However, it seems likely that Reliance group will retain a minority stake in the business and that it will remain headquartered in India. The unsettled nature of the Indian telecommunications market, with foreign investment in Indian companies an easy political target, means that Batelco cannot be assured of investment and management continuity in the long term as telecoms and investment regulations are in the process of being revised and may summarily be altered again in the future according to changing political tactics and revenue-creation schemes. Batelco has fallen foul of the wayward Indian market once before, having lost its coveted mobile operator licences in 2012 as part of a government crackdown on historical spectrum allocation procedures . We therefore take a more bearish view that this would be a good long-term investment for Batelco unless it can negotiate the relocation of the business outside India.