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Reliance to Spend $5 Billion on Telecom, Analysts Say

Reliance Industries Ltd., India’s biggest company by market value, may spend about $5 billion on a wireless Internet venture as Chairman Mukesh Ambani reenters an industry he left to his brother in 2005, analysts said.

The company plans to spend more than $1 billion on leasing infrastructure, such as base stations and optic-fiber lines for its broadband services, Alok Deshpande, an analyst with Elara Capital Ltd., said. Reliance, which briefed analysts June 12, will also pay 128.5 billion rupees ($2.8 billion) for Internet services licenses earmarked for Infotel Broadband Services Ltd., which it bought last week for 48 billion rupees, he said.

“That money is about one year’s free cash flow,” said Jigar Shah, the Mumbai-based head of research at Kim Eng Securities Pvt. “They are making an effort to use the cash they are generating from their current operations in a business they have known in the past.”

The acquisition of Infotel returns Ambani to the communications industry five years after he handed over his interests in the sector to his younger sibling Anil, who controls Reliance Communications Ltd. The brothers, who broke up India’s second-biggest industrial group in 2005, last month said they would compete in each other’s sectors for the first time, ending a spat that delayed infrastructure projects and a merger.

Manoj Warrier, a spokesman for Mumbai-based Reliance Industries, couldn’t immediately be reached for comment.

Shares Gain

Shares in Reliance Industries gained 1.6 percent to 1,063.50 rupees, the highest since May 13, in Mumbai trading compared with a similar increase in the benchmark Sensitive Index of the Bombay Stock Exchange. The shares have declined 10 percent in the past year.

“The telecoms business gives clarity on the deployment of their cash and that helps push up shares,” said Deepak Pareek, a Mumbai-based analyst with Angel Broking Ltd. Reliance has money left over for further acquisitions in the oil and gas sectors, he said.

Since Reliance Industries began producing natural gas from India’s biggest field in the Bay of Bengal in April last year it generates about $1 billion of free cash flow every year, Kim Eng Securities’ Shah said.

It has outstanding debt of about 625 billion rupees and cash and equivalents of 218.7 billion rupees as of March 31, the company said in April.

Reliance is in talks with banks to borrow $1 billion, two people with direct knowledge of the matter said June 4.

15,000 Base Stations

Following the acquisition of Infotel, Reliance Industries will deploy 15,000 base stations across India, increasing to 20,000, at a cost of $1.07 billion to $1.5 billion over the next three years, Shubham Majumder, a Mumbai-based analyst with Macquarie Group Ltd., said in a note to clients today.

Anil Ambani’s Reliance Communications Ltd. said it dropped out of the bidding for Internet services permits after securing third-generation mobile-phone licenses in an earlier auction.

The company said in a June 14 statement that it looks forward to competing with Reliance Industries and other wireless providers using its “different choice of technologies.”

Infotel was the only company to win licenses in all 22 regions in the auction of wireless broadband Internet services that ended on June 11, the Department of Telecommunications said in a statement on June 11. Aircel Ltd. won eight regional licenses for 34.38 billion rupees.

Less than 5 percent of mobile phone users in India use wireless broadband and that gives Reliance Industries the opportunity to grow, the company said in a presentation on its website. China has 130 million broadband users and India can get that many users in three to four years, according to the presentation.

Ratings Affirmed

Moody’s Investors Service and Standard & Poor’s maintained their ratings on Reliance Industries. Moody’s reaffirmed its Baa2 and Standard & Poor’s its BBB rating, they said in separate statements today. Both the ratings are the second-lowest in investment grade.

The winning bidders are betting India’s growing economy, which is forecast to surge 8.5 percent in the year ending March, will spur consumers to spend more on wireless products and services. The license-sale proceeds add to the 677.2 billion rupees the government raised from last month’s auction of mobile-phone permits, giving Prime Minister Manmohan Singh more room to cut the fiscal deficit.

Eleven companies, including Bharti Airtel Ltd. and Qualcomm Inc., competed for two bandwidth slots in each of 22 regional zones in the auction for BWA, or broadband wireless access. The spectrum will allow them to use new technologies like Wimax, a wireless broadband technology that would allow users to download an hour-long movie in about 40 seconds.

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