Anil Ambani’s Reliance Communications, the country’s fourth largest telecom operator and the most leveraged one, on Tuesday signed a non-binding pact with Malaysia’s Maxis Communications-held Aircel to explore a merger between the two telcos.
Since RCom had signed a deal in November with Sistema Shyam for a merger, if the current talks materialise into a transaction, it would lead to a three-way merger between RCom, Aircel and Sistema, thus creating the country’s third largest operator by subscribers with a total holding of 19.3% spectrum across all bands.
“Reliance Communications has entered into a 90-day exclusivity period with Maxis Communications Berhad and Sindya Securities and Investments Private Limited, the shareholders of Aircel, to consider the potential combination of the Indian wireless business of RCom and Aircel to mutually derive the expected substantial benefits of in-country consolidation, including opex and capex synergies and revenue enhancement. The potential combination will exclude RCom’s towers and optical fibre infrastructure, for which RCom is proceeding with an asset sale, as announced on December 4, 2015,” the company said in a statement.
“The discussions are non-binding in nature. Any transaction will be subject to due diligence, definitive documentation and regulatory, shareholders’ and other third-party approvals. Hence, there is no certainty that any transaction will result,” the statement added.
The talks with Aircel come after, earlier this month, RCom entered into a similar non-binding pact with private equity firm Tillman Global Holdings and TPG Asia to sell its tower business, Reliance Infratel, which has been valued at around Rs 21,000 crore. Besides the tower unit, Tillman and TPG will also evaluate purchase of RCom’s extensive nationwide inter-city and intra-city optic fibre assets, in a separate and independent transaction.
The way RCom is structuring the deals is to make the company debt-free. If talks with Tillman for the tower sale fructifies, RCom will transfer around Rs 16-17,000 crore of total debt of Rs 35,254 crore to the new special purpose vehicle. If the deal for fibre materialises, another Rs 7000-8,000 crore of debt will be cleared, thus leaving the company with a debt of around Rs 10,000 crore.
Company sources said this Rs 10,000 crore debt will be transferred to the three-way merged entity post the deal, thus making RCom a debt-free company. However, it will no longer be an access service provider but turn into an enterprise service firm.
Though the proposed deal with Aircel is good from the point of view of consolidation in the sector bringing synergies between the two operators, its fate will depend on how it does operationally and reduces its debt, which will balloon to around Rs 48,500 crore (Rs 38,500 crore of Aircel plus Rs 10,000 crore of RCom’s). This the merged entity will have to pare, however it will have time since the bulk of Aircel’s licences expire only around 2026-28.
Aircel, with pan-India operations, has all its spectrum in 1800 and 900 Mhz through administrative allocation.
However, it bought 3G spectrum in 13 circles in the auctions of 2010 and 4G (2300 Mhz) across eight. As per the merger and acquisition norms, the merged entity will have to pay market-linked price to the government for the administratively-held spectrum, which will amount to around Rs 5,000 crore.
Aircel, which is an unlisted entity, had revenue of Rs 10,500 crore with a net loss of Rs 6,900 crore in FY14. Sources said that RCom, which had an Ebidta of Rs 7,518 crore in FY15, will be left with Rs 4,000 crore after it sells off its tower and fibre business. This Rs 4,000 crore of Ebitda will transfer to the merged entity, thus improving its debt-to-Ebitda ratio.
In FY15, net profit of RCom declined by 32% y-o-y to Rs 714 crore. While it reported a net loss of Rs 705 crore at standalone level in the July-September quarter, the consolidated profit for the period at Rs 156 crore remained flat, compared to the previous year.
RCom’s November deal with Sistema is structured in such a manner that it gets access to the latter’s 800/850 Mhz spectrum across eight circles, valid till 2033. In lieu, Sistema gets a 10% stake in RCom. Sistema’s debt does not form part of the deal. Though RCom has 5 Mhz of 800 Mhz spectrum in these eight circles, the validity of the bulk of it is till 2021, when it needs to be renewed through auctions, something which the company can now do without.