Reliance Communication’s (RCOM’s) press release last week suggested it will announce the potential combination of the Indian wireless business of RCOM and Aircel very shortly. As per various news reports, the merged wireless entity will be held jointly by RCOM and Aircel, implying that RCOM will be carving out its wireless mobile business and transferring the same to a new entity.
The tower assets and optic fiber assets will remain a part of RCOM. Reports also stated that total debt of the merged entity is estimated at Rs 280 billion. The combined wireless entity may remain unlisted initially, and RCOM is likely to have a stake in the new company.
Potential for cost savings cannot be ruled out for the merged RCOM-Aircel wireless business, possibly in the form of tower and employee costs. As per our analysis, consolidated EBITDA for the merged entity is estimated at Rs 30-40 billion and post-synergies EBITDA may improve by 25-30% provided the subscriber base remains intact. In our view, subscriber retention may not be easy as competition may attempt to churn subscribers during transition. Another key variable impacting the profitability of the merged entity will be the per-subscriber payout to 4G entrants for use of their 4G network.
Despite potential savings from a RCOM and Aircel transaction, we remain cautious as: leverage may remain a drag for the combined entity, and, despite cost savings, net debt/EBITDA may remain above 4x, in our view, unless RCOM and Aircel infuse additional equity.