Reliance Communications (RCom) and AFK Sistema have entered into exclusive discussions on a potential merger between the Indian telecom business of Sistema Shyam Teleservices (SSTL, not covered) and RCom through share swap. The discussions are not binding in nature and subject to approvals.
If the transaction is completed, we see the following potential upsides for RCom (a) Attempting to reduce risks around spectrum renewal – In the eight overlap markets, SSTL spectrum is valid for another eighteen years unlike RCom which faces 800 spectrum renewal in six years (b) LTE upside and saving on one-time fee -Spectrum owned by SSTL has been obtained via auctions and can be used for LTE. This may allow RCom to save on one-time fee of c$50 million. (c) Proposed merger may allow RCom to offset revenue loss from recent spectrum losses and there could be cost savings as both RCom and SSTL run parallel CDMA operations in eight markets. Further as the proposed deal would be all share swap, it would allow RCom to reduce spectrum renewal risks partially without leveraging its balance sheet.
We have a Reduce rating and fair value target price of Rs 55. We make no changes to estimates as the proposed merger is subject to regulatory approvals. Key upside risk will be faster than estimated data growth.
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