Reliance Communications and Aircel Merger

By: Gursahib Singh Buttar

Anil Ambani's Reliance Communications (RCom) on Wednesday announced a merger of its wireless telecom businesses with Aircel, which will create India's third biggest telecom operator in terms of subscriber base. Ownership will be divided in half to RCom and to Aircel's parent, Malaysia's Maxis Communications. RCom and Aircel had been talks for the merger since December 2015.The deal will help reduce Reliance Communication's debt by Rs. 20,000 crore, or more than 40 per cent of its total debt, while Aircel's debt will fall by about Rs. 4,000 crore, the companies said.

As of end of March 2016, Reliance Communications had a net debt of Rs. 41,362 crore, according to latest company data whereas Aircel had Rs. 18,500 crore of debt as of 2013, according to rating agency ICRA. RCom being India's fourth biggest telecom operator in terms of wireless subscriber base with 9.87 crore customers while Aircel ranks sixth, with 8.8 crore subscribers. The combined entity will surpass Idea Cellular as number three in the sector in terms of subscriber base although it will still lag in terms of revenue. Bharti Airtel is the current market leader, followed by Vodafone.

The merger is sketchy on details as the all-important detail of how much equity the two companies plan to bring in to the merged entity has been left unanswered. In a meeting with investors, they provide some insights on details but the investors didn’t like what they saw. Although for future company’s capital needs they are in talks with Global investors to raise about a billion dollars.

The merged entity will have a net worth of Rs 35,000 crore and asset base of Rs 65,000 crore. It will hold 451 MHz of spectrum pan-India -- Aircel's 187.6 MHz, Sistema Shyam's 39.4 MHz and Reliance Communication's 224 MHZ. This forms 19.3 per cent of total spectrum. According to RCom, this is the second-largest spectrum holding among all operators and spreads across 448 MHz, 850 MHz, 900 MHz, 1,800 MHz and 2,100 MHz bands.   

Transaction is likely to be closed by in six to eight months in 2017 and will need regulatory, court and shareholder approvals. India’s telecom industry is expected to see a consolidation wave as smaller companies find it difficult to cope with high spectrum costs and inability to provide nationwide services at a price that makes business sense.

And after the new entrant Jio, it will be much more difficult for small companies to stay in market.

Now looking at this merger, unless the company clears the air about the debt that will sit in the new entity and how they plans to infuse equity, there is little reason for investors to get excited about the merger announcement. This merger is just another way of surviving in the market, they can become better only if the two partners bring further cash into the business and they buy a reasonable amount of 4G spectrum so as to compete with the other market giants.