Reliance Communication and Aircel Merger

Earlier this month, Mukesh Ambani made headlines with the launch of Reliance Jio’s low cost telecom services. The zero cost voice calling and low data charges offered by Jio created a stir and has been making news for the past fortnight. It now seems to be the turn of the other Ambani brother, Anil Ambani, to hog the limelight.

Read: Reliance Jio 4G Tariff, Speed, Data Plans, Sim Card Activation, New Connection

On Wednesday, 14 September, 2014, Anil Ambani-led Reliance Communications (RCom) struck a deal with Malaysia based Maxis Communication Behad (MCB) agreeing to merge Reliance Communications Ltd and its smaller rival, Aircel. MCB is the majority stakeholder in Aircel, the 5th largest mobile services operator in the country (by customer base). Reliance Communications is one of the oldest mobile services (GSM and CDMA) providers in the country. Merger talks between the two have been underway since October 2015 and the Reliance Group board decided to sign off the deal shortly following the declaration of the results for Quarter I of the current fiscal year.

Largest Telecom Merger

The Reliance Communications – Aircel merger will be the largest consolidation in the telecom sector of the country. The merger of these wireless businesses will create a new entity with an asset portfolio worth about INR 65,000 crore. A news report quoted Mr. Anil Ambani on the merger. He said, “Together with our partners, MCB, we are delighted to have taken the lead in consolidation of the Indian telecom sector… with the combination of our business with Aircel in a 50:50 Joint Venture with MCB. We expect this combination to create substantial long term value for shareholders of both, RCOM and MCB, given the benefits of the wide-ranging spectrum portfolio and significant revenue and cost synergies.” This new entity formed by the consolidation will be the fourth largest mobile telecom service provider of the country and both RCom and Aircel will hold a stake of 50 percent in it. This means that the board of the new company is likely to have equal representation from RCom and Aircel both.

The New Telecom Operator

The new company to be created by the merger of RCom and Aircel is likely to be the fourth largest wireless service provider in the country both in terms of revenue. With regard to its customer base, it will naturally draw from the 110 million customer base that subscribes to RCom and the 84 million customers who use Aircel. Rcom currently holds 9.8 percent of the telecom market share and Aircel had about 8.5 percent. Currently, Airtel has the largest customer base in the country (250 million); Vodafone has a subscriber base of 198 million while Idea has some 175 million customers. Factoring in the newly launched Jio, and the RCom-Aircel merged entity may rank 4th as far as customer base goes as well.

This new entity will own 451 MHz of spectrum pan-India. Spread across 448 MHz, 850 Mhz, 900 MHz, 1800 MHz and 2100 MHz band, this is the second largest spectrum holding among operators in India forming some 19.3 percent of the total spectrum available. This will allow it to offer 2G, 3G, and 4G services. It will also be in a position to leverage Reliance Jio’s 4G network since RCom already has spectrum sharing agreements with Jio.  The new company born out of this RCom-Aircel consolidation is likely to be a strong operator and is expected to be ranked among the top three operators in at least twelve circles (in terms of revenue).

The new merged entity will also participate in the upcoming telecom spectrum auction coming up next month. All major players – Airtel, Vodafone, Jio and Idea are also likely to participate in this auction in which 2,354.55 megahertz (MHz) of spectrum is being put up by the government for a reserve price of INR 5.63 trillion.

The RCom – Aircel merged business is all set to become one of the largest private sector companies in the country. It will record an asset base of INR 65,000 crore (approximately USD 9.7 billion) and will clock a net worth of about INR 35,000 crore (approximately USD 5.2 billion). It is expected that Net Present Value (NPV) of capital expenditure and operating expenditure synergies will be pegged at INR 20,000 crore (created by the economies of scale).

The brand name and CEO of the new company is yet to be finalized but it looks highly unlikely that label will share either RCom or Aircel’s identity.

Third Partner Likely

Last year, Reliance Communications had announced a takeover of Sistema Shyam, an Indo-Russian telecom venture working under the brand name MTS. The deal was pegged at INR 5000 crore (approximately about USD 730 million. MTS will now continue holding about 10 percent stake in RCom but will not hold any representation in the new RCom-Aircel merged entity. It now also seems likely that after the merger between RCom and Aircel is completed Russian company Sistema will be encouraged to acquire a further 25 percent stake in the new entity making it to raise an additional INR 6000 crore. RCom has already initiated talks with Sistema in this regard, news reports claim. Sistema’s entry will allow both Indian telecom players to dilute an equal proportion of their stake in the business entity.

With the completion of the merger Rcom’s overall debt on the books will go down by INR 20,000 crore (approximately USD 3 billion) . This is over 40 percent of the company’s total debt. Similarly, Aircel’s overall debt will go down by INR. 4,000 crore (approximately USD 600 million).

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