Market Insight

Reliance Communications planned merger with Aircel collapses

October 03, 2017

Seth Wallis-Jones Seth Wallis-Jones Principal Research Analyst, Service Providers & Platforms
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Reliance Communications has announced that plans to merge with Aircel have lapsed by mutual consent after legal and regulatory issues, with a statement from Reliance Communications noting "Inordinate delays caused by legal and regulatory uncertainties, various interventions by vested interests, policy directives impacting bank financing for telecom and changed industry dynamics"

  • Reliance Communications reported revenues fell by 33% y/y in the quarter ending 30 June 2017 with a profit of INR540 million a year earlier turning into a net loss of INR12.2 billion, while EBITDA shrank 65.2% to INR5.43 billion.
  • Reliance Communcations has been forced to cut tariffs to compete with new entrant Reliance Jio - which is led by Mukesh Ambani, the brother of Reliance Communications CEO Anil Ambani 
  • The Government has provided some limited relief to the industry by extending spectrum payment terms and lowering interest calculations, but cuts to interconnecton charges will hit most other operators while benefiting Jio

The merger with Aircel would have left Reliance with a 50% stake in the merged business and reduced debts by INR140 billion. Together with the sale of the towers business to Brookfield (though retaining a 49% economic, non-voting interest) that would have cut debts by INR250 billion or 60% of the total debt load. Reliance Communications is currently undergoing a debt restructuring that pauses interest repayments until December 2018. However RCOM also faces a suit seeking debt repayment from Ericsson.

Our Analysis

Reliance has stated that plans for sale of infrastructure, including fibre backbones and towers, spectrum and real estate assets will now be implemented to cut debts targeted by the merger. Reliance has also noted that a deal giving access to the Jio 4G LTE network – a new entrant led by Mukesh Ambani the brother of Reliance Communications CEO, which started the current price war - offers a capital light strategy.  RCOM state in their plan to reduce debts: “Unlimited free voice offers and irrational pricing by all industry participants have destroyed profitability of traditional 2G / 3G mobile business”. Given the source of the financial stresses efecting the industry, that asset light strategy indicates that RCOM will ironically focus on building a 4G business on the back of their deal with Reliance Jio. That strategy will be coupled with a focus on higher margin B2B non-mobile businesses, which include their data centre national and submarine cable networks.

Telecom Commission eases spectrum costs

As the industry has been financially stressed it has lobbied Government to reduce the costs levied on the industry through up front spectrum license fees and usage charges based on gross revenues. The Telecoms Commission has agreed to extend repayment terms for spectrum licenses from 10 to 16 years and effectively lowered interest rates by around two percentage points, by moving from the Prime Lending Rate (PLR) to the Marginal Cost of Fundbased Lending Rate (MCLR). While these moves will provide some relief the sector will remain stressed in a situation where already low ARPUs have been squeezed further.

TRAI cuts interconnection charges

The incumbent operators are also set take a hit from the reduction in interconnection charge mandated by the TRAI last month. That charge will move INR 0.14 to INR 0.06 per minute terminated, with the intention to remove termination charges completely by 2020. Such a move is seen as benefiting Jio which has pushed unlimited voice call in all tariffs and has lower costs per minute for provisioning voice capacity on the VoLTE network.

In such a situation it may prove difficult for RCOM to realise full value for the spectrum assets it is looking to sell- last years Government auction failed to sell some 60% of avilable spectrum. While ther eare other assets up for sale If the Strategic Debt Restructuring (SDR) process fails then banks may see their loans converted into equity , a step already approved by shareholders. Under the SDR process the banks would take a controlling stake and then have 18 months to restructure the business before selling it on.

While subscription losses have been lower the outlook for Aircel, owned by Malaysian operator Maxis is also unclear, though reports indicate that Aircel may also enter into a Strategic Debt Restructuring scheme.

 

Geography
Asia India
Research by Market
Mobile & Telecom
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