Reliance Communications Ltd: Buy

CMP: Rs.49.15

Telecom players Reliance Communications Ltd (R-Com) and Aircel Ltd are expected to sign an agreement for merger of their businesses by the first week of September, according to Live Mint, 26 August, 2016.

“Term sheet between the two companies have been finalised. Definitive agreement for merger between the two companies is expected to be signed in a week or 10 days,” a person with direct knowledge of the matter said.

The R-Com and Aircel talks, if successful, would form India's third-largest telecom operator with a subscriber base of over 196 million.

“At present no regulatory approvals are required. The process for regulatory approval will begin after R-Com and Aircel sign definitive agreement. It should take around 4-6 month time to complete merger and the combined entity will be rebranded,” the person said.

The new entity, which is in the works, will hold spectrum across all allocated bands—800 megahertz (MHz), 900 MHz, 1,800 MHz, 2,100 MHz and 2,300 MHz—for 2G, 3G and 4G services.

On the other hand, R-Com and Sistema (MTS) are in process of merger. Sistema will hold 10% stake in the new entity that will formed post its merger with R-Com.

In December last, the two firms announced entering into 90-day ‘exclusivity period’ for the merger deal that will exclude R-Com’s tower and optical fibre assets for which a separate sale process is ongoing. The talks were later extended twice.

The merged entity is expected to have Rs.25,000 crore business from the first day of its operation and is estimated have Ebitda (earnings before interest, taxes, depreciation and amortization) of Rs.7,000 crore and finance cost of about Rs.3,000 crore.

“R-Com and Aircel have had nil free cash flow for a long time but the resultant entity is being structured in a manner to have Rs.4,000 crore free cash flow which it can use for investments in network,” the person said.

The two mergers are set in a backdrop where the debt-ridden telecom sector is said to have a debt burden of Rs. 3,50,000 crore. Reliance Jio is expected to exert 4G tariff pressure on telecom majors Airtel, Vodafone and Idea.

Earlier, Idea had denied media reports on its merger with the second largest telecom firm Vodafone. According to Telecom Regulatory Authority's February 2016 data, Vodafone had a market share of 19.16 per cent while Idea was close behind with 17.01 per cent market share.

Reliance Communications aims to increase the volume of people using data to make calls on its network, having seen a spike in app-to-app calling by its users, a top official said. Gurdeep Singh, chief executive of RCom's consumer business, said around 6-8% of its users currently make calls using apps, up from around 2% a year ago, and the telco was hoping to convert more of its traditional voice callers to use data for making calls rather than simply using apps to chat.

And going forward, chipset technologies are converging and all future handsets will support multiple spectrum bands, with all new smartphones being multi-band devices, trends which will trigger more calls using data networks. .

Moreover, the launch of Reliance Jio Ltd is positive for the shareholders of Reliance Communications Ltd, due to technology (and tower) sharing agreement. 

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