RCom-Aircel merger would be a coup for Anil Ambani

anil-ambaniAfter signing a merger deal with MTS, Anil Ambani’s Reliance Communications is now targeting Aircel Cellular for a merger deal that will be a major coup for the younger Ambani brother.

The Mumbai-based company it has entered into a 90-day exclusivity period with Maxis Communications Berhad (MCB) and Sindya Securities and Investments Private Limited, the shareholders of Aircel Limited, to consider the potential combination of the Indian wireless business of RCOM and Aircel “to mutually derive the expected substantial benefits of in- country consolidation, including opex and capex synergies and revenue enhancement.”

Entering the talks stage itself is a major victory for Anil Ambani as Aircel was also being courted aggressively by nearly all the other major players in India. While these players were seen as the big boys of telecom, Anil Ambani’s RCom was seen as a firm which is barely able to survive due to massive amounts of debt.

However, Aircel seems to have liked the hand of partnership offered by Anil Ambani as the other operators were only interested in buying specific assets. Aircel has limited maneuverability as far as asset sales are concerned because of its huge debt.

In March this year, Aircel was not allowed to bid for new airwaves as the government found that it had a ‘negative net worth’ — a situation in which the worth of a company’s assets is less than the amount of debt the company has to pay.

According to DoT, the company had a negative net worth of Rs 8,985 cr, while RCom had a positive net worth of Rs 17,022 cr. This factor could also raise alarm bells among some of RCom’s investors. However, for now, the company’s stock is up 3.3% at Rs 86.60.

“The potential combination will exclude RCOM’s towers and optical fibre infrastructure, for which RCOM is proceeding with an asset sale, as announced on December 4, 2015. The discussions are non-binding in nature,” the company said.

“Any transaction will be subject to due diligence, definitive documentation and regulatory, shareholders’ and other third party approvals. Hence, there is no certainty that any transaction will result.”

SYNERGIES

Aircel holds 3G spectrum in around 40% of the circles in India, and has lucrative 1800 MHz spectrum across the country. This 1800 MHz spectrum can be used to launch 4G services after making a payment to the government of India to liberalize it, and topping up the quantity with 0.6 MHz in the upcoming auction.

AIRCELIn addition, Aircel also ready-to-roll-out 4G spectrum in a eight circles.

Chennai-based Aircel aquired pan-India 2G spectrum about eight years ago, but has found the going tough in most circles as the country, and the world, was caught in the global economic recession soon after.

In addition, like many other recent 2G entrants, the company found that creating a new voice-based business in India was tougher than it had expected. Meanwhile, its high debt load has further prevented it from making required investments, especially in rolling out 3G networks.

RCom is already a partner to Aircel in areas like 2G and 3G, where the two allow each others’ customers to use their respective networks.

In terms of the geographic extent of 3G spectrum, Aircel and RCom do not have much of a synergy.

For example, out of the 13 circles where Aircel has 3G spectrum, RCom also has the same spectrum in 8 circles. However, nearly all the circles where both have overlapping 3G spectrum are low-revenue or Class C circles.

Areas where RCom will get new 3G spectrum from a merger with Aircel include the four states of the south, Punjab, Kolkata and UP East.

However, the deal would also add to RCom’s kitty 20 MHz of 4G spectrum in 8 circles where the Chennai-based company won in the 2010 auction. RCom did not win in any circle.

These eight circles are Andhra Pradesh, Tamil Nadu, West Bengal, Bihar, Orissa, Assam, North East and Jammu & Kashmir.

However, the key advantage for RCom will not be spectrum availability; after all, more than enough spectrum is coming up in the auctions slated for February. The key advantage will be cost.

From Aircel’s side, the move will rescue its investments into telecom and provide an opportunity to finally get some returns from its telecom investments into India.
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