RCom - Sistema merger

Anil Ambani-owned Reliance Communications (RCom) is merging the telecom business of Sistema Shyam Teleservices (SSTL) in a cashless deal worth Rs.4,500-5000 crore that will lead to the first major consolidation in the intensely competitive sector since 2009. “SSTL will get around 10% stake in the combined entity , but no board seat and no veto powers,“ a person directly involved in the deal said.
The deal will give India's fourth-largest carrier access to airwaves in the 850 MHz band which can be used for 4G services that it plans to start by end of the year.Moreover, it will be able to extend the validity of its licences by 12 years in eight high-revenue-generating circles like Delhi, Gujarat, Karnataka and Tamil Nadu.On the other hand, holders in SSTL, which has been struggling to grow its CDMA-based telecom business, will get to be a part of a stronger company.
Three people familiar with the matter said that every shareholder of SSTL, the Indian unit of Russian conglomerate Sistema JSFC, will get one share of RCom for 11.5 shares of theirs.
RCom is valued at nearly Rs.19,000 crore. Besides the stock, RCom won't take on any loans from the pure-play CDMA carrier's books, a relief to investors worried about the company's debt which stood at Rs.38,595 crore at the end of June.
Excluding interest, SSTL, which operates in India under the MTS brand, owes around Rs.2,500 crore to the DoT which RCom is taking on its books.
The promoter group holding in RCom will come down to around 54% from nearly 60% currently .
The person added that Sistema JSFC may infuse more funds to raise its stake in the new entity at a later stage, but “nothing concrete has been decided on this issue“.
Sistema JSFC, which entered India in 2007, holds nearly 57% in SSTL. Other shareholders include the Russian government with more than 17% and Shyam Group holding 24%. Minority shareholders own the rest. Once the deal closes, it will be the first major consolidation in the sector since Telenor bought into Unitech Wireless in 2009.
“The MTS brand will cease to exist, while there is a non-compete clause with Sistema,“ the person said, adding that details on taking over MTS's employees is still being worked out, and is likely to be finalised around March.
SSTL offers services in nine of India's 22 service areas to around nine million subscribers. RCOM is a pan-India operator offering both CDMA and GSM services and has around 110 million users. “MTS brings in about Rs.1,500 crore of (annual) top line and around 10,000 sites, besides IT infrastructure,“ the person cited above said.
Analysts said buying MTS, which possesses airwaves in Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, UP (West), Kolkata, West Bengal and Rajasthan, may work well for RCom given the latter's focus on 4G LTE. MTS had bought spectrum in eight of those circles, excluding Rajasthan, in an auction in 2013, which means RCom wouldn't need to pay anything more to the government, going by the current M&A rules.