RCom-Aircel Merger

Reliance Communications announced its long-awaited merger with unlisted telecom operator Aircel, marking the first move toward consolidation in the space and creating the country's fourth-largest phone company in terms of customers and revenue.
Upon completion, the merged entity will also rope in a third partner by diluting about 25% equity to raise around Rs.6,000 crore.Talks have already been initiated with Russia's Sistema, which already holds 10% in RCom, to also invest in the merged company .Once a third partner enters, Reliance and Aircel will dilute stakes on a proportional basis.
The Reliance Communications board signed off on the deal that has been in negotiations since October last year shortly after the company's quarterly results were filed on Wednesday.
RCom will turn its wireless business into a special purpose vehicle in a slump sale, excluding the tower and overseas arms of the Ambani company. This special purpose vehicle in turn will get merged into the mobile business of Maxis Communications Bhd-owned Aircel.Both partners will have joint 50:50 ownership of this new entity that will remain unlisted in the initial years and operate under a new brand name that is yet to be decided. RCom and Aircel will have equal board representation. Sources said Ambani and Maxis Group promoter T Ananda Krishnan will stay out of this to ensure that an independent professional team runs the company under board supervision.
The new brand name and CEO of the combine are yet to be decided. The new label will not share any identity with either parent.
The combine will be one of the country's largest private sector companies, with an asset base of Rs.65,000 crore. Economies of scale will create synergies worth Rs.20,000 crore ($3 billion). The new unit will leverage the 4G network of Reliance Jio Infocomm, run by Ambani's brother Mukesh Ambani, experts said. RCom and Jio already have spectrum trading and sharing alliances.
RCom will transfer Rs.20,000 crore of its debt into the new combine that includes Rs.14,000 crore of long-term debt and Rs.6,000 crore of installments payable to the Department of Telecommunications (DoT) over 10 years for spectrum purchases by both RCom and Sistema. Aircel will also transfer Rs.14,000 crore of its debt to the entity. Earlier this year, Aircel repaid part of its debt after selling 4G spectrum to Bharti Airtel in eight circles for Rs.3,500 crore. The combined subscriber base is estimated to be around 180 million along with a revenue market share of 6% each. However, analysts put the number of active subscribers at 120 million.
The transaction is likely to be closed in six to eight months in early 2017 and will need regulatory, court and shareholder approvals.
The merged entity will have the second-largest spectrum holding in the country with 2G, 3G and 4G operations.
India's telecom industry is expected to embark on a wave of consolidation as smaller companies find it difficult to cope with high spectrum costs and an inability to provide nationwide services at a price that makes business sense. These pressures have intensified with new entrant Jio providing free voice calls for life and charging less for data than incumbents, undercutting the key source of revenue for phone companies.
The current levels of debt are also likely to be “burdensome“, particularly when prices are plummeting, he said.
RCom's tower, optic fibre portfolio and its undersea cables arm Global Cloud XChange will be kept out of the ambit of the merger.
Although a trailing operator has never made it to the top anywhere in the world, the move to consolidate is the right one for these two entities to survive.
Apart from Malaysia-based Maxis, shareholders of Aircel include its affiliate group companies and Sunita Reddy.
Sources familiar with deal details had earlier said both partners agreed to invest $580 million each to create a Rs.7,600-crore equity pool for the new entity to help it expand business. The money will in part be used to liberalise RCom's around 80 MHz of airwaves in the 1800 MHz band, i.e. paying fees that will allow the company to use them for data and voice without restrictions. The price for that will be benchmarked to the upcoming spectrum auction.
RCom is also in discussions with Canadian asset manager Brookfield to sell a majority stake in its tower arm Reliance Infratel for an enterprise valuation of $2.5-3 billion. If both transactions (wireless and tower) go ahead, that will help RCom cut its debt to Rs.10,000 crore from Rs.42,364 crore.

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