RCom in three-way merger talks with Aircel, MTS

Signalling the start of consolidation in the telecom sector, Reliance Communications has initiated talks for a three-way merger with Aircel and MTS. If the merger goes through, the combined entity will be the second-largest operator in the country in terms of subscribers.

While the discussion with MTS has been on since November, Reliance Communications on Tuesday said it has entered into a 90-day exclusive agreement with the promoters of Aircel for a possible merger.

RCom has initiated discussions with the shareholders of Aircel – Malaysia-based Maxis Communications Bhd and Sindya Securities and Investments Pvt Ltd. Simultaneously, it is in talks with AFK Sistema, the Russian promoters of MTS. The contours of the merger, in terms of shareholding or financial transactions, are not known.

Though Reliance Communications said the discussions were non-binding in nature and that there is no certainty the talks will result in a transaction, market watchers said this is the best option for all three operators.

More to come next year “This kind of consolidation was expected in the Indian telecom market for quite some time now and we can anticipate a few more announcements in 2016… With increasing competitiveness in the market, sustainability will become challenging for the bottom four-five telcos. Thus, it makes sense for them to identify long-term alternatives,” said Amresh Nandan, Research Director, Gartner.

The RCom-Aircel-MTS combination will have more than 200 million customers catapulting it ahead of Vodafone and Idea. The merged entity will hold 19.3 per cent of all spectrum across radio bands (800, 900, 1800, 2100, and 2300 MHz), which will place it in an ideal position to offer all types of mobile services from basic 2G to high speed broadband on 4G platform.

Towers excluded The agreement with Aircel does not include RCom’s towers, optical fibre infrastructure and under-sea cable businesses. RCom has inked a separate agreement to sell its tower assets to private equity firms TPG and Tillman Global. Separately, the two PE firms are also evaluating RCom’s nationwide inter- and intra-city optical fibre assets. Together, the transactions are expected to fetch about ₹30,000 crore, all of which will be used to reduce RCom’s debt of about ₹40,000 crore.

But there are many issues that could come in the way of the proposed merger. The pending CBI investigation against Aircel promoters based on allegations made by its former owner, C Sivasankaran, could haunt the deal. Unless the deal is structured in a way that Aircel’s operations are kept out of the ongoing case, the merged entity could face legal blocks.

There is also uncertainty over the spectrum held by MTS. There is a view within the Telecom Ministry and TRAI that MTS has not paid market-determined price when it acquired spectrum in 2013. MTS has been asked to pay a price based on the 2015 auctions. If this is not resolved then the merged entity will be holding under-priced airwaves with which it will be allowed to offer only 2G services.

Under existing rules, operators are allowed to offer any type of services using that spectrum for which the market price has been paid.

Shares in RCom ended up 2.39 per cent at ₹85.70 on the BSE, which closed down 0.56 per cent on Tuesday.

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