The crowded telecom sector could see some consolidation with Reliance Communications on Monday announcing that it is in discussions with AFK Sistema for a possible merger with the Russian conglomerate’s Indian subsidiary.

If the deal goes through it will be an all-stock transaction.

Though RCom, an Anil Ambani group firm, is already a pan-India mobile operator, access to the spectrum owned by Sistema Shyam TeleServices in nine circles could help it start offering high-speed data services using fourth generation (4G) technology. Sistema, which operates in India through the MTS brand, had won fresh spectrum in eight circles during the auctions held in 2013. Should the deal go through, this spectrum will come in handy for RCom when its existing 20-year licences start expiring from 2017.

For the Russian company, a deal with RCom will lead to a pan-India footprint. Sistema Shyam has less than 1 per cent market share and has been making losses.

“The discussions are indicative and non-binding in nature, and remain subject to due diligence, definitive documentation and approvals, as may be necessary. There is no certainty that any transaction will result,” RCom said in a statement.

In May, Sistema’s owner, Russian billionaire Vladimir Yevtushenkov, had admitted to having met Ambani to explore a joint venture in India but ruled out an outright sale. While the contours of the deal are still being worked out, sources said that Sistema may be offered 7-9 per cent in the merged entity.

Avoiding liabilities At present, the promoter’s stake in RCom stands at 59.7 per cent, and following the merger, the company intends to maintain it at a little over 51 per cent. The Mumbai-headquartered company does not intend to take any liabilities or debt from MTS’ existing operations onto its books, they added.

In 2008, RCom had flirted with South African telecom major MTN but that deal did not go through due to valuation issues. A deal with Sistema could put RCom in a better position to compete against Airtel, Vodafone and Mukesh Ambani’s Reliance Jio.

Sistema has 800 MHz spectrum, which is useful for data services, in nine circles. In eight of them, it has the right to use the airwaves till 2033. So, if the merger goes through, RCom will not need to buy spectrum in these circles when its licence expires.

Revenue increase Following the merger, RCom expects additional revenues of about ₹2,000 crore per annum from Sistema Shyam’s existing operations across Rajasthan, Karnataka, Tamil Nadu, Kolkata, West Bengal, Gujarat, Delhi, Kerala and Uttar Pradesh (West).

Sistema Shyam had registered losses of ₹391 crore in the quarter ended March 31 compared with losses of ₹316 crore during the comparable quarter a year ago.

On Monday, RCom shares rose 0.60 per cent to close at ₹58.85 on the BSE.

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