Reliance Communications Ltd (R-Com) has had so many non-binding discussions and agreements in recent years that it’s easy to dismiss them as immaterial. Earlier this month, when the company said it had entered a non-binding agreement for the sale of its tower and optic fibre assets, one analyst said, “We’ll wait till the deal actually materializes.”
But on Tuesday, when the company said it had started non-binding discussions with shareholders of Aircel Ltd for a proposed merger of their wireless businesses, analysts sat up and took notice. One analyst at a domestic institutional brokerage firm said it is inevitable for these companies to seriously consider a merger.
First, both companies are laden with debt, and chances of survival are bleaker by just being bit players in the majority of circles they operate. A merger would strengthen their position considerably, both in terms of increased revenue market share, as well as a reduction in costs.
Based on the revenues in the September quarter, the proposed combined entity would have a considerably stronger presence in 10 telecom service areas. Put together, revenue market share in these 10 circles would rise to around 20%, which is impressive considering that the second largest company in the sector, Vodafone India Ltd, has a revenue share of 23.3% in these 10 areas. In seven of the 10, the combined entity would end up being a strong number two.
On a pan-India basis, Aircel and R-Com are ranked fifth and sixth, behind Tata Teleservices Ltd. A merger would push the combined entity to a strong number four position with a 12% market share, far ahead of Tata Teleservices, which has a share of 6.8%.
On costs, a merger will result in better economies of scale as well as savings by eliminating redundancies. It should result in higher profit margins and more headroom to service debt.
Besides, combining the spectrum assets of the two companies will result in a strong presence across various bands, and will also ensure greater longevity. For instance, some of R-Com’s 1800 MHz spectrum is coming up for renewal, whereas overlapping spectrum held by Aircel in the same circles expires much later.
But of course, there are a large number of imponderables. First, it’s not clear how much of R-Com’s debt will be transferred to the proposed new entity that will house the combined wireless business. A 21 October report by theEconomic Times suggested that merger talks will be subject to both companies reducing debt by selling other assets. There is still no clarity if either or both companies will be successful in doing this.
The big question about valuations and the likely swap ratio for the merger is unknown as well. It’s worthwhile noting that when Sistema Shyam TeleServices Ltd agreed to merge with R-Com, it extracted a decent valuation.
In this backdrop, it makes sense for investors to wait for more clarity rather than jumping to the conclusion that R-Com will end as a big winner at the end of these discussions. But, as has been the norm with trading in R-Com shares, traders tend to put the cart before the horse. The company’s shares have risen by over 30% in the past month. Hopefully for its investors, R-Com’s non-binding discussions will make progress
Reliance Group companies have sued HT Media Ltd, Mint’spublisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.