Deal with MTS gives new lease of life to RCom

Merger creates 4th -largest telecom company, provides RCom access to spectrum for 12 extra years

Reliance Communications on Monday announced the merger of Sistema Shyam TeleServices' India operations with itself in an all-stock deal. Sistema will receive a 10 per cent stake in RCom once the deal, negotiated over months, goes through.

Sistema Shyam TeleServices offers data services in India under the MTS brand. RCom will acquire its nine million customers and Rs 1,500 crore in revenue by virtue of the transaction.

The merger marks the beginning of consolidation in the telecom industry that could see small players pulling out.

The deal is critical for RCom because it gains access to spectrum for extra years. RCom's spectrum in the 800 MHz band expires in 2021 and the merger extends the validity in the 800/850 MHz band in eight circles - Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, Kolkata, Uttar Pradesh (West) and West Bengal - by 12 years till 2033. Sistema Shyam TeleServices' airwaves in the 800/850 MHz band are ideally suited for 4G LTE services.

The additional spectrum will complement RCom's nationwide footprint of minimum 5 MHz contiguous 800/850 MHz spectrum aggregating 148.75 MHz. "We are delighted to welcome Sistema Shyam TeleServices as a valued shareholder and partner in Reliance Communications. The addition of Sistema's valuable spectrum holdings in the 800/850 MHz band will strengthen RCom's spectrum portfolio and extend our ability to provide world-class 4G LTE services to our customers in eight circles in the country till 2033," said Gurdeep Singh, president and chief executive officer, consumer business, Reliance Communications.

This transaction does not entail any cash outflow from RCom other than the Rs 392 crore a year it must pay the government over the next 10 years for the spectrum licence owned by Sistema Shyam TeleServices. In return, Sistema JSFC, a publicly-traded diversified holding company in Russia and the CIS, will receive a 10 per cent stake in RCom. Sistema will only be a strategic investor without a board seat or veto.

"We are confident that Sistema Shyam TeleServices' entry into the equity capital of RCom as a strategic investor will strengthen the competitive position of the combined company and provide subscribers with superior experience by fast-tracking the growth of LTE technology in India. Moreover, we believe the completion of this transaction will serve as an example of growing business ties between Russia and India and encourage other investments between the two countries," said Mikhail Shamolin, president and chief executive officer of Sistema.

HOW RCOM BENEFITS FROM THIS DEAL

• Acquires valuable spectrum in 850 MHZ band in important circles of Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, UP (West), Kolkata, West Bengal and Rajasthan
• Extends spectrum validity by 12 years in the above circles (excluding Rajasthan)
• Eliminates need to bid for fresh spectrum in 2021 when existing spectrum holdings expire
• Becomes largest holder of spectrum in 850 MHz band with holding of 148.75 MHz
• Acquires nine million MTS customers
• Deal to add Rs 1,500 crore (approx.) to RCom’s revenues
• No outflow of cash as deal funded through stock
• RCom to save Rs 15,000 crore for not taking part in auction in 2021
• Deal to make RCom fourth-largest telecom operator after Airtel, Vodafone and Idea with 120 mn subscribers

Before closing the deal by June 2016, Sistema Shyam TeleServices will pay off all its liabilities. By the end of March 2015, Sistema Shyam TeleServices had a net debt of Rs 4,153 crore. RCom had a net debt of Rs 38,595 crore in June 2015, up from Rs 36,725 crore in March 2015. RCom is in talks with to sell stakes in its tower units to pare some debt. With the acquisition of MTS, RCom expects to save close to Rs 15,000 crore in spectrum fees for licences that expire in 2021. Analysts said both players were trying to remain relevant through this deal, as competition would become fierce after the entry of Reliance Jio.

"This consolidation would provide larger advantages of scale, finance, spectrum to the combined entity as well as the consumer. However, like any merger, post-merger integration remains a critical aspect along with the changing landscape of competition given the 4G plans of the existing operators and Reliance Jio plans in the market," said Raja Lahiri, partner, Grant Thornton India.