The merger of the wireless business of Reliance Communications Ltd. with Aircel Ltd. , is a key milestone in the ongoing consolidation in the telecom sector, says India Ratings and Research.
India Ratings believes that the merger will enable the new entity to give strong competition to its peers in the backdrop of the disruption that the launch of operations by Reliance Jio Infocomm has caused. The combined entity Reliance Communications-Aircel will now be the third largest telecom entity in India by subscriber base, thus moving ahead of Idea Cellular Ltd. This development coupled with Reliance Jio’s penetration strategy will spur competition and in turn push tariffs lower.
India Ratings believes that the spectrum acquisition strategy, particularly around 4G, is an important driver for the consolidation in the telecom sector. This deal provides Reliance Communications access to the superior 800 MHz band in eight circles with extended validity till 2033, as its own spectrum is scheduled to expire in 2021-2022. The merged entity will have 448 MHz spectrum, which is about 17 percent of the total spectrum held, is the third largest spectrum holding, following 770 MHz of Bharti Airtel Ltd. and 596 MHz of Reliance Jio.
The merged entity will offer strong competition to both Vodafone India Ltd. and Idea which are weaker placed, as far as 4G operations are concerned. India Ratings believes that the sector will now have five meaningful players namely, Bharti Airtel, Vodafone, Reliance Jio, Idea and the merged Reliance Communications-Aircel-Sistema (with a new brand) as the industry moves towards data driven revenues.
Reliance Communications-Aircel Alliance’s Strengths
The top five circles of Aircel are Assam, Jammu and Kashmir, UP East, Bihar and Gujarat, while those of Reliance Communications are Bihar, Tamil Nadu and Chennai, Delhi, and Mumbai. The merged entity will be positioned as the second largest in the Bihar circle, after Bharti, and overtaking Vodafone and Idea, which were number two and number three respectively. In the Tamil Nadu and Chennai circle, the merged entity will vie for the second spot with Vodafone, which is ranked the second largest after Bharti.
Reliance Communications has a wireless active subscriber base of 92.2 million as on March 2016 (market share of 9.8 percent), whereas Aircel has 63.3 million subscribers (market share of 6.8 percent), leading to a combined subscriber market share of 16.1 percent with 155.5 million subscribers; which will rank forth after Idea with 19.6 percent subscriber share and Vodafone with 20.4 percent subscriber market share as of March 31, 2016. The merged entity could potentially have a revenue market share of 14 percent, given Reliance Communications’ existing revenue market share at around 11 percent in financial year 2015-16 and Aircel’s 3 percent revenue market share.
Combined Entity’s Financials
Aircel reported revenues of Rs 55 billion, with EBIDTA of Rs 8.06 billion, and an EBIDTA margin of 14.5 percent, and net loss of Rs 14.5 billion and cash loss of Rs 6 billion in FY15. Aircel had a total debt of Rs 209 billion in FY15.
Reliance Communications reported consolidated revenue of Rs 221 billion, EBITDA of Rs 74 billion and EBITDA margin of 33.6 percent in FY16 and debt of Rs 41 billion. The combined entity’s revenues are estimated at around Rs 250 billion (for full year of operations), with EBITDA of around Rs 65-70 billion.
However, both Reliance Communications and Aircel have significant debt and their average revenu per user are below industry average, as evident from their low standalone revenue market share and Aircel’s presence in low ARPU generating circles. Aircel on a standalone basis is a highly leveraged entity (FY15 debt to EBIDTA of 26 times), whereas Reliance Communications had net leverage of 5.6 times in FY16. Therefore India Ratings believes the merged entity will continue to depend upon the parents’ support for fund infusion for growth capex. Post the deal, the merged entity will hold Rs 280 billion of debt from its parents to start with.
The merger transaction is subject to regulatory and shareholder approvals.
(India Ratings and Research a wholly owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)