Mukesh Ambani, chairman and managing director of Reliance Industries (Photographer: Sanjit Das/Bloomberg News)

RCom Deal Will Lower Costs And Bring Synergies For RIL, Says Morgan Stanley

Mukesh Ambani-led Reliance Industries Ltd.'s acquisition of Reliance Communications Ltd.'s telecom infrastructure will bring synergies and lower costs for India's largest company by market capitalisation, Morgan Stanley India said in a report.

The brokerage, however, added that the deal could delay free cash flow generation and raise debt on RIL’s balance sheet by 10-12 percent in the near term.

While there are no disclosures on the deal consideration, if we were to assume deal enterprise value closer to the debt reduction announced by RCom (on Dec. 26) it would raise RIL’s net debt by around 10-12 percent and likely be earnings per share dilutive by 1-3 percent on our FY19-20 estimates.   
Morgan Stanley India Report 

Anil Ambani had said on Dec. 26 that the assets were worth Rs 25,000 crore. The deal will include a cash payment and transfer of deferred spectrum installment, the two companies said in separate statements yesterday.

Motilal Oswal said the Rs 25,000 crore price for wireless assets could be indicative of the sale value. If this is assumed to be the case, Reliance Jio has agreed to pay six times for the 122 megahertz spectrum and an additional Rs 12,000 crore for the towers and fiber assets, the brokerage added.

Pricing Power

RIL is one of the largest tenants of RCom’s towers and pays Rs 1,500-1,600 crore for it annually, as per Morgan Stanley estimates. The acquisition will also allow Reliance Jio to raise prices further.

The industry consolidation should also help pricing power for Reliance Industries’ telecom business, evidence of which was seen in the two recently announced new tariff plans which raised effective prices by about 20 percent.
Morgan Stanley India Report 

Prashant Singhal of consultancy firm EY India described the deal as a "win-win" for both the Ambani brothers. The acquisition will help Jio further its 4G capabilities and allow RCom to significantly lower its debt, Singhal said.

Best Fit

It made the most sense for RIL to buy RCom’s assets for three reasons, said Sanjay Kapoor, a former chief executive officer of Bharti Airtel Ltd.

  • They understand the assets the most since they partly created it.
  • They have already been using the assets on a sharing basis.
  • The 800 and 850 megahertz spectrum is very vital for Jio to build their coverage.

“This game is going to be won in a non-linear environment on customer experience. And to build customer experience you need to build all legs of infrastructure, devices, content, digital services, storage, etc. They're putting this together,” Kapoor said.

Watch the full interview with Sanjay Kapoor here.

Shares of RCom surged as much as 35.2 percent to Rs 41.7, while the RIL stock traded largely unchanged.