Brokerages Unimpressed By Reliance Communications-Aircel Merger 

Brokerages are maintaining their cautious stance on Reliance Communications Ltd. after it announced the deal to demerge its wireless business into Aircel Ltd.

Anil Ambani promoted Reliance and Maxis Communications Bhd., which controls Aircel’s parent, will hold 50 percent each in the new company, according to a filing on the stock exchanges. The deal, which is expected to be closed in 2017, will help Reliance reduce its debt by Rs 20,000 crore, or more than 40 percent of its total, and Aircel by Rs 4,000 crore.

Brokerages including Credit Suisse and Bank of America Merrill Lynch point out that the merged entity will remain one of the most levered telecom company in India, which in turn may limit its ability to invest.

Brokerages will put out their final note to clients after the Reliance’s conference call later today.

HSBC

• Maintains ‘sell’ rating with price target of Rs 45 per share.
  
• Deal approval process to be time consuming.
  
• Overall integration to be tricky especially branding.
  
• Primary focus of the merged entity is likely to be debt reduction and this raises concerns on ability to retain subscribers.
  
• One potential opportunity for the merged entity could be their 3G spectrum holding with 10 MHz in 8 circles.

Credit Suisse

• Maintains ‘underperform’ rating with price target of Rs 40 per share.
  
• The merged entity will be amongst the top 3 in terms of number of subscribers and amongst the top 4 in terms of revenue share and spectrum market share, respectively.
• The merged entity will have pan India 2G coverage, and 3G coverage in 18 circles.
• Merged entity will be one of the most levered telco with limited ability to invest.
  
• Primary synergies to come from operation expenditure rationalisation.
  
• The deal will be marginal positive for the rest of sector, and marginal negative for tower companies.

Bank of America Merrill Lynch

• Maintains ‘underperform’ rating with price target of Rs 39.
  
• Reliance Communications’ wireless business will continue to lose market share given lack of strong brand, lower capex investments and expected increase in market competition post Jio launch.

Morgan Stanley

• Maintains ‘overweight’ rating with price target of Rs 93 (most aggressive target price)
  
• Reliance Communications to benefit as 1,800 MHz spectrum expiry will be pushed from 2021 to 2024/2026.
• Company to also benefit from stronger 2,100 MHz spectrum portfolio of the combined entities.

Shares of Reliance Communications opened 3.6 percent higher at Rs 53 before paring gains and trading largely unchanged as of 12 p.m.