RCom-Aircel merger picks up pace, might conclude in July

Companies to transfer Rs 14,000-crore debt each to new entity; sale of tower biz not contingent for merger

The merger between Reliance Communications (RCom) and Aircel is on track, said sources close to the deal.

Since the merger is between two entities with different technologies — a large part of RCom subscriber base is on CDMA — the merger will take some more time to conclude.

By the end of July, RCom will have migrated its five million CDMA customers to its GSM network, which will offer 4G services through a partnership with Reliance Jio.

RCom and Aircel have extended their exclusive discussion period by a month, during which they will hammer out a potential merger. Debt will not be a hindrance as the two companies intend to transfer only Rs 14,000 crore of it each to the merged entity. RCom has a gross debt of Rs 42,651 crore and Aircel Rs 23,436 crore.

Once the due diligence is over, RCom will carve out its wireless business and merge it with Aircel’s wireless business, which will result in a new brand.

According to sources close to the deal, “The merger of RCom with Aircel is not contingent on the tower sale. The merger is on track and Aircel and RCom will collectively transfer Rs 28,000 crore of debt (Rs 14,000 crore each) to the new entity. With a revenue market share of 6 per cent each, the new entity will have a double-digit revenue market share and a customer base of 150-160 million.”

The deal is necessary for the survival of both companies in a cut-throat industry where the three big players control the lion’s share of industry revenues. Given that the telecom business is capital intensive, funding it requires strong financials and cash flows to support higher capital expenditure.

The new entity will not only have higher revenue market share but will also have access to Jio’s 4G services. In fact, the merger will also have a beneficial impact on the tower sale proposition, as the new buyer will have better tenancy ratios once Aircel comes on board.

Both RCom and Aircel need a gameplan to offer data services to their customers. With a stretched balance sheet that may have been difficult, but the merger resolves the issue to a great extent.

Aircel has spectrum to offer 3G in 13 markets while RCom has it in 11 circles. But with Jio powering 4G services, the new entity will be able to offer broadband services without sinking in billions of dollars in network and spectrum.

According to ICRA, a merger of the wireless businesses of RCom and Aircel will also help RCom expand its GSM services in West Bengal, Bihar and Assam, where it did not win back its 900 MHz spectrum in the March 2015 auctions.

THE STORY SO FAR...
The new entity formed will have access to Jio’s 4G services

DECEMBER 2015

• Reliance Communications enters into a 90-day exclusive merger talks with Aircel
   
• The merger would include wireless businesses which would create a combined entity that would have 180 mn customers
   
• Combined entity to have a revenue marketshare of 12%
   
• Both companies to have a 50:50 stake in the new company
  

 

Both companies agree to bring down debt in new company to Rs 20,000 crore

MARCH 2016

• Merger talks extended by two months

MAY 2016

• Merger talks extended by another 30 days

June 2016

• Merger talks on track
   
• New entity to have total debt of Rs 28,000 crore of debt against the earlier estimated Rs 20,000 crore
   
• Partnership with Jio to help new entity deliver broadband services