Sistema and RCom in talks for a stock-swap merger

Russia-based Sistema JSFC has entered into discussions with Anil Ambani’s Reliance Communications (RCom) for a potential merger between Sistema Shyam TeleServices, Indian arm of Sistema JSFC, and RCom, through a stock swap.

The deal, if through, will mark the start of consolidation in the telecom sector, long due, according to experts.

In a statement to the BSE, RCom said the discussions are indicative and non-binding, and remain subject to due diligence, definitive documentation and approvals. “There is no certainty that any transaction will result,” the statement said. However, the government is yet to notify the merger and acquisition norms for the telecom sector.

According to sources, following the merger, the shareholders of Sistema will get around 10 per cent equity stake in RCom. The latter is not likely to take up the debt of MTS, a brand of Sistema Shyam TeleServices. MTS’s debt stood at $600 million at the end of the March quarter.

“Currently, the due diligence is on and it will take at least four to five months before the deal could be closed,” according to a person involved in the development.

Telecommunications companies have been banking on the launch of fourth generation (4G) mobile service to boost revenues at a time when voice business volumes are declining. While Bharti Airtel has already launched 4G in many circles, Mukesh Ambani-promoted Reliance Jio will launch its 4G service by the year end.

RCom wants to launch 4G using 850 megahertz (MHz) spectrum (used in CDMA service). Sistema Shyam does not hold adjoining blocks of spectrum in this frequency, which is preventing it from launching 4G service. This frequency 850Mhz is considered to be the most efficient one for launching 4G services.

MTS holds liberalised spectrum in its eight circles, while RCom holds liberalised spectrum in few circles only, an expert said. This will make the merger of the two a winning combination for launching 4G/LTE services, the expert added.

SSTL operates in nine circles — Delhi, Kolkata, Rajasthan, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh (West), Kerala and West Bengal. Its licence in Rajasthan service area will come up for renewal in 2017-18 and except Rajasthan, they have liberalised spectrum in all the circles. MTS did not participate in the recently concluded March auction of spectrum.

Vladimir Yevtushenkov, the owner of Sistema JSFC, recently said the company had held talks with telecom operators in India, including RCom, for business expansion but nothing concrete emerged.

Sistema JSFC holds about 57 per cent in Sistema Shyam, which offers telecom services under the MTS brand. The Russian government owns over 17 per cent and the Shyam Group owns 24 per cent stake; minority shareholders own the rest.

Sistema Shyam offers CDMA-based services in nine circles and has about nine million subscribers. During the quarter ended March, data revenues crossed 51 per cent of total revenues and high-speed data service now covers 850 towns across nine circles.

The company bore the brunt of a Supreme Court order where all licences of new telecom firms were cancelled in 2012.

RCom offers both CDMA and GSM-based mobile services across all circles.

Sistema Shyam has also been looking to offer 4G through partnerships with other telecom firms. It is eagerly awaiting spectrum-sharing and trading rules from the government.

In a recent interview to the Business Standard Sistema Shyam chief executive Dmitry Shukov said, “We have had negotiations with all operators to explore opportunities, as there is a need for consolidation in the sector. The rules of the game, that is, the merger and acquisition policy, is yet to be announced by the government. We will take a call once it is notified.”
THE URGE TO MERGE

• Sistema Shyam, which offers services under MTS brand, is in exclusive talks with RCom for a merger
• The deal, if through, will mark the start of consolidation in the telecom sector
• 10% equity in RCom, Sistema shareholders might get
• But M&A norms yet to be notified by the govt
• 9 mn subscribers Sistema has across 9 circles. It offers CDMA services