Rcom: Spectrum gains from the Sistema deal

Operational metrics, debt and impending RJio launch continue to be key worries

The potential merger of Reliance Communications (RCom) with Sistema Shyam Teleservices will lead to further consolidation in the telecom sector. The merger, expected to be carried out in the form of a share swap, will create a company with a subscriber base of 118 million, with RCom’s subscriber market share improving to 12.19 per cent and Sistema’s share at 0.91 per cent, while revenue market share will move to 6.5 per cent. RCom’s nearest competitor, Idea, has a subscriber market share of 16.36 per cent and revenue market share 18.2 per cent.

While the combined market share (revenue/subscriber) is within the prescribed 50 per cent limit, the acquisition would help Rcom improve its market share in six circles, according to a Goldman Sachs report.

While final merger & acquisition (M&M) guidelines are awaited, in the 800 MHz band, the combined entity’s spectrum share is more than 50 per cent in a number of circles. This could lead to compliance challenges.

The merger would allow RCom to consolidate its holdings in the 800 MHz band in nine circles including in the two metro circles of Delhi and Kolkata and circle A states of Gujarat, Karnataka and Tamil Nadu. This spectrum could be used to roll out long term evolution-based services across the circles.

 

The merger, however, will not significantly alter the pecking order or the current competitive nature of the market. Analysts say the aggression shown by smaller players on tariffs is likely to continue despite the potential merger of the fourth and the ninth largest players. These could be the reasons why the RCom stock, which was up in the morning session ended the day down quarter of a per cent. On Monday when the merger buzz was doing the rounds, it was up just 0.6 per cent.

What's more important for RCom is to improve its operational metrics. What is worrying the Street is the low level of capex by Rcom. While Idea and Bharti have given a guidance of between $800 million and $2 billion, RCom’s number is at $300 million.

A key trigger for the stock is the deleveraging given the high debt (net debt of Rs 36,725 crore at the end of March 31, 2015) on its books. Although the company has made various announcements on this front, nothing meaningful has materialised so far. Most analysts have a cautious view on the stock with 56 per cent of the 25 analysts tracking the stock having a ‘sell’ rating. Investors should await clarity on M&A guidelines, improvement in revenue market share or further deleveraging by the company before taking any exposure to the stock.