Fitch: Rcom's Sistema Deal May Signal More Indian Telco M&A

Reliance Communications' (Rcom) acquisition of Sistema Shyam Teleservices may spark further Indian telco M&A, Fitch Ratings says. Larger operators are likely to seek acquisitions as they require more spectrum to support their fast-growing 3G/4G service revenues; while smaller, loss-making telcos will be willing sellers due to rising competition and the regulator's decision to relax spectrum rules.

Competition will probably intensify in 2016, as we expect Reliance Jio, a subsidiary of Reliance Industries (RIL, BBB-/Stable), to launch its 4G-enabled data services in 1Q16. We expect Jio's entry to lead to a decline in average data tariffs by at least 20%. Jio may also offer voice-over-LTE, as compatible and affordable 4G handsets are now freely available.

Smaller telcos, potentially including Tata Telecom, Videocon Telecom and Aircel, are likely to feel the impact first, and may look to exit as they make losses and lack key spectrum assets or the deep pockets needed to invest in networks. Smaller telcos are losing voice market share to larger operators, and competition in the data segment will intensify on Jio's entry. The regulator's decision to allow spectrum sharing and trading, and to relax spectrum caps, could allow these smaller telcos to monetise their underused spectrum.

We believe the industry can support five or six profit-making telcos in the long term. The top three telcos - market leader Bharti Airtel (BBB-/Stable), Vodafone India and Idea Cellular - will gradually increase revenue market share from the current 73%. The Indian telecoms market is very competitive, with about 10 operators, while network quality is poor due to under-investment and limited spectrum. To date, inefficient use of spectrum by smaller telcos and uncertain M&A rules have prevented industry consolidation.

We expect Rcom to expand on its existing infrastructure-sharing arrangement with Reliance Jio. Rcom and Jio already have a reciprocal infrastructure agreement to share Rcom's 43,000 towers, 120,000km of inter-city fibre, and 70,000km intra-city fibre network over the next 17-20 years.

Rcom's 'BB-' IDR will remain unaffected by the all-stock acquisition of Sistema Shyam Teleservices' (SSTL) wireless business. SSTL is a subsidiary of Russia's Sistema JSFC (BB-/Stable).

The deal will give Rcom an additional 9 million data subscribers, USD230m in revenue and access to efficient 800MHz/850MHz spectrum in eight Indian regions, or circles. The deal will be largely cash neutral for Rcom, as additional cash generation from the acquisition will partly pay for about USD60m in annual spectrum payments to the Indian government for 10 years. The deal is unlikely to help Rcom meaningfully to reduce its USD6bn in net debt. The payment relates to spectrum, which SSTL acquired in the March 2013 auctions. SSTL will pay down its existing debt of USD600m before the acquisition.

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