Moody's: Acquisition of RCOM's telecom assets has no impact on RIL's Baa2 ratings

On 28 December, Reliance Jio Infocomm Limited (RJIL), the telecom arm of Reliance Industries Limited (RIL, Baa2 stable) announced signing of definitive agreement for the acquisition of towers, optic fiber cable network, spectrum and media convergence nodes of Reliance Communications Limited (RCOM). RCOM, which is currently undergoing a strategic debt restructuring, is selling these assets to reduce its borrowings. Moody's Investors Service says that the acquisition has no impact on RIL's ratings.

The purchase consideration, which is not yet been disclosed by either parties, is payable at completion and is subject to adjustments, as per the RIL's press release.

Based on RCOM's announcement on 26 December, it expects the ongoing sale of its assets, including the ones being acquired by RIL, will reduce its borrowings and spectrum liability by INR250 billion and the transactions will complete in a phased manner between January and March 2018.

"We expect RIL will pay less than INR250 billion for the assets it will acquire as it is not buying the real estate, which was part of the INR 250 billion debt reduction plan of RCOM.

Even if we assume that the entire RCOM's debt reduction of INR250 billion is derived from sale of assets to RIL, it will only account for 0.4x of RIL's reported EBITDA for the last twelve months ended September 2017 and 11.6% of RIL's consolidated borrowings as of September 2017. RIL also had cash and cash equivalents of INR770 billion on the same day, which can be used to fund the acquisition," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

"However, the increase in RIL's leverage upfront will likely be partly offset by a reduction in planned capex for its telecom business," says Halan, who is also the lead analyst for RIL at Moody's.

As part of the transaction, RIL will acquire 122.4 MHz of 4G spectrum, 43,000 towers, 178,000 route kilometer of pan India optical fiber network and 248 media convergence nodes. RIL considers these assets strategic in nature and expect to use them for large scale roll-out of its wireless and fiber to home and enterprise services.

The acquisition also removes the overhang of RIL's ability to access the telecom infrastructure assets of RCOM following the latter's debt restructuring. It also ensures that RCOM's 4G spectrum does not fall into hands of RIL's competitors.

As such, despite a possible increase in RIL's consolidated leverage the acquisition can be accommodated within RIL's rating. However, the acquisition could reduce the cushion under RIL's rating for further increase in its borrowings, especially if the company does not reduce its planned capital expenditure for its telecom business.

The acquisition is subject to receipt of requisite approvals from Governmental and regulatory authorities, consents from all lenders of RCOM, release of all encumbrances on the assets and other conditions precedent.

The acquisition is the latest installment in the ongoing consolidation in Indian telecom sector, which is evidently moving from having over 10 active telecom service providers to just about three or four players having the entire market.

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