R-Com- Aircel Merger Spurs Telecom Consolidation, Steps Up Competition

The merger of the wireless business of Reliance Communications (RCom) with Aircel (Aircel), is a key milestone in the ongoing consolidation in the telecom sector, says India Ratings and Research (Ind-Ra). Ind-Ra believes that the merger will enable the new entity RCom-Aircel to give strong competition to its peers in the backdrop of the disruption that the launch of operations by Reliance Jio Infocomm (RJio) has caused. The combined entity RCom- Aircel will now be the third largest telecom entity in India by subscriber base, thus moving ahead of Idea Cellular Limited (Idea). This development coupled with RJio's penetration strategy will spur competition and in turn push tariffs lower.

Ind-Ra believes that the spectrum acquisition strategy, particularly around 4G, is an important driver for the consolidation in the telecom sector. This deal provides RCom access to the superior 800MHz band in eight circles with extended validity till 2033, as its own spectrum is scheduled to expire in 2021-2022. The merged entity will have 448MHz spectrum, which is about 17% of the total spectrum held,is the third largest spectrum holding, following 770MHz of Bharti and 596MHz of RJio.

The merged entity will offer strong competition to both Vodafone India (Vodafone) and Idea which are weaker placed, as far as 4G operations are concerned. Ind-Ra believes that the sector will now have five meaningful players namely, Bharti Airtel (Bharti), Vodafone, RJio, Idea and the merged RCom -Aircel- Sistema (with a new brand) as the industry moves towards data driven revenues.

The top five circles of Aircel are Assam, J&K, UP East, Bihar and Gujarat, while those of RCom are Bihar, Tamil Nadu and Chennai, Delhi, and Mumbai. The merged entity will be positioned as the second largest in the Bihar circle, after Bharti, and overtaking Vodafone and Idea, which were number two and number three respectively. In the Tamil Nadu and Chennai circle, the merged entity will vie for the second spot with Vodafone, which is ranked the second largest after Bharti. RCom has a wireless active subscriber base of 92.2m as on March 2016 (market share 9.8%), whereas Aircel has 63.3m subscribers (market share 6.8%), leading to a combined subscriber market share of 16.1% with 155.5m subscribers; which will rank forth after Idea with 19.6% subscriber share and Vodafone with 20.4% subscriber market share as of March 31, 2016. The merged entity could potentially have a revenue market share of 14%, given RCom's existing revenue market share at around 11% in FY16 and Aircel's 3% revenue market share.

Aircel reported revenues of INR55bn, with EBIDTA of INR8.06bn, and an EBIDTA margin of 14.5%, and net loss of INR14.5bn and cash loss of INR6bn in FY15. Aircel had a total debt of INR209bn in FY15. RCOM reported consolidated revenue of INR221bn, EBITDA of INR74bn and EBITDA margin of 33.6% in FY16 and debt of INR41bn. The combined entity's revenues are estimated at around INR250bn (for full year of operations), with EBITDA of around INR65-70bn.

However, both RCom and Aircel have significant debt and their ARPU's are below industry average, as evident from their low standalone revenue market share and Aircel's presence in low ARPU generating circles. Aircel on a standalone basis is a highly leveraged entity (FY15 debt to EBIDTA 26x), whereas RCom had net leverage of 5.6x in FY16. Therefore Ind-Ra believes the merged entity will continue to depend upon the parents' support for fund infusion for growth capex. Post the deal the merged entity will hold INR280bn of debt from its parents to start with.

The merger transaction is subject to regulatory and shareholder approvals.

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