RCOM to buy Sistema's Indian telecom business

Triggering a significant consolidation in telecom business in the country, industrialist Anil Ambani-led Reliance Communications on Monday announced a major accord to acquire the Indian business of Russia's Sistema, which is operating under the 'MTS' brand, in a unique stock-cum-spectrum-fee payment deal.

The deal first calls for a demerger of the telecom business of the Russian group's Indian entity Sistema Shyam TeleServices, and then the acquisition of the demerged entity by Reliance Communications. Prior to that, Sistema Shyam TeleServices will pay off its existing debt. It will then get 10 percent stake in Reliance Communications post-merger, the two companies said.

"In addition, Reliance Communications will assume the liability to pay the Department of Telecom installments for Sistema Shyam's spectrum, amounting to Rs.392 crore per annum for the next 10 years," the companies added.

Sistema Shyam Teleservices is an arm of Sistema -- a publicly-traded, diversified holding company in Russia and the region that invests in companies across the globe in areas such as telecommunications, high technology, radars and aerospace, banking, retail, mass-media, tourism and healthcare services. It owns the MTS brand.

For Reliance, the deal means an addition of 9 million customers and around Rs.1,500 crore in annual revenues, apart from the valued telecom airwaves or spectrum in the 800 MHz and 850 MHz band that is ideally suited for 4G services to complement its own unique nationwide footprint of minimum 5 MHz of contiguous spectrum in this band aggregating 148.75 MHz.

This will also extend the validity of Reliance Communications spectrum in the 800 MHz and 850 MHz band in eight important circles by a period of 12 years from 2021 till 2033 -- Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, Kolkata, Uttar Pradesh-West, and West Bengal.

The development must also be read against the backdrop of chairman Anil Ambani's recent announcement that his company will partner with elder brother, Mukesh Ambani-controlled Reliance Jio to offer each other's subscribers seamless reciprocal access to 3G data and voice telephony in the country.

Reliance Jio had entered into an agreement with Reliance Communications for sharing the latter's extensive inter-city as well as intra-city infrastructure of nearly 520,000 km of optic fiber pairs, besides some 45,000 towers. The aggregate value of the deal was pegged at Rs.12,000 crore (nearly $6 billion).

As per the latest data available with the telecom watchdog, the top five wireless broadband service providers in India as on August 31 were Bharti Airtel (26.36 million), Vodafone (23.19 million), Idea Cellular (18.11 million), Reliance Communications (10.10 million) and BSNL (8.99 million). The deal could take Reliance Communications a notch up.

"The combination of our wireless businesses, through the demerger of Sistema Shyam Teleservices wireless business into RCOM for stock consideration, will generate significant capex (capital expenditure) and opex (operational expenditure) synergies for mutual benefit," said Gurdeep Singh, president and chief executive for consumer business with Reliance Communications, reacting to Monday's deal.

"The merger is a milestone event. Despite the numerous challenges the sector faced in recent years, the combination of two leading data service providers is a clear sign of progress for the Indian telecom industry," added Mikhail Shamolin, president and chief executive of Sistema.

The closing of the transaction, expected in the second quarter of 2016, is subject to applicable corporate, regulatory and other approvals. Post-closing, minority investors of Sistema Shyam Teleservices will be given an option to exchange their shares with the pro-rata Reliance Communications shares held by the demerged company.

Founded by legendary industrialist Dhirubhai Ambani, Reliance Communications is the flagship company of the Reliance Group, led by his younger son Anil Ambani. The Group currently places its net worth in excess of $15 billion, cash flows of $1.7 billion and total net profit of over $800 million.

Reliance Communications has a customer base of over 118 million -- including 2.6 million individual overseas retail customers, over 39,000 Indian and multinational corporate clients in the large, small and medium enterprises space and over 290 global, regional and domestic carriers.