RCom-Sistema deal signals more telecom mergers, says Fitch

Reliance Communications' acquisition of Sistema Shyam Teleservices may spark more mergers and acquisitions in the Indian telecom sector, Fitch Ratings said.

Larger operators are likely to seek acquisitions as they require more spectrum to support their fast-growing 3G and 4G service revenues, Fitch said.

On the other hand, smaller loss-making telcos will be willing sellers due to rising competition and the regulator's decision to relax spectrum rules, it added.

Earlier this month, RCom announced it will buy Russian conglomerate Sistema's Indian mobile telephony business in an all-stock deal, valued at around USD 690 million (Rs 4,500 crore).

The first consolidation in the highly competitive Indian telecom sector, the RCom-SSTL merger will create an operator with 118 million subscribers.

"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 Q1 2016," Fitch said.

It said the Indian telecom market is very competitive with about 10 operators. Network quality, on the other hand, is poor due to under-investment and limited 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, Vodafone India and Idea Cellular - will gradually increase revenue market share from the current 73 per cent," it said.

To date, inefficient use of spectrum by smaller telcos and uncertain M&A rules have prevented industry consolidation, the agency added.

"We expect Jio's entry to lead to a decline in average data tariffs by at least 20 per cent. Jio may also offer voice-over-LTE, as compatible and affordable 4G handsets are now freely available," it added.

Fitch said 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," it said.

The regulator's decision to allow spectrum sharing and trading, and to relax spectrum caps, could allow these smaller telcos to monetise their under-used spectrum, Fitch said.

On the RCom-SSTL deal, Fitch said it is unlikely to help RCom in meaningfully reducing its USD 6 billion in net debt.

"The payment relates to spectrum, which SSTL acquired in the March 2013 auctions. SSTL will pay down its existing debt of USD 600 million before the acquisition," it said.