RCom, Aircel to merge businesses as India telco consolidation gathers pace

By Sankalp Phartiyal and Devidutta Tripathy

MUMBAI (Reuters) - India's Reliance Communications Ltd is to combine its wireless business with smaller rival Aircel to create the nation's third-biggest mobile phone network operator in terms of subscribers, as intensifying competition pushes consolidation in the world's second-biggest market.

Reliance Communications, controlled by billionaire Anil Ambani, and Aircel's parent Malaysia's Maxis Communications Bhd will each own 50 percent of the merged carrier, the two sides said in a joint statement on Wednesday.

The merged business with more than 190 million customers will overtake Idea Cellular Ltd in terms of subscription numbers although will still lag it in terms of revenue.

Currently Reliance Communications is the fourth-largest mobile carrier by subscribers, while Aircel ranks sixth in the market of 10 players led by Bharti Airtel Ltd and Vodafone Group Plc's Indian unit.

With more than 1 billion mobile phone subscriptions, India's telecoms market is the world's second-biggest behind China, but tough competition means low margins.

Competition is intensifying further with Reliance Jio, a new 4G telecoms venture backed by Anil's elder brother and India's richest man Mukesh Ambani, that started operations this month is expected to shake up the market with its cut-rate services.

"We expect this combination to create substantial long-term value for shareholders of both ... given the benefits of the wide-ranging spectrum portfolio and significant revenue and cost synergies," Reliance Communications Chairman Anil Ambani said in the statement.

The two sides are also talking to international investors about injecting more equity capital into the combined business, the companies said in the statement. Reliance Communications will separately run its enterprise business comprising undersea cables and data centres after the deal closure in 2017.

"It is just another way of surviving," Jigar Shah, chief executive at Maybank Kimeng Securities India, said of the deal. "They can become better only if the two partners bring further cash into the business and they buy a reasonable amount of 4G spectrum."

In the first sign of sector consolidation, Reliance Communications in November agreed to buy Russian conglomerate Sistema's Indian mobile phone business in an all-stock deal. That transaction has yet to be completed.

DEBT BURDEN

The combined business will have debt of about 280 billion rupees ($4.2 billion) as Reliance Communications and Aircel transfer some debt into the new entity, a source with direct knowledge of the matter said.

The deal will help cut Reliance Communication's debt by 200 billion rupees ($3 billion), or more than 40 percent of its total debt, while Aircel's debt will fall by about 40 billion rupees, the companies said, without disclosing their latest debt levels.

As of end-March, Reliance Communications had net debt of 413.62 billion rupees. Closely-held Aircel had 185 billion rupees of debt as of 2013, according to rating agency ICRA. Reliance Communications, the most leveraged listed telecoms carrier, also has plans to sell its telecoms masts to cut debt.

The companies had entered into exclusive talks in December last year for the deal, which is subject to regulatory approvals and consent of creditor banks.

Goldman Sachs, SBI Capital Markets, Standard Chartered and A.T. Kearney were among the advisors for the deal.

($1 = 66.8061 Indian rupees)

(Reporting by Sankalp Phartiyal and Devidutta Tripathy; Editing by Louise Heavens, Greg Mahlich)