Sistema deal gives RCom a new lease of life

India's telecom sector is headed for consolidation, if the Reliance Communications-Sistema Shyam Teleservices deal is anything to go by. The deal suggests that the going has not been easy for the smaller players, even though the ride has been less rocky in recent years.

This deal is significant for two reasons. One, it is going to be a precursor to more such deals as several fringe players who have been piling up losses will look to exit. Two, this deal is significant for Reliance Communication and Reliance Jio, as it gives the former precious spectrum in the 800-850 MHz band in nine circles at 2013 prices.

It is well known that RCom is looking at an infrastructure sharing deal with Mukesh Ambani's Reliance Jio. This deal will allow RCom to share spectrum in the 800 MHz band, which will give Reliance Jio a pan-India footprint in the LTE efficient band.

 

The deal will not add significantly to RCom's revenues and operating income, but it will give better visibility to the company as far as spectrum is concerned. The Anil Ambani-owned telecom major lost its 900 MHz spectrum it was holding in three circles during the March auctions, as its stretched balance-sheet did not allow it to be very aggressive.

Citi Equities Research says the merger would provide RCom spectrum visibility, as seven of these will come for renewal in 2032, while all of RCom's 800MHz will be due for renewal in 2021-22.

Despite the significance of this deal, RCom has not had to pay a premium to Sistema. Analysts say the deal values Shyam Sistema TeleServices at $320 million, which adds up to the value of its spectrum (price SSTL paid) and 8,500 Base Transceiver Stations (BTS).

After months of negotiations, Sistema announced the sale of its India operations for a 10 per cent stake in RCom. Sistema is walking away with a tenth of what it had invested in the Indian market.

This deal was critical for RCom as it now gives the company's business visibility beyond 2012 when its 800 MHz spectrum expires. The deal gives RCOM 5 MHz of liberalised spectrum in the 800 MHz band in four markets for now. The company will get the same in another four markets after it pays an additional Rs 1,500 crore.

According to Deutsche Bank Markets Research, "This will allow for the roll-out of LTE in the coverage-efficient 800 MHz band."

Industry watchers say that the deal will increase RCom's FY17 earnings by 15-17 per cent, as the deal will give the company additional spectrum to share with RJio.

However, in order to trade the spectrum or get contiguous spectrum, RCom would need to cough up an additional Rs 4,000 crore ($613mn), which is the difference between the price of spectrum in March 2015 and 2013 auctions.

Morgan Stanley expects spectrum trading and sharing to be an integral part of RCom's deal with Reliance Jio. The brokerage goes on to say: "Its footprint would enable Reliance Jio to have an all-India 800 MHz spectrum band."

This deal, analysts and investment bankers believe, is a precursor to many such deals, which will give an honourable exit to smaller telecom players in India, which is better than shutting shop altogether. In a note, Nomura says: "We wouldn't be surprised if others follow too - but Telenor CEO in the results call last week stated that 'it is in India for a long-time', but it still means that M&A is possible."