RCom’s merger with Aircel gets NCLT nod

The decision of the National Company Law Tribunal to approve the merger of Reliance Communications (RCom) and Aircel provides major relief for the Anil Ambani group in cleaning up its burgeoning debt. The merger will create a more competitive telecom company, which could face the onslaught of Reliance Jio.

RCom will merge into Aircel and a new entity will be created called Aircom, with both partners having 50 per cent equity stakes. Both companies will also transfer ~14,000 crore of debt each to the new entity, apart from a deferred liability, essentially the payment for spectrum in instalments of ~7,000 crore over eight years.

Internal estimates say the new company will have earnings before interest, tax, depreciation and amortisation (Ebitda) of ~15,000 crore based on current trends. Assuming it has to pay 10 per cent interest on its loans annually, the interest outgo would be ~2,800 crore. A debt to Ebitda ratio — a metric used to evaluate the loan-paying capacity of a company — at under 2 is manageable.

And, of course, Aircom has the option of going public after a few years and bringing down its debt profile even further.

As a standalone entity, RCom was under severe financial stress. With debts of ~45,700 crore, it is forking out over ~3,600 crore as interest annually. And with an Ebitda of ~9,800 crore — ~7,500 crore from the wireless business and the rest from other smaller businesses — its debt is over 4.6 times its earnings.

That is far higher than the fair leverage for telecom companies, whose net debt should be around three times their Ebitda.

Of course, not all problems will vanish with the merger. RCom will still have around ~31,700 crore of debt, which it must reduce by December as promised to lenders.

The company is aggressively looking at selling its assets; it hopes to sell 51 per cent in its tower business to Brookfield for ~11,000 crore and monetise its real estate business, which is expected to garner ~8,000-9,000 crore.

Experts said the company, which had been trying to monetise assets for the last two years, would not be able to suddenly sell all its properties at prices it was seeking. If it does, RCom’s overall debt would come down to ~11,700 crore.

But the smaller firm, according to estimates, will have an Ebitda of ~3,800 crore, which includes ~2,300 from the undersea cable, the enterprise business and data centres, and earnings from the 49 per cent stake in the tower business.

As a result, its debt will be only three times its Ebitda, an acceptable number. And RCom has the option to sell the 49 per cent it still owns in the tower business. But if the real estate deal does not happen by December — Ambani has told bankers that this will bring down debt to around ~20,000 crore — the company will still have debt over five times its Ebitda.

Sources said Aircel’s current debt was pegged at around ~18,000-20,000 crore. It has been able to pare its debt by selling 2,100 MHz spectrum to Airtel for ~3,000 crore. Its Ebitda is more or less in line with the ~7,500 crore of RCom, so it has a reasonably healthy debt to Ebitda ratio. With a substantial portion of the debt being transferred to the new company, Aircel has to pay back ~4,000-6,000 crore of loans. Experts said it might have some extra spectrum in some circles after the merger, which it could hawk alongside its 2,000odd towers.

The merger could create an entity that might be able to face Jio or it could be an attractive proposition for Jio to buy out eventually. Even though the two companies have been losing subscriber market share, they still control over 14.65 per cent of the market, close to what Vodafone and Idea do individually. They also have a substantial and diverse spectrum portfolio, with over 15.3 per cent share of the total spectrum in the country. RCom has already paid over ~6,000 crore for liberalising spectrum. But their revenue share has been falling and is at 9-10 per cent. This could be an area of concern, especially with Jio grabbing subscribers from smaller players.