Fight for Survival

The RCom-Aircel merged entity may be staring at a bleak future, given its high debt exposure

The recent merger between the Anil Ambani-led Reliance Communications (RCom) and Aircel has kicked off the much-anticipated consolidation process in the telecom sector. For the past several years, both RCom and Aircel were struggling. RCom’s consolidated revenues and net profits have shrunk by 0.9 per cent and 38 per cent, respectively, between 2013/14 and 2015/16. Aircel, on the other hand, reported net losses in 2013/14 and 2014/15. The entity, with equal shareholding from Aircel and RCom, has to fight even harder to survive.

The merged entity will also have to depend heavily on Reliance Jio to survive in a market that’s changing fast. Recent developments only make it evident. Reportedly, Reliance Jio 4G services was going to be launched on August 15. Two days later was RCom’s date with big-ticket announcements around its own 4G services. But as it turned out, Jio was launched on September 1. In response, RCom kept everything low-key. “Jio was supposed to launch first. We could not have jeopardised their plans. There is an agreement between us,” says an RCom official, who did not wish to be identified.

Jio, for now, is writing the rules of the game – dictating tariff rates that are difficult for competitors to match, including the RCom-Aircel combine. In fact, the new entity will start of with a debt of `28,000 crore – `14,000 crore from each – which will limit its ability to bring down the tariffs further, or buy additional spectrum.

Analysts are sceptical of the merger, too. An IDFC Securities report said the suboptimal quality of subscribers, with an average revenue per user of `100, skewed operations, complexities of a three- way merger and establishment of a new brand, along with debt burden, would make it difficult for the new entity.

Despite the challenges, the deal has two upsides – spectrum and subscriber numbers. The RCom-Aircel entity has 448MHz spectrum across 850, 900, 1,800 and 2,100 MHz bands, which is about 17 per cent of the total spectrum among telcos – making it the third largest in terms of spectrum share. The entity’s subscriber base will be 155.5 million – fourth-largest after Airtel, Vodafone and Idea.

But what does the future hold for the new entity? Well, it might eventually lose out to bigger players such as Jio and Airtel. On September 15, RCom had said that it has plans to raise about $1 billion in equity from external investors for expansion and to pay for spectrum. The other possibility is a takeover by Jio.

The affinity between Reliance Industries’ Chairman Mukesh Ambani and RCom Chairman Anil Ambani has grown in recent years. RCom already has a tie-up with Jio for sharing passive infrastructure and spectrum. Last year, while addressing shareholders at RCom’s annual general meeting, Anil Ambani had said that “strategic cooperation and partnership between RJio and RCom is a virtual consolidation in the telecom sector”. Therefore, most likely, Jio will determine the future of the new entity. ~

THE MERGED ENTITY WILL HAVE TO DEPEND HEAVILY ON RELIANCE JIO TO SURVIVE IN A MARKET THAT’S CHANGING FAST