RCom deal brings synergies for Jio’s biz: Morgan Stanley

The acquisition of wireless assets of Reliance Communications (RCom) will lower costs and bring synergies to Reliance Jio's business but may potentially raise parent RIL's net debt by 10-12 per cent in near term, Morgan Stanley said on Friday. The two companies, last evening, announced a blockbuster deal under which Mukesh Ambani's Jio said it will acquire debt-laden RCom's wireless assets -- including spectrum, tower and the optical fibre network -- for a widely-estimated Rs 24,000 crore to Rs 25,000 crore.

The deal, for which a binding agreement has been signed by the two companies, is expected to be completed in a phased manner between January and March 2018. "Acquisition of RCom's telecom infrastructure should bring synergies and lower costs while raising clarity on growth capex. The deal could potentially raise balance sheet leverage by 1012 per cent near term," global financial services major Morgan Stanley (MS) said in a note, reports the PTI.

On the flip side, it may "raise RIL's net debt by about 10-12 per cent and likely be EPS (Earnings per share) dilutive by 1-3 per cent" on its FY 2019-20 estimates. Morgan Stanley noted that Reliance Industries (RIL) will save on tower rentals, being one of the largest tenants for RCom's towers and paying Rs 1,500-1,600 crore in annual rental, as per its estimates. "RCom, during its June 7, 2013 press release on tower sharing with RIL, had highlighted Rs 120 billion (Rs 12,000 crore) as the agreement value over the lifetime of the deal," it pointed out. Investment banking firm Jefferies, however, felt that the upside from the deal could be limited unless Reliance pays "much less than" the estimated fair value of Rs 24,000-29,000 crore. "Timing is uncertain and the deal value unknown but unless Reliance pays much less than the Rs 240-290 billion we estimate as their fair value, upside may be limited, especially as it already has access to the towers/fibre at favourable terms," Jefferies said, terming the risk-reward as being unfavourable. It cautioned that although RCom expects the deal to conclude in first quarter of calender 2018, "it has slipped on such timelines before". "It could yet again, with the deal contingent, among others, on approvals from the government, regulators, lenders...It may be a complex process...," it added.

The industry has also given the deal a thumbs-up, and the COAI DG, Rajan Mathews, speaking to the PTI, said: "It is good for the industry because the industry continues to consolidate around serious players who have deep pockets and financial wherewithal to play effectively and delivery value to customers in future."