RCom-Aircel wireless merger faces challenges

Debt continues to be high; competitive pressures are a bigger headache

Despite increase in size and a place among top four telecom service providers, the new entity formed from the merger of Reliance Communications' (RCom)'s and Aircel's wireless businesses will face challenges.

The first is debt. Both will be offloading debt of ~14,000 crore each into the merged entity. And if deferred spectrum payments are included (~6,000 crore for RCom and ~1,000 crore for Aircel), the merged company's debt would stand at ~35,000 crore. At this number, analysts say net debt to Ebitda (earnings before interest, taxes, depreciation, and amortisation) would stand at a high six times, which the management believes would be lower. In the absence of wireless Ebitda figures, it becomes difficult to ascertain operating profit of the entity. RCom's consolidated Ebitda for FY16 stood at ~7,419 crore but also included tower assets. While most of Rcom's spectrum is liberalised, further liberalisation of spectrum, especially in the 1,800megahertz (MHz) band in 14 circles could increase costs. The merged entity would take a call on this based on the network and data demand.

The other issue is of funding expansion, both on the network and customer acquisition. RCom indicated there could be equity infusion of $1 billion from international investors; for now, both RCom and Aircel would have 50 per cent holding in the merged entity. While the management indicated the gains from the merger, the jury is out on this. With a customer base of 190 million (third largest in India) and spectrum bank of 448 Mhz (second largest), it expects to benefit from scale. RCom has pegged the net present value of long-term synergies at ~20,000 crore. But, given the volatile nature of the sector, this is anybody's guess.

The biggest challenge is competition, now that Reliance Jio has announced expansion plan at rates considered disruptive. This would put further pressure on the merged entity to reciprocate to protect its customer base and cut rates, leading to pressure on financials.

What is left of the remaining RCom is data centres, optic fibre network, and other telecom infrastructure. The company, which had a net debt of ~48,000 crore (including deferred spectrum payments) at the end of FY16, would have a debt of ~27,000 crore after transferring its wireless assets to the new entity. After the tower deal (expected to be at ~18,000-19,000 crore and completion in 2016), RCom is expected to be left with a debt of ~9,000 crore.

Given that a large part of operating profit was on wireless and tower business, the leftover entity would need to scale up revenues and operating profit to be comfortable on leverage.