Can this be for real - RCom and MTS marriage?

Thomas George

Reliance Communications (RCom) looking ahead to get hitched with Sistema Shyam Telecom Limited (MTS), is certainly going to be an interesting development for the Indian telecom industry.

Going by the global trend, it’s now clear that there can be only 4-5 serious players in India like most of the other mature markets as the industry enters the next phase of consolidation.

With looming payment schedules for the acquired spectrum, pending renewals and stressed balanced sheet in their backyard, most of the telecom service providers are looking for the right partners to align or acquire. As most of them are equally stressed, they are seeking for an alliance of their convenience.

It’s a desperate attempt and an obvious marriage proposed out of their convenience to stay relevant in today’s competitive  marketplace and with a sight on better future valuations.

Is it a survival game?

As industry observer, we see this move of RCom and MTS coming together in the deadly war of telecom service providers as an attempt to lift their valuations and high value exit. Till then both will hope for a better turn-around based on external environment like market stability in the coming years, focus on traffic based approach, which will enable them to stay on and survive.

Today, RCom with the revenue market share erosion of more than 40pc (from 11.5 p.c to 6.1 p.c) in the last 5 years, cannot arrest the decline by themselves and it can not suddenly change its gears to grow and bring back the stability into the business.

It’s very evident that a mere 300 million capex guidance cannot fulfill the growing data business need in the country and they will always lag behind to capture the emerging data business opportunities.

While RCom today has few monetizing options like real estate, spectrum holdings, submarine cables, DTH assets and may be their tower business, which can help in unlocking its value, but it will only help in reducing the debt (close to INR 32K Crore) company has on its books. This substantiate the hypothesis of a better valuation and higher value exit.

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The operational cash flow will not be enough to take care of the investments required to compete with the other incumbents in data services space.

Few positives that can come out of this alliance: 

This combined entity will be the only provider with 800 spectrums holding in more than 10 circles with sub 1GHz LTE spectrum, which means they can roll out LTE in 10 markets. The challenge is whether they will be able to invest in the capex with its declared level of capex guidance or not.

However, with this merger the new entity will have lesser renewal pressure in circles like Delhi, Kolkata, Gujarat, Kerala, Karnataka, Tamil Nadu, UP(W) and West Bengal etc., as they will expire only in 2033 for SSTL. RCom did not renew its 900/1800 licenses in 3 circles (West Bengal, Bihar and Assam) in the recent auction.

Hence, the ground got prepared quite some time back and the dating seems to have been on since then. Though, the merger talks and claims are non-binding in nature and subject to all due diligence and approvals.

The merged entity might have close to 120 million customers, where around 10 million might be coming from SSTL. This could be a win-win alliance for both players as they get thrown into more hyper competitive telecom services pit, where more and more onslaught and shake-outs are anticipated.

If all goes well, how will they rechristen the new entity as “RComTS” or stick to the good old “RCom” name only?