How RCom Assets Acquisition Will Give Jio A Significant Edge In Its Rural Coverage And 4G Offerings

With Reliance Jio Infocomm agreeing to buy wireless assets like spectrum, towers and optic fibre from Reliance Communications (RCom), a long telecom chapter in the history of Reliance Group seems to have closed. RCom was started by the older Ambani sibling in the undivided Reliance Group. But in the subsequent, bitter split of the group businesses in 2003, it went to the younger Ambani. Now that RCom is getting back to the Reliance Industries’ fold, not only will Mukesh Ambani gain valuable assets, he will also have one less competitor to contend with.

That the end of RCom was coming was evident for the last many months, as it struggled with insurmountable debt and dwindling fortunes. The loans on its books totalled about Rs 45,000 crore and it was already under a strategic debt restructuring plan where some deadlines for creditors had been breached.

This report quotes analysts to say that the debt on RCom’s books had nearly doubled since 2009-10. Then earlier this year, RCom announced plans to shut down its 2G network across all circles, which meant substantial erosion in its subscriber base. It could not continue to run 2G services due to high costs and also the upcoming expiry of spectrum needed for 2G – spectrum in the 800 mhz and 2100 mhz bands. The precarious financial position of RCom was further exacerbated with the entry of Jio in September last year but anyway, by then, RCom’s share of total industry subscribers had almost halved to 8.3 per cent over six years.

Jio came with free voice calling, fast data speeds and freebies – it shook up every player in India’s telecom market, not just RCom. While other incumbents then went for accelerated mergers and acquisitions to cut costs and consolidate spectrum holdings, RCom’s proposed merger with Aircel was called off. And things continued to spiral out of control, with creditors lining up at RCom’s door. With the announcement of a definitive agreement, it could mean anywhere between Rs 20,000-25,000 crore debt is off RCom’s books, though neither company has announced the financial details of this transaction. Overall, RCom has said it will reduce debt to mere Rs 6,000 crore through this and other measures under the approved strategic debt restructuring plan.

As for Jio, its very arrival in the market in September 2016 was a game changer, accelerating industry consolidation. Brokerage firm Indian Ratings & Research said in a note to clients recently that the structure of India’s telecom industry is being redrawn to oligopolistic from large number of operators earlier, as smaller, unprofitable telcos exit. “Over the last one year, smaller telcos lost 38 million subscribers on an aggregate basis, which has challenged their business continuity. Most of the smaller telcos have sold business at rock-bottom valuations and even need to restructure their debt. Hastened consolidation has benefited larger telcos… large telcos have (also) benefited from the acquisition of spectrum and telecom assets at lucrative prices, which has in turn has strengthened their business model.”

Most notable was the merger between Idea Cellular and Vodafone India, the number two and three ranked operators in India. Post the merger, the combined entity is likely to be the largest telecom operator with 34 per cent subscriber share and 43 per cent revenue market share. Several smaller operators have either scaled down operations or exited the business completely, including Bharti Airtel’s acquisition of Telenor, Tikona and Videocon’s spectrum and the spectrum trading-sharing arrangement between RCom and Reliance Jio (signed before the latest announcement). Bharti Airtel has also subsequently acquired Tata Teleservices’ mobile business.

With the RCom assets’ buy, Jio is expected to get significant and further leverage. First, it will get ownership of RCom’s spectrum holding in the precious 800 mhz band, which stands at 101.75 Mhz. In seven telecom circles across the country, this spectrum is valid until 2033. So since RCom holds this spectrum for a long validity period, Jio will enjoy the acquisition without fear of renewal costs for at least a decade and more. Jio’s own holdings in these circles are valid only until 2021. But brokerage Jefferies said in a note to clients that the timing of completion of the Jio-RCom deal is uncertain, deal value is 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.”

The analysts are referring to a spectrum sharing deal, which has been operational between the two companies since last year. They go on to say that Jio has emerged as the successful bidder for RCom's 122.4 MHz 4G spectrum, 43k towers, 178k RKM of OFC (fibre) and 248 MCNs (nodes). RCom expects the deal to conclude in the first quarter of next fiscal “but it has slipped on such timelines before.”

“It could (slip) yet again with the deal contingent, among others, on approvals from the government, regulators, lenders and maybe even some creditors. It may be a complex process; it isn't always that Reliance engages seven advisors to buy assets it is intimately familiar with,” they added.

Also, by gaining about 43,000 towers as part of this deal, Jio gains a significant edge in its rural coverage and 4G offerings. Remember, RCom had a significant play in the hinterland and this would come to the aid of Jio’s rapid expansion in these circles. Getting ownership of tower assets would also be crucial to expand the 4G footprint and take on rivals.

Meanwhile, the Jefferies analysts went on to say that though the deal value is unknown, but “Rs 240-290 billion would be fair, in our view. Spectrum forms the bulk of this at Rs 150 billion based on the last auction prices with towers (Rs 70-90 billion) and OFC (Rs 30-50 billion) making up the rest.”

And this piece speaks of Jio’s grand plans on launching high-speed fibre to the home (FTTH) broadband in more than 30 cities. It is expected to bundle its TV service with FTTH broadband to tap over 100 million TV households across these cities, including Tier II and III. With RCom’s fibre now in its pocket, these ambitions of Jio will also get wings.