Over the last few years, intense competition, coupled with the rising cost of spectrum, continued capex requirements in meeting service levels and rolling out data services, have made the scale of business a critical success factor in the Indian telecom industry. Relatively smaller players have found it difficult to generate steady cash flows while the larger players have consolidated their position in the industry. In addition, burgeoning debt levels, and the launch of RJio at aggressive pricing, triggering intense price wars, has aggravated the situation. Consolidation, in such a market, thus seems to be the need of the hour.
The RCom-Aircel deal is one such effort at consolidation in the telecom market. RCom has signed a definitive agreement to merge its wireless business with Aircel – making it the largest consolidated transaction in the Indian telecom industry in the last decade. Finalisation of guidelines for mergers and acquisitions in February 2014 and spectrum-sharing / trading in October 2015 by the Department of Telecommunications (DoT) has been the next major driver of consolidation in the industry. Over the past one year, the industry has witnessed a spurt in business mergers and spectrum trading/sharing activities. These have been driven by the need to acquire scale to face the heightened competitive intensity, and to address the spectrum requirements for data growth in the country.
Mr. Harsh Jagnani, VP Corporate Ratings, ICRA, said: “Even after the consolidation, competitive intensity would remain high as now the industry has dominant players with sizeable spectrum holdings and financial resources. Thus the pricing pressure in the industry would be high which would adversely impact the revenue and profitability. Further, the capital structure of the industry would get strained as telcos will have to incur sizeable capex to maintain/improve their service quality. The consolidation drive is marginally negative for the telecom towers industry causing redundancy in terms of tenancies. In addition, fresh tenancy addition may be lower than it would have been had there been a larger number of operators. Further, growth in the scale of the operators would improve their pricing power, allowing them to negotiate lower rentals with the tower companies.”
As per the deal, RCom and Maxis Communications Berhad (MCB), the promoters of Aircel, will hold 50% each in the merged entity, with equal representation on board. Both entities will transfer Rs. 14,000 crore each of debt to the merged entity in addition to Rs. 7,500 crore of deferred payment liabilities to DoT, taking the total debt in the new entity to Rs. 35,500 crore. Earlier Sistema Shyam Teleservices Limited (SSTL) had conducted a similar merger with RCom.
“The RCom-Aircel combined entity is expected to have a subscriber base of 187.6 million (as per the June 2016 subs base), next only to market leaders Bharti (255.7 million) and Vodafone (199.4 million). The merged entity would be the fourth largest in terms of active subscriber base and in terms of revenues, it is expected to be the fourth largest after Bharti, Vodafone and Idea, not far ahead of BSNL. Further, the entity will hold the third largest spectrum across bands. With this merger, the industry now has six sizeable players, namely – Bharti, Vodafone, Idea, merged entity, state-owned telcos and RJio (which is a new entrant but with financial muscle and strong spectrum holding),” Mr Jagnani reiterated.
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