Reliance Communications’ move for a three-way merger with Aircel and MTS, to become the second largest operator, is an attempt to stay relevant in a highly competitive market dominated by Airtel, Vodafone and Idea Cellular.
With Reliance Jio set to launch its services early next year, the pressure on lower ranked operators will only build up.
As of now, RCom, Aircel and MTS do not figure among the top operators. Both RCom and Aircel have been struggling with heavy debt. While Reliance has been selling off various assets, including towers and real estate, to bring down debt to Rs.10,000 crore from Rs.35,000 crore, Aircel still has about Rs.20,000 crore of debt. MTS, on the other hand, has been hit by regulatory rulings, which has deprived it of opportunities to expand faster.
MTS, owned by Russian conglomerate Sistema JSFC, had entered India as a pan-India player, but its operations were curtailed after the Supreme Court ordered its licences to be scrapped as part of the ruling on the 2G scam.
Though Sistema bought back spectrum in eight circles through auction, it has not been able to go back to its original strength. Indian operations have reported in excess of Rs.400 crore loss for Sistema in the third quarter ended September 30.
Aircel does not disclose its numbers, while RCom had reported profit of ₹156 crore in the September quarter. In contrast, Bharti Airtel, the country’s largest telecom services provider, had reported a net profit of Rs.1,523 crore for the second quarter of the current financial year.
If the merger goes through, the combined entity will have over 200 million subscribers, overtaking Vodafone and Idea Cellular. It will also improve the revenue market share for Reliance from 6-7 per cent to 14-15 per cent.
The merged entity will have access to a whole range of spectrum, spread across different frequency bands – from 2G to CDMA to 4G. This will allow it to sell part of the spectrum through trading deals and pare the debt further.
Though Sistema has said it will settle its debt before the merger, the big worry would be Aircel’s debt, which can be brought down by trading its 4G spectrum in the 2,300 MHz band.
“World over, consolidation is a game changer. There are lot of clear indications that consolidation will happen in the telecom sector. While data usage is growing, average revenue per user is under pressure due to competition. The sector will have 3-4 dominant operators,” said Hemant Joshi, Partner, Deloitte Haskins & Sells LLP. While the three operators’ precarious financial position is primarily driving the proposed merger, the impending launch by Reliance Jio is adding fuel.
“Jio is expected to corner 4-5 per cent of the revenue market share. It would be easier for RJio to eat into the share of smaller players like Aircel than the bigger operators like Airtel. However, a merged entity will be tough to beat,” said an analyst on conditions of anonymity.
RJio is expected to launch services in March-April, giving enough time for RCom, Aircel and MTS to cobble up an alliance. “Consolidation is good in a hyper-competitive market. There are many operators that are not making money. Consolidation will help create synergies and make the market more rational. A similar thing had happened in the airline industry, where you had many airlines but now have 4-5 major operators,” said Prashant Singhal, Global Telecommunications Leader at EY.
Analysts said the falling price of crude may have also driven Sistema and Maxis to the negotiation table. Russia’s economy has been hit hard by falling crude oil prices, which in turn may be putting pressure on Sistema to exit loss-making ventures.
The World Bank has cut Malaysia’s economic growth estimate for next year on concerns over tighter government and consumer spending, that would potentially squeeze domestic demand.
Malaysia’s economy is expected to grow 4.5 per cent next year, slower than its earlier estimate of a 4.7 per cent.
“Telecom is a long gestation business and you need deep pockets to sustain competition. If promoters are under pressure financially, they will not infuse the money required for expansion,” said an analyst.
While the bigger operators like Vodafone and Airtel have announced fresh investments worth billions of dollars, RCom, Aircel and MTS have been slow on that front.