Mumbai: Reliance Industries Ltd or RIL, India’s most valued private firm, said on Friday it will acquire a 95% stake in Infotel Broadband Services, a privately held telecom services company, for Rs4,800 crore, marking the re-entry of Mukesh Ambani into the telecom sector five years after he exited the business in favour of his younger brother Anil Ambani, to settle “ownership issues”.
Infotel Broadband, which won a licence to roll out broadband wireless services in 22 circles across India for Rs12,847.77 crore, is managed by Anant Nahata, and will now become an RIL subsidiary.
This is Ambani’s first investment in a sector where his younger brother is present, following the scrapping of a non-compete agreement in the last week of May. The two had entered into that agreement during a family settlement in 2005.
“We see this as the next wave of value creation opportunity in the wireless broadband space,” Ambani said.
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A Reliance Anil Dhirubhai Ambani Group or R-Adag official spokesperson said, “As leading telecom infrastructure and content service providers, we look forward to offering our services to RIL and other BWA players, even while we compete for customers in the marketplace through our choice of different technologies.”
Some analysts expect RIL may team up with R-Adag in telecom. A 24 May report of Goldman Sachs analysts Nilesh Banerjee and Nishant Baranwal said: “We believe RIL could either potentially seek inorganic growth via alliances with existing operators, or could also seek operational synergies of its retail vertical with R-Adag’s telecom business.”
In its statement, RIL said it would adopt an asset-light approach in the new business it had acquired and would move ahead by forging “several strategic relations with a host of leading global technology players, service providers, infrastructure providers, application developers, device manufacturers and others.”
Significantly, even as RIL decided to acquire Infotel, Anil Ambani-controlled Reliance Communications Ltd or RCom exited the BWA auction a week back as it found the prices too high. Sources at RIL, however, hold a different view. “There is money in data and not in voice,” they said.
Telecom has been an area of great interest for the RIL chairman who had incubated the undivided Reliance’s telecom arm (the erstwhile Reliance Infocomm Ltd) that went to his younger brother.
Ambani may be looking for his next big project, given that RIL’s businesses will generate cash surpluses of Rs25,000 crore every year and the company needs a vehicle that can utilize the money.
According to a Goldman Sachs estimate, RIL will generate $25 billion (Rs1.17 trillion) excess cash between fiscal 2011 and 2014 and needs to figure ways of investing it.
RIL’s entry into telecom was the subject of speculation ever since the non-compete agreement was cancelled. A PTI report quoted Anant Nahata as saying: “We were in talks with RIL even before the auction for BWA started.”
To be sure, rolling out broadband services will be more challenging than rolling out a telecom network. Bhagwan D. Khurana, a well known telecom expert who had helped RCom roll out its network and put fibre underground across India, said RIL will not set up the network in bits and pieces.
“He (Mukesh Ambani) will roll out the network on a national scale before he launches services across the 22 circles,” Khurana said, adding, unlike his telecom venture, this would be more challenging as he’ll have to lease the bandwidth from existing telecom operators.
According to analysts, the wireless broadband market may be a better route to enter the telecom sector.
“The average revenue per user for mobile services providers has been declining and if RIL were to invest in a fully operational mobile services provider, the valuations would have been higher than what it is paying for Infotel,” said Jaideep Ghosh, executive director at audit and consulting firm KPMG. “By gaining access to wireless broadband, it can not only cater to retail users, but enterprises including other mobile telephony companies as well.”
The industry will also keenly watch RIL’s use of technology. Even though the BWA auctions have concluded and spectrum given out, it is not clear yet which technology the operators will use for wireless broadband. The two competing technologies, backed by different corporate lobbies, that are available for operators are Worldwide Interoperability for Microwave Access, or WiMAX and Long Term Evolution or LTE.
Among the most vocal supporters of Wimax is chipmaker Intel Technologies, while wireless technology chip maker Qualcomm, which has won BWA auctions for four telecom circles, has been backing LTE.
When Mukesh Ambani rolled out telecom services, he had bet on Qualcomm’s code division multiple access technology, going against the multitude of operators who voted for GSM.
A former managing director of a multinational telecom company, who was also part of a consortium that was bidding for wireless broadband licence but later walked out, said once voice services are allowed on wireless broadband, Infotel could become a major player in both data and voice.
“BWA bid prices have gone beyond initial expectations by any estimate,” said Kamlesh Bhatia, principal research analyst at Indian arm of Gartner Inc. “Beyond the cost of spectrum, roll out of broadband services and the development of a content ecosystem will require a lot of capital. In that context, it is good to have a partner like RIL who will be able afford it.”
“As in the case of 3G, return on investment is still unclear at this point,” Bhatia said.
Analysts estimate that it will take at least two-three years before telecom operators can hope to generate any significant amount of revenue for 3G.
One of the most evident gaps in the current 3G ecosystem is the lack of relevant content but Bhatia said once connectivity is plugged through efficient broadband, this will develop on its own, responding to demand.
Mukesh Ambani is moving into creating and buying content in which R-Adag already has a headstart. This includes BIG Flix, an online movie rental business, and Zapak, a video games maker, both of which can be become key components in broadband services.