Most analysts bearish on RCom-Aircel merger

A subscriber base that generates low average revenue per user of Rs100 along with carrying a huge debt burden are some of the challenges, IDFC analysts said


Moody’s Investors Service placed Reliance Communications under review for a downgrade. Bloomberg
Moody’s Investors Service placed Reliance Communications under review for a downgrade. Bloomberg

New Delhi: Analysts are sceptical about claims that the merger of Reliance Communications Ltd’s (RCom) wireless business and Aircel Ltd will improve the combined entity’s competitive position in the world’s second largest telecom market by users.

A subscriber base that generates low average revenue per user of Rs100, slow growth rate and weak operations along with the fact that the entity will have to establish a new brand and will carry a huge debt burden are the challenges before the combined company, analysts at IDFC said. “We believe that the top three players would continue to focus on building data network and competing with Reliance Jio,” an IDFC report said, affirming that this deal is in fact healthy for the industry.

RCom on Wednesday signed a definitive agreement for the merger claiming this would lead to it being ranked among the top three operators in terms of revenue in 12 circles while giving it the second largest spectrum holding among all operators. RCom also said that the merged entity shall be the largest private sector company owning an asset base of Rs65,000 crore and having net worth of Rs35,000 crore. With a 50% stake for each RCom and Aircel, both the companies announced debt reduction in their balance sheets as a result of the merger.

Also Read: RCom clears some air on Aircel merger but investors not happy

Still, Moody’s Investors Service placed RCom’s ratings under review for a downgrade.

“We had expected a significant reduction in RCom’s absolute debt levels—primarily through the sale of non-core assets—in support of the company’s Ba3 ratings. However, even with the merger adjusted pro forma leverage will remain above our tolerances for a Ba3 rating. Moreover, uncertainty around the closure of the proposed tower sale, announced in December 2015, continues to weigh on the rating,” said Annalisa Di Chiara, Moody’s lead analyst for RCom.

Amresh Nandan, research director at Gartner Inc., believes that the consolidation is good news for the industry. “From the perspective of a common subscriber, merging does not make a difference and there shouldn’t be any immediate effect of this deal. However, a worrisome situation would arise if there is aggressive pricing and large movement of subscribers from one operator to another,” he said.

(Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.)

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