RCom, without Aircel’s fig leaf, is not a pretty sight
Two wrongs don’t make a right. But somehow, the idea of merging two highly leveraged companies was being seen as a solution to the problem of, believe it or not, high leverage. That fig leaf has now disappeared with Reliance Communications Ltd (RCom) and Aircel Ltd calling off their merger.
Having said that, with the merger off the table, things have become progressively worse for RCom. Its deal with Brookfield Infrastructure Group was supposed to get debt worth Rs11,000 crore off its books, or about a fourth of its net debt of Rs44,345 crore as of 31 March 2017.
But the deal was conditional on the merger with Aircel, which means there will be fresh negotiations. The amount of debt that goes off RCom’s books on account of the tower deal could be far lower than was earlier envisaged, simply because projections related to tenancy ratios have changed considerably since the two companies arrived at the Rs11,000 crore valuation.
Apart from the fact that Aircel will no longer help spruce up the tenancy ratio of the towers, Brookfield would also need to consider RCom’s future. After all, one of its suppliers, Ericsson India Pvt. Ltd, has filed insolvency petitions against it for non-recovery of dues worth Rs1,154 crore.
The company has also been trying to sell its optical fibre and real estate assets, which analysts at CLSA Research value at around Rs6,000 crore and Rs3,000 crore, respectively. Even assuming a 100% probability of these long-pending deals coming through and a small 20% markdown by Brookfield, the company will still be left with three-fifths of its debt. But worse still, it would be left with its worst performing business to service this debt.
The telecom services business will be deeper in trouble once it starts paying tower rentals to a new owner. Likewise, profit generated by the optical fibre business will be off the table. Even without the rentals outgo and with the income from the fibre business, cash flows have been in negative territory, as the table alongside shows.
Since Reliance Jio Infocomm Ltd’s launch last year, RCom has been among the worst-hit companies. Its gross revenues have fallen by around 30% since the September 2016 quarter, or about three times the rate at which industry revenues have fallen. Similarly, the exodus of subscribers has been among the highest at RCom. Active subscribers on its network fell 15% between August 2016 and July 2017, at a time when the industry-wide subscriber base rose by around 10%.
It’s as clear as daylight that only deep-pocketed business groups will survive in the current market, since retaining subscribers requires large continuing investments. RCom, in stark contrast, wasn’t even able to acquire the spectrum it needed to continue 2G operations in some circles last year. It’s hardly surprising that its subscriber count has been dwindling.
Given this backdrop, Tata Teleservices Ltd appears to have taken the call to shut down its mobile business, according to some news reports. As this column has pointed out earlier, the writing has been on the wall for small telcos such as RCom and Tata Teleservices. The only question that remains is how long these companies can hold on.
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.