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Mumbai: Anil Ambani-led Reliance Communications Ltd (R-Com) has entered into exclusive talks with Aircel Ltd for a potential merger a month after it announced that it would buy the local unit of Russia’s Sistema JSFC.

The three-way deal, if it materializes, will create a telecom firm with 150 million subscribers that will hold the most spectrum in the country—around 19.3% of the total airwaves available with telecom operators.

A telecom consultant who spoke on condition of anonymity said that R-Com’s acquisitions would eventually benefit Reliance Jio Infocomm Ltd, the telecom venture controlled by Anil Ambani’s elder brother Mukesh.

In September, Anil Ambani, chairman of R-Com, said his company was in talks with Reliance Jio to share and trade spectrum in the 800 megahertz (MHz) band. A deal to share R-Com’s spectrum will help Reliance Jio expand the reach of its fourth-generation (4G) telecom service, which is likely to be launched by the end of March.

On Tuesday, R-Com said it has entered into a 90-day exclusive period of discussions with Maxis Communications Bhd and Sindya Securities and Investments Pvt. Ltd, the shareholders of Aircel.

The talks will “...consider the potential combination of the Indian wireless business of R-Com and Aircel to mutually derive the expected substantial benefits of incountry consolidation, including opex (operating expenditure) and capex (capital expenditure) synergies and revenue enhancement".

“The potential combination will exclude R-Com’s towers and optical fibre infrastructure, for which R-Com is proceeding with an asset sale, as announced on 4 December 2015," R-Com said in the statement.

On 4 December, R-Com signed a preliminary but non-binding agreement with Tillman Global Holdings Llc and TPG Asia Inc. for the sale of its telecom towers and optic fibre assets. The deal may be worth as much as 30,000 crore, Mint reported.

The discussions between R-Com and Aircel are non-binding and any transaction will be subject to due diligence, along with shareholders and other third-party approvals.

“Hence, there is no certainty that any transaction will result," the company added.

R-Com shareholders will receive free shares in a new combined wireless entity and R-Com’s debt of over 10,000 crore will be transferred to this company, according to two people familiar with how the deal will be structured who asked not to be identified.

After the two mergers, R-Com will be debt-free, they added.

Mint couldn’t independently verify this as details of the deal were not announced.

R-Com declined to comment on this information

Aircel, which has a debt of over 20,000 crore, will also transfer 10,000 crore of its debt into the new entity.

The coming year could see more deals in the local telecom industry, said experts.

“This kind of consolidation has been expected in the Indian telecom market for quite some time now and we can anticipate few more announcements in 2016. The regulator (Telecom Regulatory Authority of India) realized such a need of consolidation and helped the situation through policies around spectrum trading," Amresh Nandan, research director at consulting firm Gartner.

Nandan added that increasing competition could make life difficult for the bottom four or five telcos. “Thus, it makes sense for them to identify long-term alternatives," he said.

Specifically, the spectrum consolidation the three-way deal entails could help R-Com build its enterprise and mobile data business, Nandan explained.

Asset sales and consolidation

The Anil Ambani-led group has been looking at both consolidation and asset sales aggressively.

On 14 December, Mint reported that Reliance Group could seek to reduce debt by more than 40% through asset sales. Stake sales in its financial services businesses, along with plans to sell telecom towers, optical fibre, cement and road assets, could net the group more than 50,000 crore. This is about 44% of the group’s outstanding debt of 1.14 trillion in September, according to Capitaline, which provides financial and market data.

On 13 December, brokerage CLSA said R-Com’s impending tower deal could lower its consolidated debt by a significant 60%. The operator had a debt of 35,250 crore as on 30 September.

In addition to multiple infrastructure sharing deals with Reliance Jio (towers and fibre), R-Com is also finalizing a spectrum-sharing and trading deal with the company for its 800MHz spectrum, CLSA noted.

“Given that Reliance Jio has 5MHz of 800MHz in only two of the top-six industry ARPU (average revenue per unit) circles and nine of the 22 circles, this deal with R-Com is crucial as it would ensure a pan-India footprint on 800MHz thus boosting its 4G LTE services," CLSA said in the note.

LTE, or long-term evolution, is a 4th-generation, high-speed technology standard.

“Reliance Jio deals are aiding to unlock R-Com asset values while the reciprocal benefits from sharing network and spectrum would lower capex requirement. Further proceeds from the spectrum sharing/trading deals would be used by R-Com to pay the 7,000 crore liberalization fee for 800MHz spectrum and repay added debt, providing further upsides," the CLSA note added.

On Tuesday, shares of R-Com gained 2.39% to close at 85.70 on the BSE, while the benchmark Sensex lost 0.56% to close at 25,590.65 points.

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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