Home >Market >Mark-to-market >RCom clears some air on Aircel merger but investors not happy
Investors clearly didn’t like what they saw. RCom shares fell by more than 3% soon after the call related to the merger ended. Photo: Hemant Mishra/Mint
Investors clearly didn’t like what they saw. RCom shares fell by more than 3% soon after the call related to the merger ended. Photo: Hemant Mishra/Mint

RCom clears some air on Aircel merger but investors not happy

RCom was silent on revenue and profit details of its own wireless business and that of Aircel's; it said it will share these details closer to the consummation of the deal next year

On Wednesday, when Reliance Communications Ltd (RCom) announced the merger of its wireless operations with Aircel Ltd, its statement was sketchy on the details. On Thursday, in a conference call with investors, it cleared some of the air around the merger, but kept some details close to its chest.

Investors clearly didn’t like what they saw. RCom shares fell by more than 3% soon after the call related to the merger ended.

First, the company disclosed that the combined entity will have total debt of 35,000 crore, including 7,000 crore in the form of deferred spectrum payment liabilities. Based on earlier news reports, most investors had assumed that the debt in the new entity will be restricted to 28,000 crore. According to an analyst with a domestic institutional brokerage firm, this is clearly a negative surprise, as the combined entity may end up with a net debt/Ebitda (earnings before interest, taxes, depreciation, and amortization) ratio of around five times even under a best-case scenario. This includes rosy assumptions that revenues remain at current levels and that the combined entity’s margins settle around 30%. This is despite falling tariffs and notwithstanding the fact that the separation of the wireless and tower operations will result in a huge additional cost overhead in the form of tower rentals.

A high level of indebtedness will put constraints on the new entity to fund expansion and improve the quality of its network. Besides, as analysts pointed out on the call, according to prevailing rules, the merger would necessitate further payouts to the government in the form of spectrum liberalization charges. The company’s answer to future capital needs is that it is in talks with global investors to raise about a billion dollars. But this is easier said than done.

In the current environment, Indian telcos are hardly the flavour of the season. Shares of Idea Cellular Ltd—the only pure play in the Indian wireless sector—have fallen by more than 40% year-till-date, largely because of the price war unleashed by Reliance Jio Infocomm Ltd.

RCom also said on the call that it plans to cut debt in the retained (non-wireless) business by selling its tower infrastructure business. Again, the recent change in the dynamics of the industry would affect the valuations this asset receives. More importantly, investors are now tired of hearing about the tower asset sale; they are unlikely to get excited by just hearing that a deal is in the pipeline.

Much to the disappointment of analysts and investors, the company was silent on revenue and profit details of its own wireless business and that of Aircel’s. It said it will share these details closer to the consummation of the deal next year. All told, RCom and Aircel’s future prospects depend largely on how successful the two are in raising a large amount of equity capital in the combined entity, and how well they shore up margins by optimizing costs. As such, it’s premature to conclude that the deal, if it goes through, will help RCom materially.

(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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