Home >Market >Mark-to-market >The R-Com-Reliance Jio deal: more questions than answers

Shares of Reliance Communications Ltd (R-Com) have risen 8% in the past two trading sessions, on hopes that the company would gain from a tie-up with Reliance Jio Infocomm Ltd for sharing and trading radio spectrum. R-Com’s investors have, on numerous occasions, displayed a tendency to put the cart before the horse, only to be disappointed later.

As such, one can dismiss the recent rally as a case of another burst of irrational exuberance. After all, the government has not yet notified the fine print for spectrum trading.

In this particular case, investor hopes have been lifted by statements made by R-Com chairman Anil Ambani at this week’s annual general meeting. He told shareholders that the company is in advanced talks with Reliance Jio for spectrum sharing and trading.

As far as spectrum sharing goes, the rules notified by the government look prohibitive, points out an analyst with a domestic institutional brokerage firm. For instance, the two companies can only share spectrum in circles where they both already have spectrum in the same frequency.

Besides, there are other limitations such as combining resources and using common equipment such as base transceiver stations. Since Reliance Jio already has adequate spectrum in the 800 megahertz (MHz) frequency in 10 circles, it is unlikely to go through these structuring issues involved in sharing, says the analyst.

R-Com can hope to gain by selling its contiguous 800MHz spectrum to Reliance Jio in other circles. After all, if the latter intends to make a decent launch with voice over LTE (fourth generation), it requires spectrum in this band in as many circles as possible. Without it, it may end up with a data-centric offering. Besides, of the 10 circles it already has this spectrum in, six are in so-called C-level circles, which are the least lucrative in terms of revenue potential.

But again, there are a number of imponderables.

For starters, the exact spectrum trading rules aren’t yet known. Also, Reliance Jio will have to factor in costs of liberalizing the spectrum, and paying other spectrum charges et al as part of its overall acquisition cost. In addition, since R-Com’s current revenues from data cards (dongles) will be at risk, it will price this in as well. It’s only if it manages to get a decent premium over all of this that the deal will make sense.

There is also the related uncertainty of what R-Com plans to do with the proposed Sistema Shyam TeleServices Ltd acquisition. It could well continue the data cards business using Sistema’s spectrum, if it ends up selling its own spectrum to Reliance Jio. But the $64 million question is what will be the cost associated with this acquisition. Will the equity dilution take the sheen away for existing investors?

In sum, the company’s advanced talks with Sistema and Reliance Jio raise more questions than answers. Investors should also remember that while R-Com has had many such mini-rallies in its shares, the bottomline is that in the past two years, the shares have more than halved.

The writer does not own shares in the above-mentioned companies.

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