Calling it Quits

RCOM-Aircel merger collapses

In a move that could have serious implications on the ongoing consolidation saga in the Indian telecom sector, Reliance Communications (RCOM) has called off its merger with Aircel, citing inordinate delays caused by legal and regulatory uncertainties, various interventions by vested interests, policy directives impacting bank financing for telecom, and changed industry dynamics.

RCOM and Maxis Communications Berhad, the Malaysia-based parent company of Aircel, had signed binding agreements in September 2016 to create a separate entity for managing their wireless operations, with each holding a 50 per stake in the merged entity and an equal representation on the board of directors and all committees. The entity was to be managed by an independent professional team under the supervision of the board.

The merger was being seen as a strategic step by both operators to reduce their debt and improve their competitiveness by leveraging substantial benefits of scale, and capex and opex synergies. The merged entity was touted to become one of India’s largest private sector companies, with an asset base of over Rs 650 billion and a net worth of Rs 350 billion. It would have ranked amongst the country’s top five operators by customer base and revenues, holding a substantial spectrum portfolio aggregating 448 MHz across the 850 MHz, 900 MHz, 1800 MHz and 2100 MHz bands, and would have enjoyed enhanced business continuity through extended validity of spectrum holdings till 2033.

Headwinds from operational creditors and regulatory authorities

In March 2017, RCOM obtained approval for the merger from the Securities and Exchange Board of India, the National Stock Exchange, the Bombay Stock Exchange and the Competition Commission of India, following which it filed an application with the National Company Law Tribunal (NCLT), Mumbai Bench. However, RCOM’s main lenders, including the China Development Bank (CDB), Standard Chartered Bank and HSBC, objected to the petition being admitted in the NCLT. CDB contended that the assets being transferred between RCOM and Aircel had been offered as a security to it, and therefore the merger required its approval. Aircel had sourced equipment from China-based vendors such as Huawei and ZTE, which were backed by loans from CDB. Meanwhile, CDB accounted for 37.11 per cent of RCOM’s total secured debt as of September 2016. Since both the companies had outstanding debt, CDB wanted to know who would service their loan commitments. RCOM, however, dismissed CDB’s concerns saying that the deal with Aircel would only affect the shareholders and that although the debt would move between the companies, it would not have any impact on the lenders.

The lenders eventually gave their conditional consent to the merger but other creditors like Indus Towers, Ericsson, Bharti Infratel and GTL Infrastructure’s subsidiary Chennai Network Infrastructure Limited (CNIL) objected to it. Bharti Infratel and Indus Towers sought clarity on how their dues would be paid post the merger. Bharti Infratel contended that once RCOM’s assets were handed over to the new merged company, it would be left with the liabilities of a shell company. Meanwhile, CNIL’s concerns stemmed from the fact that it had bought 17,500 mobile towers from Aircel.

In another major blow to the merger, equipment vendor Ericsson filed an insolvency case against RCOM in the NCLT. The vendor is an operational creditor of RCOM and had sought the tribunal’s intervention for recovering Rs 11.54 billion worth of dues from the operator and its subsidiaries, Reliance Infratel and Reliance Telecom.

The Department of Telecommunications (DoT) also submitted before the NCLT that RCOM’s merger with Aircel would need a no-objection or clearance from the Supreme Court. DoT stated that the apex court had restrained Aircel from selling and trading the 2G spectrum allotted to it in 2006 and had signalled a possible cancellation of Aircel’s 2G licences if the owners of the Maxis Group did not appear before Indian courts in a case related to irregularities in the 2G spectrum allocation. Meanwhile, RCOM informed the NCLT that it had already submitted the proposed scheme of arrangement to the Supreme Court and the court had not raised any objection or issue observations.

The road ahead for RCOM

For RCOM, the merger of its wireless business with Aircel and a separate deal to sell 51 per cent stake in its tower business to Brookfield Infrastructure and its institutional partners for Rs 110 billion was the cornerstone of its plan to pare its Rs 450 billion debt, one of the highest in the industry. RCOM had planned to transfer a debt of Rs 140 billion to the merged entity. Meanwhile, with the merger talks collapsing, the deal with Brookfield is also being renegotiated, with the investment firm now likely to pay less than the originally agreed amount.

RCOM’s lenders invoked strategic debt restructuring (SDR) for the telecom company in June 2017, allowing them to convert the operator’s debt into equity and take over the management. The banks, however, allowed the company to postpone debt servicing payments till December 2017 after it presented a restructuring plan involving the sale of its telecom tower business and the spin-off and merger of its wireless assets. RCOM has stated that this standstill period will continue till December 2018.

RCOM is now considering alternative

strategies for debt reduction. The operator has decided to evaluate a new plan for its mobile business through the optimisation of its spectrum portfolio and adoption of a 4G-focused mobile strategy. RCOM has 200 MHz of spectrum across the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands, valued at over Rs 190 billion for the balance of the licence validity period, based on the last auction pricing. The company will evaluate opportunities for monetisation of the same through trading and sharing arrangements. Meanwhile, the merger of the mobile business of Sistema Shyam TeleServices Limited (SSTL) with RCOM, which was completed in October 2017, will strengthen RCOM’s spectrum portfolio by 30 MHz through the addition of SSTL’s spectrum holdings in the 800-850 MHz band. This will also extend the company’s spectrum validity period in eight circles for another 16 years, that is, till 2033. Apart from this, RCOM has the advantage of capital-light access to Reliance Jio Infocomm Limited’s (RJIL) nationwide 4G mobile network through spectrum sharing and intra-circle roaming agreements.

The company is also proceeding with its monetisation plans for real estate assets in Maharashtra and New Delhi. Initial indications of interest from leading developers and independent third-party valuations have established the present value monetisation potential of Rs 100 billion for the real estate assets in Maharashtra alone.

Going forward, RCOM plans to focus more on its capital-light business-to-business (B2B) non-mobile segments such as global and Indian enterprises, internet data centres and the global submarine cable network.

New debt reduction roadmap for Aircel

As part of the merger agreement, Aircel had planned to transfer Rs 150 billion of its total debt of Rs 200 billion to the merged entity and the rest was to be undertaken by its parent company, the Maxis Group. Aircel is now likely to start an independent debt restructuring programme to achieve a substantial reduction in its debt.

Even before the merger was called off, Aircel had approached financial consultants to explore such a restructuring and had sought advice on whether it could use the insolvency or debt recast route to cut debt and continue as a niche player in a limited number of circles. An SDR programme now seems to be the best bet for the company since the adoption of the bankruptcy route would instantaneously invoke Maxis’s bank guarantees.

Aircel lost around 900,000 customers between December 2016 and July 2017. In addition, the company’s financial losses also widened during this period. Given the changing contours of the Indian telecom sector and the increasing pressure on earnings, it is imperative for Aircel to soon come out with an optimal debt management plan along with a strategy to stay relevant and competitive in the business.

Need for a new M&A framework

Given the high degree of financial leverage, tight margins and unsustainable stress levels, the Indian telecom industry has resorted to consolidation as a self-correcting measure. However, with the RCOM-Aircel merger collapsing, there is a need to relook at the associated policy and regulatory framework to facilitate consolidation. While merger and acquisition (M&A) guidelines are in place and there is greater policy clarity around spectrum trading and sharing, the principal concern is about time-bound clearances from the various entities involved. At present, there are about six major governmental agencies that have to give clearance before an M&A takes place. The recent bankruptcy law has made transactions all the more complex in case either of the parties has a debt burden. The government therefore needs to reduce the roadblocks in M&A deals and these steps would have to be taken on a policy level rather than on a company-specific basis to ensure a level playing field. There is also a need to revise spectrum holding limits and resolve issues related to the multiplicity of licence areas and licences.


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