Zee Media Bureau
New Delhi: In the largest consolidation in the country's telecom sector, Reliance Communications Ltd (RCom) is to combine its wireless business with smaller rival Aircel to create the nation`s third-biggest mobile phone network operator in terms of subscribers, as intensifying competition pushes consolidation in the world`s second-biggest market.
Reliance Communications, controlled by billionaire Anil Ambani, and Aircel`s parent Malaysia`s Maxis Communications Bhd will each own 50 percent of the merged carrier, the two sides said in a joint statement on Wednesday.
The merged business with more than 190 million customers will overtake Idea Cellular Ltd in terms of subscription numbers although will still lag it in terms of revenue.
Currently Reliance Communications is the fourth-largest mobile carrier by subscribers, while Aircel ranks sixth in the market of 10 players led by Bharti Airtel Ltd and Vodafone Group Plc`s Indian unit.
As per experts, the RCom-Aircel deal was much awaited consolidation and imminent.
Given the financial situation and spate of developments the sector has witnessed in past 12 months, consolidation will help telcos leverage on the synergies and drive profitability.
According to Moody's Investors Service, "While we view the combination of the wireless businesses positively, we will also need to re-evaluate the credit profile of RCom in conjunction with the proposed organisational and financial restructuring, as the remaining business will be smaller in scale with - in our view - a weaker business risk profile."
Moody's has placed under review for downgrade Reliance Communications Ltd's Ba3 corporate family rating and senior secured rating following the announcement of its plan to merge its wireless business with Aircel Ltd and its first quarter results for the 2016-17 fiscal, it said in a statement.
India Ratings and Research however said that the merger of is a key milestone in the ongoing consolidation in the telecom sector.
Ind-Ra believes that the merger will enable the new entity RCom-Aircel to give strong competition to its peers in the backdrop of the disruption that the launch of operations by Reliance Jio Infocomm (RJio) has caused.
The combined entity RCom-Aircel will now be the third largest telecom entity in India by subscriber base, thus moving ahead of Idea Cellular Limited (Idea).
"This development coupled with RJio's penetration strategy will spur competition and in turn push tariffs lower," it said.
The spectrum acquisition strategy, particularly around 4G, is an important driver for the consolidation in the telecom sector, it added.
"The merged entity will offer strong competition to both Vodafone India Ltd and Idea which are weaker placed, as far as 4G operations are concerned," it said.
Ind-Ra believes that the sector will now have five meaningful players namely, Bharti Airtel, Vodafone, RJio, Idea and the merged RCom-Aircel-Sistema (with a new brand) as the industry moves towards data driven revenues.
Meanwhile, Moody's said, a definitive agreement has yet to be signed with respect to the disposal of tower assets owned by its subsidiary, Reliance Infratel.
Moody's also said the results for the April-June period announced along with the merger are "weak" because of the migration of customers from CDMA to 4G LTE.
"The review for downgrade will focus on assessing RCom's deleveraging plan, especially with regard to the financial impact of the combination of its wireless businesses with Aircel and the potential tower sale," Moody's said.
The merged entity could potentially have a revenue market share of 14 percent, given RCom's existing revenue market share at around 11 percent in 2015-16 and Aircel's 3 percent revenue market share.
Moody's said that while the merged company will run as a separate business to RCom, it will remain a sizeable part of the wider telecommunications group and will likely be supported by RCom in a distress situation.
"We had expected a significant reduction in RCom's absolute debt levels -- primarily through the sale of non-core assets -- in support of the company's Ba3 ratings. However, even with the merger adjusted pro forma leverage will remain above our tolerances for a Ba3 rating," Moody's said.
"Uncertainty around the closure of the proposed tower sale, announced in December 2015, continues to weigh on the rating," said Moody's.
On the other hand, India Ratings and Research (Ind-Ra) said the merger of the wireless business of RCom with Aircel is a key milestone in the ongoing consolidation in the telecom sector and will push down tariff in the market.
Ind-Ra believes that the merger will enable the new entity to give strong competition to its peers in the backdrop of the disruption that the launch of operations by Reliance Jio Infocomm (RJio) has caused.
"The combined entity RCom- Aircel will now be the third largest telecom entity in India by subscriber base, thus moving ahead of Idea Cellular Limited (Idea). This development coupled with RJio's penetration strategy will spur competition and in turn push tariffs lower," Ind-Ra said.
It said that the merged entity will offer strong competition to both Vodafone and Idea which are weaker placed, as far as 4G operations are concerned.
The top five circles of Aircel are Assam, J&K, UP East, Bihar and Gujarat, while those of RCom are Bihar, Tamil Nadu and Chennai, Delhi and Mumbai, Ind-Ra said.
"The merged entity will be positioned as the second largest in the Bihar circle, after Bharti, and overtaking Vodafone and Idea, which were number two and number three respectively," Ind-Ra said.