RCOM/Aircel merger collapses amidst regulatory uncertainty

2 Oct 2017

Reliance Communications (RCOM) and Aircel have called off their long-planned merger agreement, 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,’ the Economic Times writes, quoting a statement from the former. The merger formed part of a recovery plan for RCOM – which is currently undergoing strategic debt restructuring (SDR) – that would help reduce the cellco’s debt to INR200 billion (USD3.1 billion) from its current rate of around INR450 billion. Several of RCOM’s lenders initially opposed the tie-up, but eventually acquiesced to the deal, whilst creditors including Indus Towers, Ericsson, Bharti Infratel and the Department of Telecommunications (DoT) objected to the merger, saying that their dues needed to be cleared before the deal could go ahead. In its statement, RCOM explained that it would now consider alternative plans for its mobile business, such as optimisation of its spectrum portfolio and a more 4G-focused strategy. The spectrum monetisation, along with the monetisation of its fibre, tower and real estate assets, is expected to generate proceeds of around INR250 billion in debt reduction. The other half of RCOM’s debt reduction plan, the sale of its tower infrastructure to Brookfield Infrastructure Partners, could still go ahead despite the disruption according to sources close to the latter company. The terms of the sale had been conditional on the merger of RCOM and Aircel, but Brookfield is reportedly still keen to complete the acquisition, albeit at a ‘seriously revised’ price, as the valuation had previously been based on the future growth of the combined firm.

RCOM and Aircel attributed the collapse of the merger to a combination of factors, most notably the severe level of financial stress placed upon operators by excessive spectrum pricing and the intense increase in competitive pressures since the arrival of Reliance Jio Infocomm (Jio) in September last year, with the latter exacerbated by a series of regulatory decisions in favour of the newcomer. Illustrating the challenges facing India’s wireless segment, the Telecom Regulatory Authority of India (TRAI) reported this week that adjusted gross revenue (AGR) for the three months to end-June 2017 was down by just over 25% year-on-year from INR534 billion to INR398 billion. RCOM’s chairman also noted that, to make matters worse, the disruption has caused local and foreign banks to stop lending, further aggravating the CAPEX-hungry industry’s woes.

The Telecom Commission has, however, reportedly greenlit plans to provide some relief to the sector by extending the deferred payment period for spectrum to 16 years from the current ten, and lowering the interest rate on payment to 12% from 14%.