Reliance Comm-Aircel Merger Fail Adds To Telecom Sector’s Agony: Brokerages

Reliance Communications Ltd.-Aircel failed merger is a “setback” and a “material negative development” for both the telcos, according to most brokerages tracking the sector.

Shares of the company fell as much as 9.1 percent to Rs 17.45, the lowest level since it began trading in March 2006, as of 9:25 a.m. in Mumbai. The carrier's bonds due in 2020 were set for their biggest daily decline in more than seven weeks on Tuesday.

Tower Sale-Deal

Among other major risks that stem from the deal's cancellation, one common risk pointed out by CLSA and JP Morgan is the risk to the tower deal with Brookefield. Reliance Communications is looking to sell 51 percent of economic interest and and 100 percent voting rights in its the tower assets to Brookefield for Rs 11,000 crore, the CLSA report said.

It added that the valuation of the tower sale deal will be impacted as it was earlier based on the combined Aircel-Reliance Communications entity offering tenancies to the tower company.

JP Morgan notes that even if the tower sale deal was dependent on post-merger wireless transactions, "it could still go ahead, but at lower valuations"

Also Read: Reliance Communications Calls Off Merger With Aircel

Debt Restructuring For RCom

In the recent Reliance annual general meet, shareholder approval for debt-to-equity conversion had already been given to Reliance Communications' lenders. Now that the deal has been called off, Reliance Communications will be on a standstill from the lenders because a strategic debt restructuring plan is underway, said CLSA. For the same reason, JP Morgan has downgraded Reliance Communications' bonds to ‘underweight'.

“Avoiding the bonds makes sense with more potential for downside than upside”, said JP Morgan in the report. It added that since a bit more debt was left to be transferred to the joint venture, the deal's cancellation will put pressure on the recovery value.

Other Risks

This current development is also expected to affect valuations of Global Cloud Xchange, Reliance Communications' subsidiary, said JP Morgan.

The company's merger with Sistema will boost its revenue coverage of 800 MHz. However, Reliance Communications' inability to renew the 1800 MHz spectrum could see its revenue coverage in 900/1800 MHz bands fall sharply, said CLSA. The 900/1800 MHz ban comprises RCom's 2G subscribers, the report added.

The continuous loss in Reliance Communications' market share is a risk too, it noted.

Going forward, says JP Morgan, if the sector consolidation leading to three plus one players is successful, in the next couple of years there could be a scenario for the two companies (Rcom and Aircel) to just sell out their spectrum and customer base to other players along with some debt.