Anil Ambani-led Reliance Communications today announced the takeover of Sistema Shyam Teleservices Limited (SSTL), the Indian arm of Russia's Sistema, which operates under the brand name of MTS India.
With 109 million subscribers, Reliance Communications Ltd. (RCom) is the fourth-largest operator in India, but its subscriber base will grow to about 118 million (according to August 2015 data from the Telecom Regulatory Authority of India (TRAI) ) following the tie-up with Sistema Shyam TeleServices Ltd. (SSTL). Market leader Bharti Airtel Ltd. (Mumbai: BHARTIARTL) currently serves 232 million customers, while Vodafone India has 186.5 million and Idea Cellular Ltd. about 164 million.
India remains an intensely competitive telecom market where average revenue per user is low, and experts have long argued that it will ultimately not be able to support more than four or five players.
In some circles, however, there are as many as ten operators, which has made consolidation look increasingly probable. The merger between RCom and SSTL is likely to be the first of a number of such deals that will take place over the next few months, with smaller players like Aircel Ltd. , Videocon Telecommunications Ltd. , Telenor Group (Nasdaq: TELN) and Tata Teleservices Ltd. also believed to be exploring merger opportunities.
Importantly, the deal with SSTL will provide RCom with much-needed spectrum in the 850MHz band in the nine circles of Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, Uttar Pradesh West, Kolkata, West Bengal and Rajasthan. What's more, those licenses are valid for 18 years in all circles bar Rajasthan, where the concession will expire in 2018.
Under the terms of the deal, SSTL will acquire and hold a 10% equity stake in RCom. RCom will also make regular payments to SSTL to cover the cost of its spectrum licenses, amounting to 3.92 billion Indian rupees ($59.8 million) per annum over the next ten years, according to the press release issued by RCom.
"The combination of our wireless businesses, through the demerger of SSTL wireless business into RCom for stock consideration, will generate significant capex and opex synergies for mutual benefit," said Gurdeep Singh, the president and CEO of RCom's consumer business, in a statement.
But the deal could also benefit Reliance Jio, which soon plans to launch 4G services in India. Led by Mukesh Ambani, the brother of Anil, RJio is in the final stages of formulating a spectrum-sharing and trading agreement with RCom. That means that RCom's acquisition of SSTL's spectrum, along with its nine million customers, will be of particular interest to RJio. (See Reliance JioCom in the Making? )
According to the agreement with RCom, SSTL will pay off its existing debt of INR25 billion ($381.4 million) before the transaction closes.
Russia's Sistema owns a majority stake of 56.6% in SSTL, while the Russian government and India's Shyam Group hold stakes of 17.14% and 23.9% respectively.
— Gagandeep Kaur, contributing editor, special to Light Reading