India's Reliance Communications has agreed to merge its wireless business with that of Aircel, leaving each company with a 50% stake in the new entity.
The deal will see Reliance Communications Ltd. and Aircel Ltd. each transfer 140 billion Indian rupees of debt ($2.08 billion) into the joint venture, saddling it with INR280 billion ($4.16 billion) in overall debt. The company will also have to make a spectrum-license payment of about INR60 billion ($890 million). Debts at RCom, which will continue operating its enterprise and global business as a separate entity, will fall by around 40% as a result of the move.
The merger brings together India's fourth- and sixth-largest mobile operators and will have an asset base of nearly INR650 billion ($9.7 billion), with the heft to challenge its bigger rivals.
"The RCom-Aircel combination will create a strong operator clearly ranked amongst India's top four telcos by customer base and revenues, also ranking amongst the top three operators by revenues in 12 important circles," says the joint statement issued by the operators.
The new company will have a market share of 17% as of June 2016, according to data from the Telecom Regulatory Authority of India (TRAI) , with about 194 million customers (110 million from RCom and 84 million from Aircel). Its creation will add to the pressure on Idea Cellular Ltd. , which has a 17.03% share of the market and is already feeling the heat from the launch of low-cost 4G services by new entrant Reliance Jio earlier this month. (See Resisting RJio: What's the Big Idea?)
The combined entity will also be much better off in terms of spectrum holdings. Backed by Malaysia's Maxis Communications Berhad, Aircel holds 187MHz of spectrum across the 900MHz, 1800MHz and 2100MHz bands, but this will grow to 451MHz of spectrum following the merger.
Due its low average revenue per user and cut-throat competition, India's mobile market has been experiencing consolidation for some time. RCom acquired smaller player MTS India in 2015, while market leader Bharti Airtel Ltd. (Mumbai: BHARTIARTL) bought assets from Videocon Telecommunications Ltd. , another sub-scale operator, earlier this year. There have also been rumors of a possible merger between Vodafone India , India's second-biggest operator, and Idea. RJio's market entry earlier this month could well trigger further deals by making it much harder for smaller service providers to survive.
"In a fragmented telecom market, the much-awaited consolidation was imminent," says Prashant Singhal, a global telecom leader at Ernst & Young. "India is the only telecom market in the world sustaining more than six players with a market size of USD40 billion."
"Given the financial situation and spate of developments the sector has witnessed in the past 12 months, consolidation will help telcos leverage on the synergies and drive profitability," adds Singhal. "We expect further consolidation in the market."
The RCom-Aircel deal is subject to the approval of the Securities and Exchange Board of India, the Competition Commission of India and other authorities.
— Gagandeep Kaur, contributing editor, special to Light Reading