Source : Economic Times and The Hindu Business Line - 02 November 2015

Anil Ambani owned Reliance Communications is merging the telecom business of Sistema Shyam Teleservices (SSTL) with itself in a cashless deal worth around Rs. 4,500-5,000 that will lead to the first major consolidation in the intensely competitive sector since 2009.

The move will be a challenge to Reliance Jio, which was the biggest holder of 800 MHz spectrum before this deal. With this, RCom has overtaken Jio as the holder of the biggest amount of 800 MHz 4G spectrum in India. In addition, RCom will assume the liability to pay the government installments for SSTL's spectrum, amounting to Rs. 392 crore per annum for the next 10 years.

"RCom will acquire approximately 9 million customers and approximately Rs. 1,500 crore of annual revenues by virtue of the transaction," the company said in a statement.

In addition, RCom will acquire SSTL's most valuable and superior 800/850 MHz band spectrum, ideally suited for 4G LTE services, to complement its own unique nationwide footprint of minimum 5 MHz contiguous 800/850 MHz spectrum aggregating 148.75 MHz.

"SSTL will get around 10% stake in the combined entity, but no board seat and no veto powers," a person directly involved in the deal said. ET had first reported on May 20 that Reliance Communications (RCOM) is holding talks on a possible takeover of SSTL in an all-stock deal that could give the latter's shareholders a stake of around 10% in the merged entity.

The deal will give India's fourth largest carrier access to airwaves in the 850 Mhz band which can be used for 4G services that it plans to start by year-end. Moreover, it will be able to extend the validity of its licenses by 12 years in eight high revenue generating circles like Delhi, Gujarat, Karnataka and Tamil Nadu. On the other hand, holders in SSTL, which has been struggling to grow its CDMAbased telecom business, will get to be a part of a stronger company.

Three people familiar with the matter said every shareholder of SSTL, the Indian unit of Russian conglomerate Sistema JSFC, will get one share of RCOM for 11.5 shares of theirs.

RCOM is valued at around Rs. 19,000 crore according to the company's BSE closing stock price on Friday of Rs. 75.25.

Besides the stock, RCOM won't take on any loans from pure play CDMA carrier's books, a relief to investors worried about the company's debt, which stood at Rs. 38,595 crore at end of June. The company though needs to pay the roughly Rs. 400 crore a year, including interest, for 10 years starting February 2016, that SSTL owes to the DoT for the spectrum won in the March 2013 auctions, sources said.

Excluding interest, SSTL, which operates in India under the MTS brand, owes around Rs. 2,500 crore to the DoT which RCOM is taking on its books. "Post RCOM's board approval, it should take about five to six months for the deal to close, post approvals from CCI (Competition Commission of India) and DoT. This won't need an FIPB (Foreign Investment Promotion Board) nod," the person said. The promoter group holding in RCOM will come down to around 54% from nearly 60% currently.

The person added that Sistema JSFC may infuse more funds to raise its stake in the new entity at a later stage, but "nothing concrete has been decided on this issue". Sistema JSFC, which entered India in 2007, holds nearly 57% in SSTL. Other shareholders include the Russian government with more than 17% and Shyam Group holding 24%. Minority shareholders own the rest. Once the deal closes, it will be the first major consolidation in the sector since Telenor bought into Unitech Wireless in 2009.

"The MTS brand will cease to exist, while there is a non-compete clause with Sistema," the person said, adding that details on taking over MTS's employees are being worked ou. RCOM's board is meeting on Monday to consider the merger. Sistema's board cleared the deal on Saturday. Spokespersons at RCOM and SSTL declined to comment.

SSTL offers services in nine of India's 22 service areas to around 9 million subscribers. RCOM is a pan-India operator offering both CDMA and GSM services and has around 110 million users. "MTS brings in about Rs. 1,500 crore of (annual) top line and around 10,000 sites, besides IT infrastructure," the person cited above said.

Analysts said buying MTS, which possesses airwaves in Delhi, Gujarat, TN, Karnataka, Kerala, UP (West), Kolkata, West Bengal and Rajasthan, may work well for RCOM given the latter's focus on 4G LTE. MTS bought spectrum in eight of those circles, excluding Rajasthan, in an auction in 2013. Thus RCOM won't have to pay anything more to the government.