Reliance Communications acquires Sistema India unit in $690-mn deal

New Delhi: Reliance Communications (RCom) Monday said it will buy Russian conglomerate Sistema's Indian mobile telephony business in an all-stock deal, valued at around USD 690 million (Rs 4,500 crore).

The deal, which is expected to close in the second quarter of 2016, will lead to a creation of an operator with 118 million subscribers.

Sistema Shyam Teleservices Ltd (SSTL) will hold about 10 percent stake in RCom and pay off its existing debt before closing the deal.

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While the two companies did not disclose financial details of the deal, industry sources said SSTL's equity stake has been valued at USD 290-300 million at current prices.

RCom's 10 percent stake comes at around USD 300 million.

This is the first consolidation in a highly competitive telecom sector. While RCom is the country's fourth largest operator with 110 million subscribers, SSTL is positioned at number nine with close to nine million users.

SSTL offers mobile telephony services under MTS brand across nine telecom circles in the country.

"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.

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The deal will give RCom access to spectrum or airwaves in the 850 Mhz band, which can be used for 4G services that it plans to start by the year-end.

Also, it will be able to extend the validity of its licence by 12 years in eight high revenue generating circles of Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, Kolkata, UP (West) and West Bengal.

While SSTL will pay off its existing USD 500 million debt, 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.

Sistema may get up to USD 300 million in cash from RCom if the government were not to agree on the fee payment.

Russian tycoon Vladimir Evtushenkov-controlled AFK Sistema currently holds 56.68 percent stake in SSTL while Russian government owns 17.14 percent interest. Shyam Group has 23.98 percent stake and the rest is owned by small investors.

The deal will make RCom the largest holder of the 800/850 megahertz band for wireless fourth-generation services and help it not just compete with present players but also consolidate its position ahead of Mukesh Ambani's foray into sector with 4G services under Reliance Jio brand.

RCom had last month announced partnership with Reliance Industries' telecoms unit, Jio, to trade and share spectrum.

SSTIL had scaled back operations in 2013 when it had to buy new spectrum after its earlier permits were among those cancelled by the Supreme Court. 

"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," the statement said.

Also, "the validity of RCom's spectrum in 800/850 MHz band in eight important circles" will be extended by 12 years from 2021 till 2033, it said.

On the fee payment, it said: "An appropriate payment/ earn-out mechanism has been agreed in relation to disputed spectrum contiguity charges claimed by the Department of Telecommunications.

Sistema had ventured into Indian telecom space in 2007 when he bought 10 percent stake in Shyam Telelink by paying USD 11.4 million. The stake was raised subsequently.

Gurdeep Singh President and Chief Executive Officer Consumer Business RCom said: "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."

Raja Lahiri, Partner, Grant Thornton India said M&A in the telecom sector is need of the hour and consolidation would provide larger advantages of scale, finance, spectrum to the combined entity as well as the consumer.

"However, like any merger, post-merger integration remains a critical aspect plus the changing landscape of competition given the 4G plans of the existing operators and Reliance Jio plans in the market," he said.

Once the deal is approved by the government, RCom will be able to future-proof almost half of the existing telecom circles, where most of its licences are expiring in the next few years.

Its licence in West Bengal will expire in 2017 while around 10-12 licences will expire within 2022-23.

On the other hand, Sistema had bought licence in 8 telecom circles like Delhi NCR in 2013 and are valid till 2033.

SSTL has the option to pumping in more money to raise its stake in RCom to 50 percent to help avoid the company from taking further debts.

RCom has a debt of around Rs 32,000 crore.

The transaction is expected to close in the second quarter of 2016 and is subject to customary conditions precedent, including inter alia applicable corporate, regulatory and other approvals.

Post closing of the deal, minority investors of SSTL will be given an option to exchange their shares in SSTL with the pro-rata RCom shares held by SSTL, the statement said.

RCom ended 2014-15 fiscal with revenue of Rs 21,423 crore and a net profit of Rs 620 crore. Unlisted SSTL ended calendar year 2014 with revenues of Rs 1,347.2 crore. The company did not make public its net profit numbers.