Will Reliance Communication (RCOM) Stay Afloat Post Aircel Merger Deal Failure?

Reliance Communication (RCOM)-Aircel merger deal has been called off due to regulatory delays and opposition from creditors. Had the merger happened, it would have been India’s fourth largest telecom carrier.

Anil Ambani said, “legal uncertainties and interventions by vested interests caused delays in regulatory approvals scuttled the transaction.”

On Sunday, RCom said in a regulatory filing that the merger agreement with Aircel was allowed to “lapse by mutual consent”, due to regulatory delays and opposition from some creditors. In its filing to stock exchanges, the firm said it is looking at alternatives to reduce debt, including sale of real estate assets and “optimization of spectrum”.

RCOM now has very limited options including insolvency which would be the last option to resort to.

This news also has an impact on the on-going deal with Brookfield Infrastructure as it most likely would be up for re-negotiations which might fetch them less than anticipated INR 11,000 Cr. by selling 51% stake in tower business.

Aircel & RCOM Merger: How it could have helped?

Post-merger of the two companies, RCOM would have transferred INR 14,000 Cr. to the merged entity and further with deal of selling 51% stake in mobile tower arm to Canada based Brookfield Infrastructure will fetch INR 11,000 Cr. and 49% stake in mobile tower for future growth prospect would have turned around the company.

Thereby reducing the debt by 60%. At the same time, the company had further plans to monetize the real estate and spectrum holdings. According to the agreement, both RCOM and Aircel’s parent company (Maxis Communication) would have been equal owners of the new entity.

Heavy debt laden: Reliance Communication

Post the entry of Reliance Jio, a company by his brother, Mr. Mukesh Ambani has had a cascading effect on whole telecom sector leading to stiff competition for the debt ridden companies. Reliance Jio has been offering discounted tariffs post the freebies that it started with in 2016.

RCOM isn’t untouched by this and recently

Mr. Anil Ambani in its AGM had also said, “The wireless or mobility sector, from any dimension you look at, is in the ICCU. It is not in the general ward, it is not in the ICU, it is in the ICCU.”

He added, “It is a systemic threat for government, for its revenues, it’s a systemic threat for our banking sector and it is what I call creative destruction of a sector.”

RCOM has a debt of INR 45,000 Cr. to various banks in the country and the company has got an extension till December 2017 to get back on track with backing from all the partners, creditors and banks.

RBI pushing banks to recover and higher provisioning for stressed accounts

As per the norms prescribed by the Reserve Bank of India (RBI) to banks, banks have to provision for 50% of the secured exposure and 100% in case of unsecured exposure in case Insolvency & Bankruptcy Code 2016 is invoked.

About 17 banks in India with a few international banks have a combined exposure of INR 45,000 Cr. to RCOM and these banks are already under severe stress post release of RBI’s first list of stressed accounts in June and second list in August.

Adding RCOM to the list would be very detrimental to these banks particularly the public sector banks in case any insolvency case is filed.

It is estimated that on an average each of the 17 banks is set to lose INR 800 Cr. in case Insolvency case if filed.

A setback to Strategic Debt Restructuring (SDR) plan

A Strategic Debt restructuring (SDR) plan was approved in June 2017 where in post-merger with Aircel and sale of its mobile tower business, the debt would then be converted into equity as RCOM would have been sustainable.

The SDR is only valid till December 2017, that means, the banks have time till December to not classify RCOM as Non-performing Advance (NPA). Post December, if the sale does not happen, the lenders would have to find out buyers and complete the sale process.

Insolvency is the only option?

Looking at the current state of telecom industry in India and the financial prospects of major players in the market, it looks like RCOM would not have any many options other than Insolvency or at best, sell off the complete spectrum and real estate before filing for Insolvency.

Some of the foreign lenders are complaining to the NCLT on not being included in signing off the RCOM’s plans. This would mean a further blow to monetize the assets.

The growth both in number of subscribers as well revenue per user (RPUs) is not very encouraging and RCOM in mid of all these events would find it extremely difficult to get new customers as well as retaining the old ones.

There is already a petition filed by Ericsson India, an unsecured creditor, to recover its INR 491 Cr. and if the petition is admitted by National Company Law Tribunal (NCLT), all the lenders would be pulled into the resolution process.

The resolution process would appoint a committee consisting of interim resolution professional and in parallel a committee consisting of the creditors would also be created with proportionate voting rights to their debt. Once a resolution is arrived that, it would then be sent to NCLT for approval.

Analyst on RCOM

“The mess has only turned murkier” for Reliance Communications, said Sanjiv Bhasin, executive vice president of IIFL Holdings Ltd. “The only option before the company now is to see how soon they can strip off their assets like towers, spectrum and real estate.”

“RBI is pushing the banks, banks are pushing the company founders and the company founders are pushing the asset sales,” said Chakri Lokapriya, Mumbai-based managing director of the Indian arm of TCG Group, which oversees around $3 billion. “Some of these assets should have been sold three to four years back.”

“It’s bad news for RCOM coming at a time when Aircel deal has not gone ahead and even the Brookfield deal needs to be renegotiated. A debt led company struggling to manage its balance sheet has had a double whammy,” said Arun Kejriwal, director of Kejriwal Research and Investment Services.

“The company is going through serious debt repayment challenges with deadlines that will force a fire-sale of its existing assets, mainly its realty and its tower business. With opposition of some creditors to the RCOM merger with Aircel, the RCOM asset sale seems imperative. However, in the midst of all this, it is also necessary for RCOM to sustain customers and grow business in a highly disruptive mobile telephony market,” said N. Chandramouli, chief executive officer of TRA Research.

Should the Government Step-In?

Telecom sector is bleeding heavily and does not have the capacity to further take on the debt and improve its condition. Just like Kingfisher, RCOM is also at an inflection point of survival. They have said that due to delay in regulatory approvals, the deal is called off.

Now to help telecom industry and not to repeat Kingfisher, BJP government should step in and change the regulations that are a hindrance to acquisitions, spectrum sell off and takeovers before the situation goes out of hand.

There is a cascading effect on the economy as telecom sector has the highest debt to the banks and particularly public banks.