RCom's Sistema Acquisition Signals More M&A: Fitch

by CXOtoday News Desk    Nov 13, 2015

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Reliance Communications’ acquisition of Sistema Shyam Teleservices (SSTL) may spark more mergers and acquisitions (M&A) in the Indian telecom sector, according to Fitch Ratings. In a recent statement on the telecom industry, Fitch told agencies that larger operators are likely to seek acquisitions as they require more spectrum to support their fast-growing 3G and 4G service revenues. The move will undoutedly prove beneficial for Reliance Jio as it gets ready for 4G services, analysts said.

“We expect Reliance Communications to expand on its existing infrastructure-sharing arrangement with Reliance Jio,” Fitch Ratings said in an analysis, predicting more such consolidations and merger deals in India’s telecom space.

“RCom and Jio already have reciprocal infrastructure agreements to share 43,000 towers, 120,000 km of inter-city fibre and 70,000 km intra-city fibre network over the next 17-20 years,” Fitch said in the report.

“RCom Sistema Shyam together own 44 percent of the precious 850 MHz spectrum in India. The deal values Sistema Shyam at $340 million (roughly Rs. 2,258 crores), equaling its spectrum amount paid and remaining life of its deal with no liabilities,” it said.

Earlier this month, RCom announced it will buy Russian conglomerate Sistema’s Indian mobile telephony business in an all-stock deal, valued at around $690 million (Rs 4,500 crore).

The first consolidation in the highly competitive Indian telecom sector, the RCom-SSTL merger will create an operator with 118 million subscribers.

“Competition will probably intensify in 2016, as we expect Reliance Jio, a subsidiary of Reliance Industries (RIL, BBB-/Stable), to launch its 4G-enabled data services in Q1 2016,” Fitch said.

It said the Indian telecom market is very competitive with about 10 operators. Network quality, on the other hand, is poor due to under-investment and limited spectrum.”We believe the industry can support five or six profit-making telcos in the long term. The top three telcos — market leader Bharti Airtel, Vodafone India and Idea Cellular, will gradually increase revenue market share from the current 73%,” it said.To date, inefficient use of spectrum by smaller telcos and uncertain M&A rules have prevented industry consolidation, the agency added.”We expect Jio’s entry to lead to a decline in average data tariffs by at least 20%. Jio may also offer voice-over-LTE, as compatible and affordable 4G handsets are now freely available,” it added.

As regards the R-Comm’s acquisition, it could have an impact on the smaller telcom companies that were losing voice-market share to larger operators, even as competition in the data segment will intensify on Jio’s entry.

“Smaller telecom companies, potentially including Tata Telecom, Videocon Telecom and Aircel, are likely to feel the impact first, and may look to exit as they make losses and lack key spectrum assets or the deep pockets needed to invest in networks,” it said, adding that “The regulator’s decision to allow spectrum sharing and trading, and to relax the spectrum caps, could allow these smaller telcos to monetise their underused spectrum.”

(With inputs from agencies)