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Mukesh Ambani-led Reliance Jio Infocomm is likely to harvest synergy gains, reduced operating expenses and higher savings in tower rentals with the acquisition of the wireless telecom assets of Reliance Communications (RCom), which surged to a 52-week intraday high on Friday.
Sources have pegged the Jio-RCom all-cash deal size at roughly Rs 24,000 crore, which will help the Anil Ambani company repay part of its Rs 45,000 crore debt. While the two companies didn’t specify the deal value, analysts said Jio possibly paid a fair value for RCom’s wireless infrastructure assets, which they estimate are worth between Rs 24,000 crore and Rs 29,000 crore.
US brokerage Jefferies said spectrum would form the bulk of the estimated fair value at Rs 15,000 crore, with towers (Rs 7,000-9,000 crore) and optic fibre cable (Rs 3,000-5,000 crore) making up the rest. Experts see RIL-owned Jio saving on tower rentals going forward.
As one of the largest tenants of RCom’s towers, they estimate Jio currently pays Rs 1,500-1,600 crore as annual rental.
Brokerage Morgan Stanley said the deal will lead to synergies for Reliance Industries Ltd’s telecom business, which currently has “lease/sharing arrangements with RCom” for some of its existing infrastructure, including spectrum towers and optic fibre backbone.
The deal, Morgan Stanley said, would lower RIL’s operating expenses and reduce the overhang on telecom growth capital expenditure, although free cash flow (FCF) generation could be slightly delayed.
Jefferies said the RCom airwaves would bolster Jio’s 4G LTE coverage and “allow it to have access to 30% of industry 4G spectrum”.
Jio signed an agreement to buy RCom’s wireless infrastructure assets, including spectrum, towers, optic fibre cable network and media convergence nodes, in deals likely to be completed between January and March 2018, it was announced on Thursday.
RCom still has about 140 MHz of unsold spectrum across the 1800 MHz and 850 MHz bands. RCom rallied for the fourth straight session on Friday, closing 17% higher at Rs 36.22 on the BSE, having soared nearly 35% to Rs 41.77, its 52-week high.
RCom shot up 122% in four days, adding Rs 5,506.76 crore to its market capitalisation. This led to the promoter group firm, Reliance Innoventures Private Ltd., asking the telco’s lenders and security trustees to release 330 million pledged promoter shares, or 11.93% of the total.
RIL, however, fell 0.36% to close at Rs 921.05. While the acquisition should lower costs for Jio, it could raise RIL’s balance sheet leverage by 10-12% in the near term while earnings per share would be diluted by nearly 3% in FY 2020, analysts said.
Experts said the timing of the deal was significant, coming amid consolidation and price wars.
They see market leader Bharti Airtel as best equipped to combat Jio by virtue of its pan-India data network. In the past few months, the Sunil Mittal-led telco has been fortifying its 4G data spectrum holdings with acquisitions of the wireless business of Telenor India and Tata Teleservices.
The Idea-Vodafone mega merger is widely expected to close as early as next March, with the combined entity expected to pose stronger competition to Jio and Airtel.
To be sure, analysts at Jefferies said, “the upside may be limited” for Jio as it already has access to RCom’s towers/fibre “on favourable terms”, unless “it pays much less than the fair value, which we estimate in the Rs 24,000-29,000 crore” range.
Moody’s Investors Service expects RIL to pay less than Rs 25,000 crore for RCom’s telecom assets as it is not buying the real estate, which was part the Anil Ambani-led telco’s plans to reduce debt by the same quantum.
The global rating agency said acquisition of RCom’s wireless telecom assets would have “no impact on RIL’s Baa2 ratings”.
However, the acquisition, Moody’s said, “could reduce the cushion under RIL’s rating for further increase in its borrowings,” especially if the company does not reduce its planned capital expenditure for its telecom business.
Morgan Stanley expects the deal could potentially “raise RIL’s net debt by 10-12% and likely be EPS dilutive by 1.3% on its FY19-20 estimates”. Somshankar Sinha, equity analyst, Jefferies India, added that with expectations for Jio “elevated, we view risk reward as unfavourable also noting that refining, FCF may lag expectations in FY19-21”.
The industry consolidation should strengthen Jio’s pricing power, evidence of which was seen in two recently announced tariff plans that raised effective tariffs by 20%, according to Morgan Stanley.