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RCom, MTS merger is all about 4G LTE – analysts

Anil Ambani - Chairman of Reliance Communications
Anil Ambani – Chairman of Reliance Communications
Reliance Communications and Sistema Shyam Teleservices (MTS) announced that they were in exclusive discussions to merge their operations.

While this was seen as being in the works, especially after a recent statement by Sistema’s Dmitry Shukov, analysts are saying that this merger will be a win-win for both parties.

“If they can merge, then it will be easy for RCom to pair its recently acquired 4G spectrum with MTS’ spectrum, which is already liberalized,” said a Mumbai-based analyst.

RCom had turned out to be surprisingly aggressive in recent spectrum auctions and had bid for and won 1.25 to 2.5 MHz of spectrum in many areas.

Though MTS did not participate in the auction, it had bought similar chunks of spectrum in many circles in previous auctions.

The move by RCom to buy just 1.25 or 2.5 MHz of 4G spectrum had puzzled many experts, as you need at least 3.75 MHz of spectrum per circle to launch 4G services. Ideally, 4G LTE requires 5 MHz of contiguous spectrum.

Therefore, it was speculated that RCom is planning to pool its 4G spectrum with that of Reliance Jio. If that was not possible, it was expected that RCom would pay ‘liberalization charges’ to the government and convert part of its CDMA spectrum into 4G spectrum.

However, such liberalization charges could run into hundreds, if not thousands, of crores of rupees.

Meanwhile, MTS or Sistema was frustrated in its designs to become a major data player across India by the scarcity of spectrum. To launch 4G, it would need about 1.25 MHz of spectrum in each of its nine circles

Even if it got that extra 1.25 MHz of spectrum in its 9 circles, it would still need a place to transfer its existing CDMA subscribers to.

With such a merger, said analysts, MTS and RCom could pool their liberalized (4G) spectrum into one 5 MHz chunk, and use RCom’s existing unliberalized CDMA spectrum to service both of their CDMA subscribers.

However, analysts also see many challenges. The department of telecom has exhibited inconsistent and difficult-to-predict decision making, especially with regard to giving its nod to mergers and buyouts.

Idea Cellular, which bought out Spice Telecom a few years ago, ran into regulatory troubles after its merger was not given the final nod by the department for years.

“The government looks at all mergers and sale with suspicion, and this could mean a lot of delays or objections,” said another analyst.

SHARE SWAP DEAL

According to a statement from RCom, the two companies are looking at a stock-swap merger, which means that no money will change hands. Owners of both companies will end up with shares in the combined company.

RCom said the following in a statement:

“Reliance Communications (RCOM) and AFK Sistema have entered into exclusive discussions on a potential merger between the Indian telecom business of Sistema Shyam TeleServices Ltd. (SSTL) and RCOM, through a stock swap. The discussions are indicative and non- binding in nature, and remain subject to due diligence, definitive documentation and approvals, as may be necessary. There is no certainty that any transaction will result.”

Only a few days ago, Dmitry Shukov, Chief Executive Officer of Sistema Shyam Teleservices had said he was looking forward to consolidation in the Indian telecom industry.

“Consolidation within the Indian telecom sector is bound to happen. The key catalysts now are the spectrum sharing and trading guidelines, which are expected to be issued by the Government. One hopes that clarity on such regulatory issues is received at the earliest,” he said.

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