Telecom story comes a full circle for the Ambani family…
The decision by RCOM to sell out to Reliance Jio was, in a way, a blessing in disguise for the ADAG Group. RCOM had been deep in debt to the extent of Rs.42,000 crore and the deal for the sale of its towers to Brookfield as well as the Aircel merger deal had been called off. With the Chinese lenders breathing down their neck, RCOM really did not have too many options. In a way the merger does mark the Ambani family coming full circle in telecom…
Reliance Telecom story
The Reliance telecom story began way back in 2003 when they launched the CDMA business across India in a very big way. The CDMA platform was supposed to be more robust and more suited to data usage. Things soured after a few years. The business split into the ADAG and the MDAG groups in 2005 with the entire telecom business going to the ADAG Group. The troubles for the CDMA business started soon after that. Firstly, CDMA as a telecom technology did not live up to its promise. That put a lot of upfront investments in the technology at risk. Secondly, during the heady days of 2006-07 RCOM had borrowed heavily and the tariffs were not able to keep pace with that. The last nail was the introduction of Jio services in India which led to a massive price competition and forced other telecom companies to follow suit. It also resulted in a spate of mergers with the RCOM-Jio merger being in the most recent.
It gives an exit for RCOM
It is as yet not clear how the RCOM business will shape up post the merger deal. As per the deal, Jio will take over nearly Rs.36,000 crore of debt leaving RCOM with just Rs.6000 crore of debt in its books. In exchange, RCOM will sell its entire towers business, its optical fiber network and spectrum to Reliance Jio. RCOM was already under pressure from the Chinese lenders who had initiated bankruptcy proceedings against RCOM. The cooling period offered to its other domestic lenders was anyways expiring by end of 2018. That really did not leave much of elbow room for RCOM. More importantly, the ADAG group can now focus on its 3 core focus areas of infrastructure, defence and financial services.
Value accretive for Jio
The good news is that Jio is really flush with cash from its parent’s oil business. The acquisition saves Jio tower rentals to the tune of Rs.1500 crore per annum. It also provides a captive customer base and the complete spectrum as well as the tower assets and the optical fiber network of RCOM. This will largely fit into Jio’s aggressive plans going ahead. The final price is expected to be closer to Rs.24,000 crore, which is quite small compared to what Jio has already invested in telecom. For the MDAG group it may be, in a way, a return to where they started off from! ©