Can Reliance Communications bounce back?

Anil Dhirubhai Ambani is in a business restructuring mode, with the various businesses in his control undergoing some change or the other. While Reliance Capital has announced a spin-off of its housing finance business, there is news that Reliance Infra too may soon float Invit to unlock the value of road-toll projects. Recently, Ambani also sold his cement business to Birla Corp. In the midst of it all, one company in the group that has gone through a major restructuring is Reliance Communications.

The latest move is Reliance Communications forming a JV with Aircel, which was announced on 15 September, whereby Reliance Communications will transfer its wireless business to Aircel. This definite agreement between the two parties is subject to various statutory approvals and may take 6-9 months before it is executed. Both parties will have 50 per cent stake in the JV. Reliance Communications in the recent past had also announced the acquiring of the wireless business of Sistema Shyam Teleservices, which has 9 million customers and fetched revenues of R1,500 crore. After selling the business to Reliance Communications, Sistema will own a 10 per cent stake in the company, though without any board representation.

At the same time, Reliance Communications has also undergone internal restructuring, transferring five licensed service areas to itself out of seven held by its subsidiary Reliance Telecom (Reliance Communications directly owns a 78.8 per cent stake in the company and the balance 21.20 per cent is held through its fully owned subsidiary Reliance Infocomm Infra). Since this transfer is internal no shares or considerations are issued.

But Reliance Communications is not done with its restructuring, as it’s still in the process of selling its tower and fibre business, which will remain in the parent Reliance Communications and not be part of the joint venture. How the same would be monetised is not clear, though the news has been in the air for quite some time. Will it form a JV? Or, will it sell out partially or fully? Market sources suggest that a deal may get announced soon. At the same time, the company is also looking at monetising the real estate assets it possesses. In a presentation it made to analysts in November 2015, it had stated that it has 46 spacious blocks and 1,500 houses in an NRI complex in Navi Mumbai. It also possesses four acres of prime property at Connaught Place, New Delhi. The company will use these assets to deleverage its balance sheet. Reliance Communications has a consolidated debt of R34,000 crore as on March 2016. These activities will help reduce the same.

During the last few months, Reliance Communications has announced a business tie-up with Reliance Jio, which involved the sharing of tower as also fibre-optic facilities for 15 years. “We have also entered into strategic spectrum trading and sharing agreements with Reliance Jio, to enable Reliance Communications to launch world class 4G services nationwide, with optimal capex and opex, relative to all other telecom operators in India,” writes Anil Ambani in the latest annual report.

Despite so much activity on and about Reliance Communications, the stock market does not seem to be excited by it. In the year to date, the company has lost almost 50 per cent of its market cap against the broader index – the Sensex – which is up by 9 per cent. To be sure, almost all companies in the telecom pack have taken a beating due to Reliance Jio’s entry. But within the pack, the share price of Reliance Communications has been the hardest hit. Even the announcement of the merger with Aircel has not excited the market.

Deal clarity needed

Reliance Communications seems to have gone about restructuring its business in the right direction. The merger with Aircel will make it the fourth largest in terms of revenue and customer base and will push its ranking up within the telecom sector. “The merged entity will have 448 MHZ spectrum, which is about 17 per cent of the total held,” says, Tanu Sharma of India Ratings in his 15 September report. “It is the third largest spectrum holding, following 770 MHZ of Bharti and 596 MHZ of RJio.”

But there are some concerns too with the Aircel merger. The deal is vague on many points. “Disclosures are not complete and comprehensive,” says Shriram Subramanian, MD, InGovern, a proxy firm that enhances shareholder activism of institutional investors.

The lack of clarity begins with Reliance Communications’ reasons for shifting its business from being a listed entity to a non-listed entity. Its press release about the Aircel merger after the JV announcement states that the company is not contemplating an ‘immediate’ listing of Aircel. If so, how will its value unlock for the shareholders? In the recent past, there has not been an instance of a listed entity transferring a substantial portion of its business (in this case, 48 per cent of the turnover) to a non-listed entity.

Subramanian agrees the structure of the deal could have been different. “As it is, minority shareholders do not have any say in the joint venture. The structure could have been such that Aircel could have merged with Reliance Communications; or the shareholders of Reliance Communications could have been given shares of Aircel in the same proportion they are holding in Reliance Communications itself at present.”

Another area where clarity is needed is regarding the amount of money Reliance Communications will pump into Aircel, to take its stake to 50 per cent. “Under the Framework Merger Agreement (FMA), Aircel will issue additional equity shares to the company (Reliance Communications) and Global Communication Services Holdings (promoter of Aircel) against the amount to be contributed by them,” says the press release, without disclosing how many shares each one would be issued and also at what rate. It is also silent on the timeline for the issue of shares.

Some clarity is also needed about how the valuations of Reliance Communications and Aircel have been done. A press release issued by the company stops at the statement that the total shares owned by Reliance Communications in Aircel would be 15.95 billion (out of a total of 31.90 billion). Since Reliance Communications is a listed entity, its latest turnover from the wireless business, R10,605 crore, is given in the press release, but the turnover of Aircel which is given as R11,011 crore, is only till March 2015. Whether Aircel’s losses increased in FY16 or not is anybody’s guess. We could not find out the losses incurred by Aircel in FY15.

Branding is another grey area. The JV is expected to have a new brand name, and, in all probability, it will do away with the Aircel as well as Reliance names. It will be interesting to see what new brand is likely to emerge, as the branding and marketing activities would have to be undertaken post the new company receiving all the legal approvals. This will further increase the expense for the company as it has to do massive branding due to the aggressive push by Reliance Jio.

2G scam

Aircel had been in the midst of what is generally known as the ‘2G scam’. The company was promoted by C. Sivasankaran (Siva), who sold his stake to Maxis Berhad in 2006, a company owned by Ananda Krishnan, an NRI. At present, Maxis owns 74 per cent of Aircel’s stake through Global Communication Services Holdings, while the balance 26 per cent stake is held by Sindya Securities & Investments Pvt Ltd, promoted by Suneeta Reddy (MD, Apollo Hospitals) and P. Dwarakanath Reddy. Once the deal is through, Sindya’s stake in Aircel will come down to 0.2 per cent in the new JV. It’s not clear at present why Sindya is not maintaining its present stake in the new JV. Business India could not reach out to Sindya or Aircel for clarification. Since Ananda of Maxis and his team have stayed away from India, little clarification can be expected from them. Our queries to Reliance Communications seeking clarification have remained unanswered as we go to press.

In 2011, Siva had alleged that the former telecom minister Dayanidhi Maran had forced him to sell his stake in Aircel to Maxis. Last fortnight, the special court, which is hearing the 2G scam case, ruled that the Aircel-Maxis case does fall under the ambit of the 2G scam (Maran had filed an appeal in the court, saying that this case had nothing to do with the 2G scam and was a private matter between two companies).

Though the verdict on the 2G scam case is not yet out, the CBI wants to question Ananda Krishnan and his key executives, who not unreasonably fearing arrest, have stayed away from India. No other foreign investor has been treated in this manner. How the banks and the bond-holders, who have given loans to Reliance Communications, will react would also be critical to the JV.

Several questions need to be answered before one gets more clarity on the JV between Reliance Communications and Aircel. Hopefully Ambani will respond to the issues in an effective manner, to satisfy the various stakeholders. Right now, the telecom sector is going through tough competition, with Reliance Jio announcing that voice calls would be free, and has made data prices competitive. In such a scenario, Anil Ambani’s prompt action to protect the value of his telecom business is imperative. Any further delay in clarifying the doubts on the deal would further dampen the spirit of the Reliance Communications’ shareholders. It is too early to conclude that Reliance Communications is out of the woods yet.