Reliance Communication Dilemma – Strategic Sale to Etisalat or Merger with MTN?


The initial signs of consolidation in the bleeding sector of telecom seem to have already begun.

Probably, the signal of consolidation has come-up a bit too early than anybody could have expected. That’s not all. A strange fact remains that the consolidation seems to have kicked-off with reference to a stronger company selling in talks of selling a stake, rather than starting with a weaker one.

The news has it that the telecom giant Etisalat is in talks with cash-starved Reliance Communications (RCOM) to acquire a strategic equity stake of 26% for $3.8 billion.


However, it’s not just about that. Even as the rumor of Etisalat talks with RCOM catches fire, the company is also said to be considering merger with South Africa’s MTN.

Earlier, the South African telecom major had been on the table with the Indian telecom majors for at least 3 attempts to strike a deal. But, needless to say that none of the three seating succeed in clinching the merger deal. RCOM and MTN talks got thwarted on the back of Reliance Industry’s assertion of its first right to refusal for acquiring stake in RCOM apart from the regulatory hurdles over dual listing.

Should RCOM go for merger with MTN or sell strategic stake to Etisalat?

To start with, let’s have a check at the financial health of RCOM before moving further with the analysis.

The net debt-to-Ebitda of RCOM stands at a worse position at 2.5 times. However, if we add to this the costs of 3G spectrum fee at Rs.8585 crores, the ratio rises to a whooping 3.6 times.

Now, let’s compare RCOM’s debt ratio with another major industry peer Bharti Airtel. Bharti’s net debt-to-Ebitda stands at a lower 2.6 times. Even this ratio is not something that a good company would like to settle with. But, given that Bharti’s debt ratio is including the costs related to high 3G spectrum fees and Bharti’s Zain acquisition; the number can be viewed with a relatively sobering effect.

Thus, RCOM’s debt-to-Ebitda ratio at 3.6 times is a bit too stretched for its concentrated domestic focus as against Bharti’s diversified spread for its geographical reach across domestic market and emerging African telecom markets both.

According to a report showcasing bank concerns of lending to telcos, until now banks had been lending to the telcos based on their creditworthiness, assets and future cash flow projections. But, a stage has been reached where the above indicators would fall short as collateral for any fresh requirement of debt from banks.

Thus, if RCOM agrees for a fresh equity infusion in form of stake sale to Abu Dhabi-based Etisalat, it would help in easing the debt burden of the company apart from a strategic relationship with strong international partner. The move will also to place a check on the company’s debt levels involved in providing value added services to its customers.

Now, compare the prospects of stake sale deal with speculation about merger talks with South Africa’s MTN. A couple of years back, when RCOM was engaged in merger talks with MTN, the market capitalization of RCOM were about $24 billion.

However, the market cap of RCOM has slumped by whooping three-quarters at around $6.5 billion, on the back of intense price-wars in Indian market. This factor, in itself, would affect the valuations that RCOM could demand during merger talks.

RCOM’s existing debt levels stand at approximately Rs.20000 crore. Compare it with a likely inflow of Rs.18000 crore from the 26% stake sale to Etisalat; the company would be well poised to meet its future obligations and investments in this highly capital consumptive industry of telecom.

Thus, Etisalat’s entry into RCOM would provide the company an instant salvo to face the competition crunch in the domestic industry. Whereas, opting for a MTN merger, would mean re-telecast of same old regulatory hurdles and cross-acquisition oriented merger terms.

Will RCOM be able to connect with Etisalat? What’s your view?

  1. Altaf Rahman says

    The best thing in my view is for Anil to sell Relcom to Mukhesh and concentrate on Infra, Power Business. This serve many purpose.

    1) At the time of last Relcom-MTN merger talks, Mukhesh might have felt bad as he is instrumental in setting up Relcom pre-division time, and the talks looked to him as his brainchild was getting out of family hold. So he used his first right of refusal, just to stall the negotiation. So this option gets Mukhesh happy. (Its like two kids going to market place with father, one kid buying a toy which he liked but after coming home, he was forced to hand over his much loved toy to the other kid and the pain of watching the other kid playing with the toy infront of his eyes while he can only watch with disgust)

    2) As Anil is into flashy kind of guy and as Telcom business is a very small margin business, ita not making profit. If Mukhesh gets Relcom, his shrewd business sence will somehow make Relcom come out with good colors.

    3) If he can sell out to Mukhesh, he might get 50,000 crores plus for his 60% stake (at the Etisalat rate) which he can use in his infra / power business where cash is much more required than in Telcom business.

    4) At the moment the story is that MRN has denied entering into talks with Relcom. This may be due to few reasons. Earlier talks were stalled by an outside force -Mukhesh and his first right of refusal. So may be they see Mukhesh as a strong force compared to Anil. If Relcom falls in Mukhesh fold, may be MTN will come to discussion table.

    5) The final suggestion to Anil :
    Even if he dont want to sell it to Mukhesh, the news of Etisalat offering 18K crores to Relcom brings to my mind few questions. What Relcom will do with that money? Definitely they are going to invest in their business. If that is the case, why sell it for cash, use that cash to set up more telcom business? They can ask Etisalat for exchange of stake. Its like cross holding of stakes. You get 25% of my equity, I get equal amount in your equity. That wat, Relcom gets instant business in GCC’s largest market instantly with out having to set up new business.

    In fact instead of all the market players looking to India and Africa, why dont they look at China as potential business oppartunity? Whether you like it or not, China is going to be our potential compititor or enimy of future America and Europe are nothing compared to China in future. We must get into their market if we are to have serious stratagy.

    So telcom guys!! Pool your resources and concentrate on entering Chinese market. Infact all sectors should look to Chinese market like they are entering into our every day lives. Unless we are on equal footing, we wont have currency in future conflicts.

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