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?