Reliance Jio strikes 4G gold with RCom deal; will strengthen telecom major’s broadband and fibre cable play

Reliance Jio Infocomm today announced a definitive deal for the acquisition of specified assets of Reliance Communications Limited (RCOM) and its affiliates. This means acquisition of telecom towers, spectrum and optical fiber from RCom and prized telecom assets in a fiercely competitive and rapidly evolving telecom market. The deal marks several milestones – it formally signals the exit of RCom from the wireless business which means one less competitor for RJio; it allows RJio to significantly expand its 4G play with the acquisition of precious airwaves; and it also strengthens RJio’s broadband and fiber cable play. The deal also means RJio trumped other competitors to get precious airwaves – at least one incumbent telecom company was also eyeing the spectrum cache of RCom. According to analysts, RJio already owns a fourth of all spectrum available for 3G/4G services. It remains to be seen if with this acquisition it trumps market leader Bharti Airtel in spectrum holding – Bharti’s 3G/4G spectrum share is almost 29 percent. Why is spectrum akin to gold? Well, as analysts at brokerage CLSA said earlier, it was the inability to transition to 4G and match Reliance Jio’s offering coupled with a sharp decline in cash flow which led to a spate of consolidation transactions among large and smaller telecom operators this past year. [caption id=“attachment_4249453” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] RJio entered the market armed with data and 4G ready network in September last year. Within the last 15 months, this had led to unprecedented sector consolidation so that the market is now headed towards a three-player oligopoly controlling about 95 percent of revenues. This acceleration has in part been driven by high spectrum costs. Here’s how the market reacted: Most notable was the merger between Idea Cellular and Vodafone India, the number two and three ranked operators in India. Post the merger, the combined entity is likely to be the largest telecom operator with 34 percent subscriber share and 43 percent revenue market share. Several smaller operators have either scaled down operations or exited the business completely, including Bharti Airtel’s acquisition of Telenor, Tikona and Videocon’s spectrum and the spectrum trading-sharing arrangement between RCom and Reliance Jio (signed before today’s announcement). Bharti Airtel has also subsequently acquired Tata Teleservices’ mobile business. This should explain why RJio’s bid to acquire the precious 800 MHz airwaves held by RCom makes eminent sense. This piece in Bloomberg Quint (read here ) puts RCom’s spectrum holding in the precious 800 MHz band at 101.75 Mhz. In seven telecom circles across the country, this spectrum is valid till 2033. So two things become clear about why RJio benefits – 800 MHz is a spectrum band which is considered quite efficient for data heavy 4G services (unlike higher frequency bands). Also, since RCom holds this spectrum for a long validity period, RJio will enjoy the acquisition without fear of renewal costs for at least a decade and more. RJio’s own holdings in these circles are valid only till 2021. In a statement announcing the deal, RJio said in the asset monetization process for RCom’s assets, mandated by its lenders of RCom, RJio emerged as the successful bidder. “Consequent to the agreement, RJIL or its nominees will acquire assets under four categories – Towers, Optic Fiber Cable Network (“OFC”), Spectrum and Media Convergence Nodes (“MCN”) from RCOM and its affiliates. These assets are strategic in nature and are expected to contribute significantly to the large scale roll-out of wireless and Fiber to Home and Enterprise services by RJIL,” the statement added. Earlier this week, RCom had announced its exit from the Reserve Bank of India’s (RBI) strategic debt restructuring framework, with zero equity conversion and zero loan write-offs for lenders and bond holders. Upon completion of all transactions as announced, the balance debt in RCom is expected to be Rs 6,000 crore, representing reduction of over 85 percent of total debt which currently stands at Rs 45,000 crore. Sanjay Bafna, former editor of TelecomTalk.Info tweeted that the arsenal RJio will acquire under this deal (neither company has shared details of the deal except to acknowledge that it has been signed):

According to Bafna, besides crucial airwaves, RCom has 43,000 mobile towers, 1,78,000 RKM of fiber (OFC) and 248 Media Convergence Nodes. Meanwhile, analysts at Kotak Institutional Equities said in a note to clients earlier this week that Reliance Jio had reported revenues of Rs 6,140 crore for the September quarter, with an implied paid subscriber base of around 131 million. Based on reported gross revenue numbers to sector regulator TRAI, RJio accounted for a 14.5 percent share of India’s wireless telecom market in the second quarter. Based on reported adjusted gross revenue numbers, RJio had a 13.9 percent share of the market last quarter; an Average Revenue Per User (Arpu) of Rs 130 and Kotak said RJio should end up with revenues of Rs6,000 crore in the December quarter as well. This, when revenues of incumbents are still declining. As such, Jio may end up with an even higher market share in Q3 than what was reported in Q2. Now with this fresh acquisition of spectrum from RCom, obviously the revenue and market share calculations will look even better for RJio. (Disclosure: Reliance Industries Ltd is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd)