Telecom deal with Bharti implies unprecedented muscle for Reliance Jio

New Delhi:The morning after a mega infrastructure sharing deal between arch rivals, Reliance Jio Infocomm and Bharti Airtel, several questions hang ominously in the air. The deal took almost everyone in the telecom industry by surprise though it was months in the making, with negotiations at every level between the two companies, including between Reliance’s Mukesh Ambani and Bharti’s Sunil Mittal.

So will the market be disrupted by Reliance, now that it has gained unprecedented muscle? Does this mean a back end infrastructure giant will gainmonopolisticcontrol over a deeply fragmented front end business of telecom as well? Should other telecom players be scared of the new behemoth?

Analysts hold divergent views on this deal, whose contours are frankly not clear even now. No one has been saying what the actual financial implications of this would be for either Bharti Reliance Jio. No one seems clear either about the deal’simpacton any furtherbenefitswhich may have accrued to Reliance Communications, the ADAG group company with which Reliance Jio had earlier signed a mega tower sharing pact.

In aresearchnote to clients this morning, Kotak Institutional Equities termed this deal positive “as it lowers the possibility of RIL attempting to disrupt industry discipline. What we are suggesting is convoluted logic, we understand. However, Bharti would not be keen to open its infrastructure at market rates to a player it believes will be disruptive to its bread-and-butter retail wireless business, in our view. Secondly, RIL’s opex on the infrastructure elements covered by the agreement now cannot be lower than Bharti’s - even parity would demand massive Bharti-like scale. This has implications for RIL’s ability to be price-disruptive in the market.”

But Sunil Tirumalai and Chunky Shah of Credit Suisse pointed out that historically, Indian telcos who have collaborated in the back end have also had their interests “aligned in the front end (Bharti/Voda/Idea for example). If the agreement between Bharti and R-Jio is taken to the full logical conclusion as implied by the press release, it could mean a more benign competitive environment - across tariffs, vendor negotiations and even spectrum auctions”. So what these analysts are saying is that Reliance Jio and Bharti could together perhaps lower call tariffs, affect bidding and valuations during upcoming spectrum auctions and drive down vendor costs.

But this may not be good news for other big players in the industry. The Kotak analysts said for RCom, this would be a “sentimental negative given that this deal should curb market’s expectations of further infrastructure-leasing deals with RIL-Jio.” And though Vodafone and Idea already partner Bharti in Indus, a tower venture, and may benefit marginally when revenues from this deal start accruing on tower sharing by Reliance Jio, they may find themselves out manoeuvred on other fronts.

A Morgan Stanley report said Bharti’s infrastructure includes 35,376 towers across 11 circles in Bharti Infratel standalone, 42% stake in Indus towers which has 112,114 towers across 15 circles, 175,705 route km of domestic fiber network and 225,000 route km of global fiber network. Bharti Infratel has business referral program with Indus which applies for pan-India deals. “The deal could present significant upside to our estimates for Bharti Infratel. Assuming a 10,000 cell-site tenancy at a rental of about Rs 37,000/month for Bharti Infratel standalone and 30,000 cell-site tenancy at a rental of Rs 32,000/month for Indus, this could imply a proportionate incremental revenue of Rs 9.3 billion for Bharti Infratel”.