Dire Straits: Will Anil Ambani be able to rescue RComm?

Dire Straits: Will Anil Ambani be able to rescue RComm?

The telecom arm of the Anil Ambani-owned Reliance Group is facing an existential crisis.

The last week of May was full of unprecedented developments for Reliance Communications, the seventh-largest telecom service provider in the country, starting with its first-ever yearly loss of Rs1,283 crore. The losses, coupled with high debt - Rs 45,733.40 crore as on March 2017 - prompted banks to raise a red flag on the company. To make matters worse, ratings agencies ICRA, CARE and Moody's downgraded RCom over debt concerns. The panic-stricken investors reacted; in seven trading days, RCom's stock tanked 33 per cent.

Compelled to allay fears about the telco's future, RCom Chairman Anil Ambani called the media at Reliance Centre in Santacruz, the new global headquarters of the Reliance Group where he shifted from the upscale Ballard Estate about a year ago. He fielded a volley of questions at the 95-minute-long Q&A, before settling down for an informal chat. The lenders had granted a seven-month "standstill" on the debt, he said.

Between now and December, Ambani will have to conclude two crucial deals - merger of the wireless business with Aircel and the 51 per cent stake sale in Reliance Infratel (tower business) to Canadian private investment firm Brookfield Infrastructure - that are expected to bring in around Rs25,000 crore. With this, it will be able to pare down its debt to about Rs20,000 crore.

RCom's debt comprises money from a consortium of Indian banks led by State Bank of India, and international loans. The debt pile-up, over the past decade, is a result of switching from CDMA to GSM technology, and purchase of expensive 3G spectrum in 2010 for Rs8,585.04 crore. In 2011, it availed of a Rs6,000-crore loan facility with China Development Bank to refinance the amount it had paid for the 3G spectrum. A year later, it signed an agreement with three Chinese financial institutions - ICBC, CDB and EXIM - to repay outstanding FCCBs (foreign currency convertible bonds) due for redemption. By then, the company had got into a debt trap - raising fresh debt to repay old debt.

Litany of Woes

Reducing debt is only one of the several challenges for RCom. The latest quarterly numbers show that RCom's wireless business, its bread and butter, is under immense pressure. It has witnessed an erosion in value and volume of both voice and data businesses. For instance, voice subscribers dipped 18 per cent to 84.7 million in the last quarter of 2016/17, compared to a year ago. Its voice ARPU, an important metric to determine average revenue per subscriber, fell Rs20 to Rs87. There's been an upheaval in the voice market since the entry of Reliance Jio, which has kept its voice services free. Telecom players which derive a large chunk of revenues from voice - 57 per cent in case of RCom - have been badly hit.

A Bank of America Merrill Lynch report states, "Jio's aggressive offering has impacted smaller telcos like RCom more as they have more price-sensitive consumers who are now moving to Jio. Post results, we expect a reduction in market share and resultant operating leverage putting pressure on margins."

Not just that, RCom's customers are shifting to other telcos offering free voice calls. In the last quarter, RCom lost 29.5 million voice and data customers compared to the same period last year, whereas Airtel and Idea Cellular gained 22.41 million and 14.4 million subscribers, respectively, during the same period.

The entry of Jio was the proverbial last straw. It has changed the way operators do business, and has led to a series of mergers and acquisitions over the past two years. In November 2015, RCom announced the acquisition of MTS, followed by the merger with Aircel in September 2016. Both the deals are awaiting regulatory approvals.

To succeed (or survive) in the current scenario, AirCom (proposed name for the RCom-Aircel-MTS entity) needs decent spectrum and high-quality subscribers. On both counts, it lags - in terms of spectrum holding, AirCom will hold about 883 megahertz (MHz) spectrum, far lower than Idea-Vodafone (1,850 MHz), Airtel (1,489 MHz) and Jio (1,235 MHz).

"A merged wireless entity would have about 10 per cent revenue market share, but sub-optimal quality of subscribers and debt burden would be key challenges. Also, residual business with estimated EBITDA [earnings before interest, tax, depreciation and amortisation] profile of at best Rs2,000 crore would initially have limited cash flows to service [about] Rs19,000 crore debt," says a report by IDFC Securities.

The current issue with RCom's subscriber base is partly linked to its delay in shifting from CDMA to GSM technology. That's why it has historically had a low-value subscriber base.

"People used RCom as the second SIM. They would recharge it in case of some promotional offer and use it infrequently. When Jio came, RCom SIMs were discarded. The quality of Aircel subscribers is not significantly different," says a telecom analyst.

RCom's sluggish investments in building networks and upgrading infrastructure have marred its growth prospects. The initial attempts to upgrade turned out to be futile because it could not get enough subscribers. As investments slowed, so did subscriber additions, as people chose operators with superior networks. Today, it has about 62,000 cell sites compared to Idea-Vodafone's 273,000 and Airtel's 185,000.

The Way Out

In the present financial mess, RCom will find it even more difficult to invest in network modernisation, or to even buy new spectrum, since banks may not be willing to lend money. "The investment in network is a continuous process. Given its financial health, it might be tricky to put in more capex in the network," says Rishi Tejpal, principal research analyst at Gartner.

RCom has failed to monetise its capabilities in optic fiber network fully. Its discussions with institutional and private equity players to sell the non-wireless businesses, particularly undersea networks and the optic fibre, reached a dead end. RCom has a 3.1 lakh-km-long optic fiber network - 1.9 lakh km in India and 1.2 lakh km abroad - comparable to that of Airtel (2.2 lakh km) and Idea-Vodafone (2.5 lakh km). In fact, Jio is using RCom's optic fiber for its 4G services.

Sources within RCom say that the company is focusing more on corporate customers than retail. "They have a strong fiber network, but the brand presence is clearly lacking. They are making some money by leasing, but it's not considered as strong as Airtel or BSNL. Their focus should be on getting cost efficiencies out of the merger, and innovating in areas like marketing and brand positioning," says Tejpal.

Servicing debt after the proposed deals are finalised will also be a challenge. Over the years, RCom has built other businesses that now contribute about 35 per cent to its revenues. These include global cloud exchange, undersea cables, India enterprise business, optic fiber business (global and Indian), data centre and direct-to-home services. However, Mahesh Uppal, Director at telecom consultancy ComFirst India, says that these are vanilla businesses where players like RCom can be easily substituted. "These are not branded businesses. I don't think these can have a huge upside. RCom is one of the many players with no unique advantage," he adds.

RCom is also planning to sell off its two prime land parcels - the 135-acre Dhirubhai Ambani Knowledge City in Navi Mumbai and a four-acre property near Connaught Place in New Delhi - to retire its remaining debt.

In 2006, when the Ambani brothers decided to split the Reliance business, Anil made sure his elder brother Mukesh Ambani, who was the brainchild behind the telecom business, did not enter the telecom industry for the next four years, through a non-compete clause in their agreement. And in 2016, Mukesh Ambani disrupted the market by launching Jio. The brothers already have a tower and spectrum sharing agreement. There is speculation that Mukesh will not let RCom die because of the 'Reliance' brand attached to it. Interestingly, at a recent Reliance Communications Annual General Meeting, the younger Ambani said "as far as our 100 million customers are concerned, as far as our one million retailers are concerned, as far as our employees are concerned, and as far as our vendors and partners are concerned, there has already been a virtual merger of the two organisations (RCom and Jio)."

RCom has seven months to emerge out of the debt trap. The clock is ticking.