Industry Trend Analysis - RCom's Mobile Market Exit Is Jio's Gain - MAR 2018


BMI View: Jio snapping up RCom's mobile assets is positive for the latter , allowing it to focus solely on its profit-making enterprise solutions business. New merger activity in India ' s mobile market is now expected to be few and far between, with operators now switching their focus to completing existing deals in order to compete against disruptor Jio.

With Reliance Communications (RCom) agreeing to sell its tower assets, spectrum, fibre optic cable, and media convergence nodes to Reliance Jio Infocomm Limited (Jio), we believe this will be the last large-scale consolidation prospect in the Indian mobile market, bar the possible Airtel and Aircel merger ( see ' Aircel Investment A Precursor To Consolidation, January 2 2018). The mobile market is set to enter a three-cornered fight, led by the Airtel -Telenor-Tata-Aircel alliance, followed by IDEA-Vodafone and Jio-RCom.

A Mobile Market Oligopoly Is The New Normal
Estimated Market Share After Mergers, Q3 2017
Source: BMI, operators

RCom's New Business Model More Sustainable

RCom is set to focus solely on its profitable enterprise connectivity business, exiting the consumer mobile business altogether. The sale of its mobile assets, together with the entrance of a private investor, is expected to reduce the company's debt pile by 86.7%, from INR450bn (USD7.1bn) to INR60bn (USD947.4mn). The market responded positively after RCom further announced that its creditors will not take any haircuts, and no loans will be written-off.

Investors React Positively to RCom Deal
Reliance Communications Share Price (INR)
Source: Bloomberg

RCom will retain its Global Cloud Exchange (GCX) business, which together with its Infrastructure business were the only profit generating units within the past two financial years. While RCom will sell a majority of its assets in the Infrastructure unit, its GCX business is expected to remain largely intact, making us bullish with regards to RCom, and parent Reliance Group's prospects in the short-term.

Telecoms and Infratel Losing Money For RCom
Financial Performance of RCom Subsidiaries (INRbn), FY15 - FY17
Source: BMI, Reliance Communications

While financial details for the buyout are not known, the deal is estimated to be in the region of INR240bn (USD2.8bn), which we believe to be relatively undervalued. We view that the sale of assets, despite done through a competitive bidding process, was under urgency to raise funds, after creditors, which include the China Development Bank wanted to declare RCom insolvent in October 2017 after the operator missed debt payments. The deal with Jio includes the sale of the majority of its assets in the Reliance Infratel, Reliance Telecom and Reliance Infrastructure business units. RCom would have raked in INR110bn (USD1.7bn) alone if its proposed 51% sale of Reliance Infratel to Brookfield Infrastructure had gone through in late 2017.

RCom Out; Other Operators Gear Up To Tackle Jio

We maintain that Jio is the single biggest threat to Indian mobile operators - which are looking to strengthen to compete against the disruptor. With the acquisition of RCom's assets, Jio now has access to 3G spectrum to supplement its 4G-only service, and has access to spectrum in certain telecom circles where it previously had to engage in spectrum-sharing arrangements to offer access.

IDEA, which is set to merge with Vodafone, announced in January 2018 a move to raise up to INR32.5bn (USD513.2mn) - which we believe is to boost its coffers in order to compete with Jio's low-margin pricing strategies. All major operators have been losing market share to Jio since its September 2016 entry, and we view consolidation as key to preventing further declines .

Tata Teleservices has also carved out its mobile business to Airtel in a 'cash-free, debt-free' deal, meaning that Airtel will assume Tata's mobile business by paying virtually nothing. Tata has been looking to exit the unprofitable mobile business for years, and the deal will boost Airtel's market share - and its chances at competing effectively with Jio. With a slew of M&A deals characterising the market, large players will utilise scale to continue competing on price, driving up affordability of mobile services and consequently contributing to mobile phone penetration rates in India, forecasted to reach 94.7% by the end of 2021.

Aggresive Competition To Boost Mobile Adoption
India Mobile Market Trends
e/f = BMI estimate/forecast. Source: BMI, national sources