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Reliance looks for a strategic investor

Santosh Sathanur | June 11, 2010
Pressure on margins forced Reliance to evaluate dilution of equity

The board of directors of Reliance Communications, Indias second-largest mobile carrier, has approved an equity stake sale of up to 26 per cent to strategic/private equity investors and an evaluation of other combination or consolidation opportunities. Additional capital through a stake sale will provide Reliance with some much needed elbow room while planning for investments in 3G and BWA networks. However, in the long term, only consolidation will ensure better investment returns for mobile operators in India.

Pressure on margins forced Reliance to evaluate dilution of equity

Reliance has been one of the operators most affected by the current price war in the Indian mobile market. Its ARPU has seen the sharpest decline and is among the lowest in the industry. It has seen its revenues and margins decline over the last few quarters.

Such financial performance has severely limited Reliances new investment plans especially in the GSM space; its capital intensity is the lowest among the established operators in India in FY 2010. Reliance now recognizes it needs the boost of a strategic partner in order to maintain its position in the ultra-competitive Indian market. However, more cash will not necessarily solve the underlying issue. As mentioned in our forthcoming report Indian telco performance points to a need for consolidation, we believe consolidation will ensure better investment returns for operators in India as the current ultra-competitive market landscape, falling revenue per user, and declining margins will be difficult to bear in the medium term.

Reliance is also in need of additional capex for 3G rollouts in 13 circles, including the key metro circles of Delhi and Mumbai. With further investment commitments expected after the completion of the BWA auction, it has been left with few ways of raising further capital.

Regulatory landscape favors newer entrants interested in acquiring a stake

With a subscriber base of more than 100 million and pan-India GSM & CDMA networks, Reliance will provide any player looking for a large presence in the Indian telecoms industry with a ready market base. However, current regulatory policies restrict cross holding of more than 10 per cent between existing operators in a service area. Therefore, investments from a new player such as a strategic investor may be the easier way forward. Hence, a potential suitor such as Etisalat, which already holds a 45 per cent stake in existing player Etisalat DB Telecom Ltd, will have to settle for a much smaller stake (<10 per cent) in their current holding, merge their current venture with Reliance once the three-year lock-in period ends in 2011, or do a combination of both. However, new players without a presence in the mobile space will find it much easier to acquire a stake in an existing operator. Speculation around candidates includes players such as AT&T, which exited the Indian mobile market in 2005 by selling its stake in Idea Cellular, and MTN, which unsuccessfully attempted to merge with Reliance in 2008.


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