When the estranged Ambani brothers agreed to a family settlement on June 18 2005, Reliance Infocomm (later renamed Reliance Communications, or RCom), the telecom business of the Reliance Industries set up by their father Dhirubhai Ambani, went to the younger brother, Anil.
Twelve years and a few months later, RCom has decided to get out of wireless business, which gave it the bulk of its revenues, as well as pain.
Under a plan that will get it out of a structured debt restructuring (SDR) exercise, Anil Ambani will reduce the company’s debt by Rs 25,000 crore (from Rs 45,000 crore at present) through the sale of some of its key assets, including spectrum, tower and fibre. Besides, the company will also monetise its real estate business through a special-purpose vehicle to raise Rs 10,000 crore, and sell a minority stake in the truncated RCom to a strategic partner. The whole exercise with reduce the debt on RCom’s books to only Rs 6,000 crore.
But getting out of SDR will come at a price. For one, it will draw the curtains on a significant chapter in India’s telecom history.
For many years, RCom had been seen as the second-largest player in the mobile telecom market – next only to Sunil Mittal-led Bharti Airtel – and ready to become one of the big boys in the business.
So, what went awry for the Anil Ambani company? The immediate cause, incidentally – and ironically – has been elder brother Mukesh Ambani’s aggressive telecom foray with Reliance Jio, a company now in the race to buy some of RCom’s key assets. Jio’s disruptive strategy – free voice services and data at throwaway rates, apart from offering all services free for six months – triggered a consolidation in the telecom sector. Not many had expected this to happen so soon; most players thought they would have enough time to restructure and spring back in the game.
From Tata Telservices, Sistema and Telenor to RCom, all took serious blows as users rushed to avail of Jio’s lucrative 4G services. RCom saw its subscriber market share plunging from a respectable 9.54 per cent in June 2016 (before Jio’s market entry) to 5.20 per cent in October 2017. Its revenue market share, which was under six per cent in the second quarter of 2016-17, slid to less than four per cent by the first quarter of 2017-18.
With the writing clearly on the wall, RCom in October 2017 announced it would close down its 2G and 3G services. In just one month, the company lost over 10 million customers. Simultaneously, rivals Jio, Airtel, Idea-Vodafone (which had announced a merger earlier) and BSNL together gained over 13.5 million subscribers.
The impact of the Jio onslaught on RCom was quite serious – while its debt burgeoned to over Rs 41,000 crore, interest payouts swelled, and the company’s losses went past Rs 2,390 crore in 2016-17. This got worse, as the company registered a loss of Rs 2,821 crore in the September 2017 quarter, amid lenders’ deadline to restructure debt or face proceedings at the National Company Law Tribunal (NCLT).
Before things got worse for it, RCom had pegged its survival hopes on a three-way merger – first with Shyam Sistema (which took place) and then with Aircel. The exercise was expected to substantially reduce its debt and give the merged entity a fair chance as the fourth-largest player with a reasonable market share. However, the proposed deal fell through, leaving the company with asset sale as the only option.
The fate that the Anil Ambani company has seen in the recent times seems to belie its past. With a market share of over 17 per cent, RCom had been on a roll as the clear number two in 2010. It had launched GSM services two year earlier. When Anil Ambani had got the telecom company as part of the family settlement, it was primarily a CDMA player dealing in a technology slowly losing traction. A shift to the GSM technology, along with attractive tariffs 60 per cent lower than competition, was rolled out across India in record 12 months. The company’s ambition was to have 100 million users very soon.
Its approach with 3G services had been equally aggressive – the company had shelled out over Rs 5,800 crore to buy 3G spectrum in 13 circles, including the lucrative but expensive Delhi and Mumbai circles.
But competition was also becoming fiercer, with the number of players doubling from seven to 14 as the erstwhile communications minister A Raja issued new licences in 2008. In 2012, RCom lost the number two slot to Vodafone, and what followed was a slow downturn. The company slipped to number four within two years as Idea Cellular went ahead, and further down in 2016 when RCom’s market share shrank to less than 10 per cent – both Aircel and BSNL had now overtaken it. By the time Jio entered the market, RCom was already at the lower end of the heap.
Analysts cite the company’s huge debt as a key reason. The debt burden nearly doubled over the past eight years – from around Rs 25,000 crore in 2009-10 to Rs 45,000 crore, according to CLSA estimates. That debt pile would have been okay if the company was also rolling in commensurate revenues and income. But its net-to-Ebitda ratio, which signifies the loan-paying capacity, nearly doubled in the same period.
Also, despite its customer base increasing, the overall revenues of the company did not really grow in sync (from Rs 20,000 crore to Rs 22,000 crore between 2011-12 and 2016-17) which meant the company’s average revenue per user (Arpu) was not growing despite 3G services.
The problem, according to analysts, is also that RCom was able to put very little fresh capital expenditure into the business in the past three years. This was at a time when the big boys were pumping in Rs 15,000 or more annually to increase their coverage and to get LTE 4G-ready for taking on Jio. RCom was hamstrung by the fact that lenders were worried it might have no choice but to keep costs on a close leash.
Some argue that much of RCom’s debt problem might have been resolved and it would have got some breathing space to fight a battle if it had not delayed its monetisation programme. But there is also a view that there was an obvious need for more towers as players moved to increase coverage with 4G and then the upcoming 5G in 2020 – the more you held on to, the better price you would get. No one, some analysts explain, knew that Jio would change the market so quickly. They also point out that RCom did get into deals with Jio – like the Rs 12,000-crore 10-year one for towers and leasing out its domestic inter-city fibre network; these brought it some cash.
However, those viewing a delayed monetisation as an error of judgement say that if RCom had merged its direct-to-home business with Sun TV in 2013, in a deal that it was reportedly close to, it would have retained a 26 per cent stake, valued at Rs 1,500 crore. Anil Ambani this year sold off the business and got no cash, with the buyer taking only its debt. Two years earlier, the company was also in talks with private equity fund TPG and Tillman to sell its tower and fibre assets for over Rs 30,000 crore. That is more than what it is expecting to get from sale of spectrum, tower and fibre assets today.
Twelve years and a few months later, RCom has decided to get out of wireless business, which gave it the bulk of its revenues, as well as pain.
Under a plan that will get it out of a structured debt restructuring (SDR) exercise, Anil Ambani will reduce the company’s debt by Rs 25,000 crore (from Rs 45,000 crore at present) through the sale of some of its key assets, including spectrum, tower and fibre. Besides, the company will also monetise its real estate business through a special-purpose vehicle to raise Rs 10,000 crore, and sell a minority stake in the truncated RCom to a strategic partner. The whole exercise with reduce the debt on RCom’s books to only Rs 6,000 crore.
But getting out of SDR will come at a price. For one, it will draw the curtains on a significant chapter in India’s telecom history.
For many years, RCom had been seen as the second-largest player in the mobile telecom market – next only to Sunil Mittal-led Bharti Airtel – and ready to become one of the big boys in the business.
So, what went awry for the Anil Ambani company? The immediate cause, incidentally – and ironically – has been elder brother Mukesh Ambani’s aggressive telecom foray with Reliance Jio, a company now in the race to buy some of RCom’s key assets. Jio’s disruptive strategy – free voice services and data at throwaway rates, apart from offering all services free for six months – triggered a consolidation in the telecom sector. Not many had expected this to happen so soon; most players thought they would have enough time to restructure and spring back in the game.
From Tata Telservices, Sistema and Telenor to RCom, all took serious blows as users rushed to avail of Jio’s lucrative 4G services. RCom saw its subscriber market share plunging from a respectable 9.54 per cent in June 2016 (before Jio’s market entry) to 5.20 per cent in October 2017. Its revenue market share, which was under six per cent in the second quarter of 2016-17, slid to less than four per cent by the first quarter of 2017-18.
With the writing clearly on the wall, RCom in October 2017 announced it would close down its 2G and 3G services. In just one month, the company lost over 10 million customers. Simultaneously, rivals Jio, Airtel, Idea-Vodafone (which had announced a merger earlier) and BSNL together gained over 13.5 million subscribers.
The impact of the Jio onslaught on RCom was quite serious – while its debt burgeoned to over Rs 41,000 crore, interest payouts swelled, and the company’s losses went past Rs 2,390 crore in 2016-17. This got worse, as the company registered a loss of Rs 2,821 crore in the September 2017 quarter, amid lenders’ deadline to restructure debt or face proceedings at the National Company Law Tribunal (NCLT).
Before things got worse for it, RCom had pegged its survival hopes on a three-way merger – first with Shyam Sistema (which took place) and then with Aircel. The exercise was expected to substantially reduce its debt and give the merged entity a fair chance as the fourth-largest player with a reasonable market share. However, the proposed deal fell through, leaving the company with asset sale as the only option.
The fate that the Anil Ambani company has seen in the recent times seems to belie its past. With a market share of over 17 per cent, RCom had been on a roll as the clear number two in 2010. It had launched GSM services two year earlier. When Anil Ambani had got the telecom company as part of the family settlement, it was primarily a CDMA player dealing in a technology slowly losing traction. A shift to the GSM technology, along with attractive tariffs 60 per cent lower than competition, was rolled out across India in record 12 months. The company’s ambition was to have 100 million users very soon.
Its approach with 3G services had been equally aggressive – the company had shelled out over Rs 5,800 crore to buy 3G spectrum in 13 circles, including the lucrative but expensive Delhi and Mumbai circles.
But competition was also becoming fiercer, with the number of players doubling from seven to 14 as the erstwhile communications minister A Raja issued new licences in 2008. In 2012, RCom lost the number two slot to Vodafone, and what followed was a slow downturn. The company slipped to number four within two years as Idea Cellular went ahead, and further down in 2016 when RCom’s market share shrank to less than 10 per cent – both Aircel and BSNL had now overtaken it. By the time Jio entered the market, RCom was already at the lower end of the heap.
Analysts cite the company’s huge debt as a key reason. The debt burden nearly doubled over the past eight years – from around Rs 25,000 crore in 2009-10 to Rs 45,000 crore, according to CLSA estimates. That debt pile would have been okay if the company was also rolling in commensurate revenues and income. But its net-to-Ebitda ratio, which signifies the loan-paying capacity, nearly doubled in the same period.
Also, despite its customer base increasing, the overall revenues of the company did not really grow in sync (from Rs 20,000 crore to Rs 22,000 crore between 2011-12 and 2016-17) which meant the company’s average revenue per user (Arpu) was not growing despite 3G services.
The problem, according to analysts, is also that RCom was able to put very little fresh capital expenditure into the business in the past three years. This was at a time when the big boys were pumping in Rs 15,000 or more annually to increase their coverage and to get LTE 4G-ready for taking on Jio. RCom was hamstrung by the fact that lenders were worried it might have no choice but to keep costs on a close leash.
Some argue that much of RCom’s debt problem might have been resolved and it would have got some breathing space to fight a battle if it had not delayed its monetisation programme. But there is also a view that there was an obvious need for more towers as players moved to increase coverage with 4G and then the upcoming 5G in 2020 – the more you held on to, the better price you would get. No one, some analysts explain, knew that Jio would change the market so quickly. They also point out that RCom did get into deals with Jio – like the Rs 12,000-crore 10-year one for towers and leasing out its domestic inter-city fibre network; these brought it some cash.
However, those viewing a delayed monetisation as an error of judgement say that if RCom had merged its direct-to-home business with Sun TV in 2013, in a deal that it was reportedly close to, it would have retained a 26 per cent stake, valued at Rs 1,500 crore. Anil Ambani this year sold off the business and got no cash, with the buyer taking only its debt. Two years earlier, the company was also in talks with private equity fund TPG and Tillman to sell its tower and fibre assets for over Rs 30,000 crore. That is more than what it is expecting to get from sale of spectrum, tower and fibre assets today.
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