The year 2016 witnessed a wave of consolidation in the telecom industry, with heightened merger and acquisition activity. Reliance Communications (RCOM) remained at the forefront of this activity, signing some big-ticket financial transactions. In the biggest ever consolidation deal in the sector, RCOM and Aircel announced the merger of their wireless operations to create a combined entity with assets worth Rs 650 billion. RCOM also entered into a binding agreement with Brookfield Infrastructure Partners to sell its tower business. According to the operator, this would be the largest investment by a foreign investor in the Indian infrastructure business. Both the deals will help the company slash debt. RCOM plans to use the proceeds from the upfront payment for the tower unit and that from the Aircel deal to reduce its debt by 60 per cent to about Rs 170 billion.
Private equity (PE) players showed an increased interest in investing in tower assets. Besides Brookfield Infrastructure, Providence acquired a 4.8 per cent direct stake in Indus Towers and IDFC Alternatives announced its plans to acquire a majority stake in GTL Infrastructure. Further, Brookfield Asset Management was reported to be in talks with Bharti Airtel for buying a part of the latter’s stake in Bharti Infratel.
On the debt side, Reliance Jio Infocomm Limited continued to raise a substantial amount of money to fund its expansion plans.
However, in 2016, too, the industry could not see the listing of telecom major Vodafone’s Indian arm on local bourses. Even though the operator finalised the banks that would lead the planned initial public offering (IPO), the filing of the draft prospectus has been delayed. The IPO is expected to raise Rs 133 billion to Rs 200 billion. The Bank of America Merrill Lynch, Kotak Investment Banking and UBS are the joint global coordinators and bookrunners with Axis Bank, Deutsche Bank, HSBC, ICICI Securities and JM Financial.
tele.net takes stock of the key deals that took place in the equity and debt spaces in the telecom sector over the past year…
RCOM-Aircel merger
In October 2016, RCOM signed definitive agreements to merge its wireless operations with Aircel’s wireless business. RCOM and Maxis Communications Berhad (Aircel’s Malaysia-based parent company) will hold 50 per cent stake each in the merged entity, with equal representation on the board of directors and all committees. The merged entity will be considered a special purpose vehicle and will be managed by an independent professional team under the supervision of the board. It is likely to be one of India’s largest private sector companies, with an asset base of over Rs 650 billion and a net worth of Rs 350 billion. On completion of the transaction in 2017, RCOM will transfer Rs 200 billion of its debt to the new entity, including Rs 140 billion of long-term debt and Rs 60 billion of instalments payable to the Department of Telecommunications over 10 years for spectrum purchases by RCOM and Sistema Shyam TeleServices Limited (SSTL). Aircel will also transfer Rs 140 billion of its debt to the entity. The merger will create India’s fourth largest telecom operator in terms of customer base and revenues. The merged entity will have the second largest spectrum holding among all operators.
RCOM-Brookfield Infrastructure deal
In December 2016, RCOM entered into a binding agreement with Canada’s Brookfield Infrastructure Group to sell a majority stake in its tower business for Rs 110 billion. As per the terms of the deal, RCOM’s telecom towers will be demerged into a separate new company that will be wholly owned and independently managed by Brookfield Infrastructure. This will be the second largest independent and operator-neutral tower company in India. RCOM will also receive Class B non-voting shares in the new tower company. It will have access to certain information and other rights in the new company, but will not be involved directly or indirectly in its management and operations. RCOM and Reliance Jio Infocomm Limited (RJIL) will continue as major long-term tenants of the new tower company, along with other existing third-party telecom operators. The transaction is subject to regulatory and other requisite approvals.
Mergers, acquisitions and stake sale
In early 2016, Bharti Airtel completed the acquisition of 74 per cent stake in Augere Wireless Broadband India. The operator had announced its decision to acquire Augere Wireless in August 2015, which was approved by its board of directors in October 2015. With the acquisition, Bharti Airtel secured the right to use Augure Wireless’s 20 MHz of broadband wireless access spectrum in the 2300 MHz band in the Madhya Pradesh circle. Augere had bought this spectrum in 2010 for an estimated Rs 1.22 billion.
Meanwhile, Vodafone India acquired YOU Broadband, a TPG Capital-owned cable internet company, in a deal valued at Rs 4 billion. YOU Broadband has around 3,000 km of optic fibre and 6,000 km of last-mile cables to households across 12 cities. It offers internet and voice services to residential, small and medium enterprise, and corporate customers through various delivery platforms. The deal is yet to receive approval from the Foreign Investment Promotion Board.
In May 2016, Srei Infrastructure Finance offloaded its 18.5 per cent stake in Viom Networks to the American Tower Corporation (ATC) for Rs 29.31 billion. The move came after the Cabinet Committee on Economic Affairs approved the proposed acquisition of 51 per cent stake in Viom Networks by ATC. Viom was established as a joint venture (JV) between Srei Infrastructure Finance and Tata Teleservices Limited, with the latter holding 54 per cent stake. The remaining 27.5 per cent is owned by a group of financial investors, including IDFC Private Equity, SBI Macquarie, Funderburk Mauritius Limited (Oman Investment Fund) and GIC Investments Pte Limited (Singapore).
In June 2016, Idea Cellular’s board of directors approved the proposed merger of Idea Mobile Commerce Services Limited (IMCSL) with Aditya Birla Idea Payments Bank Limited (ABIPBL). IMCSL manages the operator’s digital wallet, Idea Money. ABIPBL was formed in February 2016 as a JV between Idea’s promoter Aditya Birla Nuvo and Idea Cellular. On the completion of the merger, ABIPBL will issue equity shares to Idea Cellular in lieu of its existing shareholding in IMCSL. Following the completion of the merger, Idea Cellular will continue to hold 49 per cent equity in ABIPBL.
During the same month, Idea Cellular transferred its 7,997 telecom towers to its subsidiary, Idea Cellular Infrastructure Services Limited (ICISL). ICISL currently offers tower infrastructure services in Bihar and Odisha. To execute this transaction, a business transfer agreement was signed between Idea Cellular and ICISL. The latter issued around 10,000 equity shares to Idea Cellular in consideration for the tower infrastructure undertaking.
In June 2016, Tata Communications entered into a definitive agreement with Singapore Technologies Telemedia to hive off stake in its data centre business. As per the agreement, the latter will acquire 74 per cent stake in Tata Communications’ data centre business in India and Singa-pore through its subsidiary, Singapore Technologies Telemedia Global Data Centre for approximately $630 million. On completion of the sale, Tata Communications will continue to hold 26 per cent share in the business. The business includes 14 data centres in key cities across India and three in Singapore.
In July 2016, Sistema acquired the Russian government’s 17.14 per cent stake in SSTL. The move came as SSTL was preparing itself for a merger with RCOM. While the value of the stake has not been disclosed, payments will be made over a period of five years, with the first payment amounting to 30 per cent of the value being made in 2016, followed by 25 per cent in 2017, and 15 per cent each in 2018, 2019 and 2020. The government had purchased the shares in March 2011 and agreed that the Russian firm could buy them after five years for $777 million or their market value, whichever was higher.
In September 2016, Reliance Industries Limited (RIL) decided to increase its equity in RJIL from Rs 450 billion to
Rs 600 billion by way of a rights issue. By then, RIL had spent Rs 1.34 trillion on RJIL, which was funded by a combination of equity (Rs 450 billion), debt (Rs 470 billion), vendor financing (Rs 280 billion) and deferred spectrum payments (Rs 140 billion). This has helped RJIL in building and expanding its optic fibre cable and tower networks.
In December 2016, RCOM sold its Ethernet business to US-based telecommunications firm GTT Americas LLC for $28 million. RCOM’s subsidiary, Reliance Globalcom Services, shifted its Ethernet business to Onyx NewCo LLC, a newly incorporated firm in the US, and later sold it to GTT. The sale consideration will come through in two instalments and help pare the operator’s debt.
PE deals
In December 2016, US-based PE firm Providence acquired a 4.8 per cent direct stake in Indus Towers. To this end, it swapped its holding in Aditya Birla Telecom Limited (ABTL) with that in Indus Towers. Providence currently holds convertible preference shares in ABTL, which gives it a beneficial stake of around 30 per cent in the latter. The deal is expected to be a cashless stock swap for Providence.
During the same month, IDFC Alternatives, the PE arm of IDFC Limited, announced its plans to acquire a majority stake in GTL Infrastructure Limited. IDFC Alternatives is planning to invest in assets where it can acquire a majority stake, and drive growth and consolidation. The lenders of the telecom tower company are likely to auction a majority stake in it before mid-2017. GTL Infrastructure is reported to have initiated the process to find a panel for the auction as per the Swiss Challenge method specified in the Reserve Bank of India’s (RBI) guidelines for stressed assets. The auction, expected to be led by EY, will entail the conversion of approximately Rs 33 billion of debt into equity. Earlier, in October 2016, GTL Infrastructure’s lenders, including the Indian Overseas Bank, Punjab National Bank, Union Bank, Corporation Bank and Bank of Baroda, approved the company’s proposal to convert loans to shares, thereby taking the majority stake in the company and selling it to a strategic investor. As per the plan, the company’s debt will be reduced to sustainable levels, as specified in the RBI guidelines for strategic debt restructuring, from Rs 82 billion to around Rs 48 billion. The company will further reduce debt by Rs 3 billion through cash flows and by selling non-core assets such as properties or customer settlements.
Debt deals
During 2016, RJIL raised Rs 20 billion by issuing five-year, non-convertible debentures (NCDs) through the electronic bidding platform route. The NCDs bear a coupon of 8.32 per cent per annum to be paid annually. Research firms CRISIL and ICRA have assigned AAA rating to the issue. The proceeds from the issuance will be utilised by RJIL to roll out its digital services business.
In October 2016, RJIL decided to raise Rs 150 billion by issuing optionally convertible preference shares (OCPS). This was to replace the rights issue for the same amount that the company had approved in July 2016. According to RJIL, each OCPS would be redeemed at Rs 50 or converted into five equity shares of Rs 10 each at any time as per the company’s discretion. However, this can happen not later than 10 years from the date of allotment of the preference shares. RJIL has not provided a reason for changing the instrument of raising funds.
In December 2016, Idea Cellular raised Rs 15 billion by selling corporate bonds in order to bring down its borrowing costs. It sold five-year bonds at an interest rate of 7.57 per cent. During the same month, RCOM planned to raise about $500 million by issuing offshore bonds. It is in the process of finalising investment bankers for the bond issue.
Others
In April 2016, Chinese smartphone-maker Xiaomi led an investment round of $25 million in Mumbai-based Hungama Digital Media Entertainment, an aggregator and publisher of online entertainment content, along with Hungama’s existing investors. As per the deal, Xiaomi picked up a minor stake in the company. This will be the Chinese company’s first investment in India.
In September 2016, messaging application service provider Hike Messenger raised over $175 million in the latest round of funding led by Tencent Holdings and the Foxconn Technology Group. The company’s existing investors, Tiger, Bharti Enterprises and the Softbank Group, also participated in this round. Hike has so far received about $250 million in four rounds of funding. The company will use the proceeds for future expansion and invest in areas that are important for its long-term success.
Outlook 2017
This year is expected to be a busy one for the sector as operators are expanding their 4G services and are likely to raise money to support their capex targets. Moreover, the industry may see some long-awaited public listings of key companies in 2017. For instance, Tejas Networks is planning to launch its IPO in March 2017 and is looking to raise Rs 8 billion through the listing. The company has appointed Axis Capital, Edelweiss and Nomura as bankers for the IPO. It plans to use the funds raised to pare its debt, foray into new technology segments such as FTTx, 4G and 5G, and expand its operations internationally. The industry may also finally see Vodafone’s Indian arm getting listed.
Moreover, the industry may witness another key consolidation deal as Bharti Airtel finalises the buyout of Telenor’s Indian operations. Reported to be at an advanced stage, the deal will see Airtel buy Telnor’s India business for $350 million and is likely to take over half of Telenor India’s liabilities, with the remaining expected to be borne by the latter.
Akanksha Mahajan Marwah
