In the face of intense competition and a staggering debt load of Rs 450 billion, Anil Ambani-led Reliance Communications (RCOM) announced that it will be shutting down its 2G mobile operations by November 30, 2017.
As of October 2017, RCOM has a mobile subscriber base of 81 million, of which about 40 million subscribers are on its 2G network. These subscribers can either shift to RCOM’s 3G/4G network or port out to another operator.
A statement issued by the company reads, “As already announced on October 1, 2017, RCOM has decided to adopt a 4G-focused strategy for profitable growth of its wireless business. Accordingly, RCOM will be optimising its 2G and 3G footprint, and related infrastructure and human resources, with effect from November 30, 2017.”
The immediate impact of RCOM’s decision to pull the plug on its 2G services will be felt by its subscribers. They are likely to face problems especially with regard to porting. The Telecom Regulatory Authority of India has already received complaints from irate subscribers in some circles such as the Northeast and Kerala, where RCOM has discontinued its voice services and has also stopped responding on its helpline, thereby making it difficult for subscribers to port to another network. TRAI has, therefore, mandated that RCOM must communicate unique porting codes to its subscribers through SMSs for any porting request, without further delay. Also, it has directed the operator to ensure quality of service of the entire network as prescribed and not reject any porting out request till December 31, 2017. Other telecom operators have also been directed to accept all requests from RCOM subscribers for the same period.
Meanwhile, RCOM employees are likely to face the axe. The Economic Times estimates that around 1,200 employees will, in all probability, be asked to leave. According to a company source, all attempts had been made to revive the business, but these did not yield any result. “It is unfortunate that jobs will be lost, but RCOM is in such a situation that there is no point in delaying the step to call it a day for our wireless business,” says a senior RCOM official.
RCOM’s current state of affairs is a far cry from when it entered the telecom space. As the telecom arm of Reliance Industries Limited, led by Mukesh Ambani, RCOM’s initial mobile offering “Monsoon Hungama” based on CDMA technology created a stir in the telecom industry, paving the way for cheap and affordable telephony. RCOM briefly even rose to the second position in subscriber terms, after Bharti Airtel. In 2004, the Ambani brothers had a falling out. A demerger followed, which gave Anil Ambani control over RCOM and the electricity and financial services businesses.
Reasons for the shutdown
RCOM enjoyed a good market valuation till 2009. However, its situation changed significantly thereafter, as its debt kept mounting amidst increased competition and low call prices.
Its big merger plan with Africa’s MTN fell through, as it was opposed by Mukesh Ambani, who still had the right of first refusal on any sale plan. Since 2010, the company had been spending heavily on bidding for spectrum, thereby raising its debt to unsustainable levels. Also, RCOM was not able to effectively compete with larger rivals Bharti Airtel, Vodafone India and Idea Cellular.
The launch of Reliance Jio services in 2016, with free voice services for life and cheap data services, unleashed another price war, which pulled the rug from under RCOM’s operations. The company’s voice revenues diminished in an industry that survives on 75 per cent revenues coming from the voice business.
RCOM’s failure to complete the merger with telecom operator Aircel in early October due to legal and regulatory issues was the last straw for RCOM, and it finally decided to shut down its 2G operations. Had the merger with Aircel fructified, RCOM could have gained scale and reduced its debt by at least half.
Debt recasting
Currently, RCOM has a strategic debt restructuring (SDR) arrangement with its lenders as per which it does not have to repay any of its loans till December 2018. However, it needs to achieve a significant debt reduction by December 2017, otherwise its lenders, led by the State Bank of India, can take over the company’s management by converting debt into equity. That said, if the lenders are convinced of the progress in RCOM’s alternative deleveraging plans, they could allow the existing management to run the company till December 2018.
Continuing with the consolidation of its operations and finances, RCOM, on October 30, 2017, announced a “zero write-off” debt management plan to recast its Rs 450 billion debt. It plans to convert its Rs 70 billion debt into equity, wherein RCOM’s promoters will dilute their stake to 26 per cent from the current 65 per cent and the lenders will hold at least 51 per cent stake in the company.
After shutting down its 2G operations, RCOM is planning to wean away its low-ARPU subscribers and phase out its 3G operations. The future focus will be on sustaining the profitable parts of the 4G business.
RCOM’s debt revamp strategy also involves raising money through the sale of assets including towers and spectrum. RCOM has a significant portfolio comprising over 43,000 towers and 178,000 route km of intercity and intra-city fibre. Monetisation of this would yield Rs 10 billion, the company expects. Reportedly, Reliance Jio has shown interest in RCOM’s assets. The sale of its data centres is expected to bring another Rs 40 billion for RCOM.
In terms of spectrum, RCOM has estimated its overall spectrum portfolio at Rs 190 billion, based on the 2016 auction prices. This figure is expected to increase once 30 MHz of airwaves, valued at Rs 74 billion, are added after its merger with telecom operator MTS. RCOM is currently in the process of merging its wireless operations with MTS. The merger has received approval from the Department of Telecommunications. The two companies are now in the process of merging their wireless operations. Consequently, MTS’s data subscribers will migrate to RCOM’s 4G network.
RCOM is also looking to monetise its real estate assets to raise Rs 100 billion. This will include the 125 acre Dhirubhai Ambani Knowledge City property near Mumbai.
The sale of assets will be monitored by the Joint Lenders’ Forum, which has appointed SBI Caps to carry out the new monetisation plan. According to Punit Garg, executive director, RCOM, the assets will be sold transparently with the help of transaction advisers in a process overseen by the lenders, and RCOM will not get into bilateral sale agreements.
After the new plan is implemented, “the lenders will be left with a sustainable secured loan of Rs 60 billion”, says Garg. He sees no glitches in executing the new plan. “The lenders were very comfortable looking at the management’s conservative estimates,” he adds.
While RCOM has time till December 2018 to comply with terms of the SDR agreement, it is confident that its asset monetisation efforts will be concluded by March 2018.
Future focus
After shutting down its 2G operations, RCOM is planning to wean away its low-ARPU subscribers and phase out its 3G operations. The future focus will be on sustaining the profitable parts of the 4G business. It is planning to offer 4G mobile broadband services in an attempt to turn around its business. According to RCOM’s media release, “The company’s 4G-led strategy will be executed, as at present, on the back of capital-light access to India’s most extensive 4G mobile network, through already operational spectrum sharing and intra-circle roaming arrangements with Reliance Jio.”
RCOM is also exploring options to merge its international long distance voice, consumer voice and post-paid 4G dongle operations into its enterprise unit. Going forward, RCOM’s makeover journey will be focused only on viable, sustainable and profitable business to business (B2B) segment with a strong domestic and global footprint. RCOM’s B2B portfolio is spread across continents and comprises enterprise, carrier, internet data centre and global submarine cable networks. According to company officials, these businesses are stable and capital light, and generate sustained and predictable annual revenues and profits. They have immense growth potential with minimum competition. Further, these businesses have no exposure to the mobility and consumer segments including fibre-to-the-home.
Clearly, RCOM is making all efforts to turn around its business. However, only time and market forces can determine whether these will succeed in bringing RCOM out of the woods.
Shampa Bahadur
