Sistema finalizes merger with RCom

Sistema has been operating in India since 2007.

Sistema has been operating in India since 2007.

Shutter Stock/Legion Media
Reliance Communications Ltd (RCom) is taking over Sistema’s Indian mobile phone business through a stock swap, the companies announced on Monday, as a result of which Sistema’s Indian unit will acquire 10% equity stake in RCom.

Russia’s Sistema JSFC on Monday announced it had signed binding documents to merge its Indian telecommunications business with India's fourth-largest telecom operator, Reliance Communications Ltd (RCom).

“The merger of SSTL and RCom's telecom businesses is a milestone event. Despite the numerous challenges the sector faced in recent years, the combination of two leading data service providers is a clear sign of progress for the Indian telecom industry,” Mikhail Shamolin, President and CEO of Sistema, said commenting on the deal.

Sistema’s telecom business will be demerged  from Sistema Shyam TeleServices Ltd (SSTL),  a joint venture of Russia’s Sistema JSFC and India’s Shyam Group, working in India under MTS brand, and merged with RCom’s telecom business through an agreement to be approved by Indian courts. As a result of the deal, SSTL will acquire and hold a 10% equity stake in RCom.

In exchange, RCom would acquire all the equity of Sistema Shyam Teleservices, which has a market share of less than one percent, with around nine million customers and Rs 1,500 crore ($229 million) in annual revenue.

SSTL said the company "intends to pay off its existing debt" before the transaction closed, a relief for RCom investors, as SSTL's debt stood at 43.12 billion rupees at the end of June 2015, according to company's consolidated financial results for the second quarter of this year.

However, after completing the transaction, RCom will have to pay for SSTL's frequency spectrum licensing fees, payable in installments, to the Indian Department of Telecommunications (DoT).

The Economic Times newspaper report, citing anonymous sources, estimates this liability at around four billion rupees a year, beginning February 2016, for next 10 years.

This is the first major deal in the over-crowded and deeply indebted telecom industry in India.

Mergers and consolidation in India's telecommunications sector is quite rare, because of complex government rules on mergers.

The Indian government's latest round of spectrum auctions, conducted earlier this year, left companies more financially strapped, and this is likely to encourage more consolidation and more deals.

In an official statement, Sistema noted that at appropriate earn-out mechanism has also been agreed in connection with disputed spectrum contiguity charges claimed by the DoT.

Sistema expects the transaction to be closed in the second quarter of 2016. It noted that the deal is subject to a number of conditions, including obtaining approvals in accordance with SSTL and RCom's corporate procedures and approvals by Indian regulatory and judicial authorities.

After the deal is closed, SSTL minority shareholders will be given an option to exchange their shares in SSTL with the pro-rata RCom shares held by the company.

“We are confident that SSTL's entry into the equity capital of RCom as a strategic investor will strengthen the competitive position of the combined company and provide subscribers with superior experience by fast-tracking the growth of LTE technology in India,” said Shamolin, adding that completion of the deal will serve as an example of growing business ties between Russia and India and will encourage other investments between them.

Gurdeep Singh, President and CEO, RCom Consumer Business, said the company was “delighted to welcome SSTL as a valued shareholder and partner in RCom,” as the combination of the companies' wireless businesses will “generate significant capital expenditure and operational expenditure synergies” for their mutual benefits.

“The Indian data market is witnessing explosive growth, and SSTL's proven strengths in that space will further enhance RCom's capabilities in delivering a superior experience to our valued customers,” Singh said. He said the addition of SSTL's spectrum holdings in the 800 - 850 MHz band will strengthen RCom's spectrum portfolio and extend its ability to provide world class 4G LTE services in 8 important circles till the year 2033.

Sergey Savchenko, CEO of SSTL, termed the merger deal as “an exciting new chapter for India’s telecom industry,” adding that the transaction underscores SSTL’s track record in building the fastest-growing data services provider.

Indian media had earlier reported the possibility of RCom entering a pact with another Indian telecom operator, Aircel, after the merger deal with SSTL was closed. In such a scenario,India could see the emergence of third largest operator, in numbers of subscribers, with Aircel, owned by Malaysian communications service provider Maxis, becoming the largest shareholder in the new company.

Sistema has been operating in India since 2007. The “Indian story,” however, was not always happy for the Russian industrial investment giant. After entering the market through acquisition of a small mobile operator SSTL which was operating only in Rajasthan at that time, the company invested around US$ 300 million in acquisition of licenses in the remaining 21 circles to become a pan-Indian operator providing CDMA based mobile services.

In early 2012, the Indian Supreme Court ordered for termination of 122 licenses of several telecom operators over bribery and corruption allegations, popularly known as the 2G scam. The licenses of SSTL were canceled as a part of the court order.  In 2013, SSTL participated in the new auctions and re-acquired licenses in eight circles for US $ 670 million, resulting in the company's withdrawal from other regions of the country.

Since 2013, SSTL has been in legal battles with the DoT and the Telecom Regulatory Authority of India, over various issues, including allocation of spectrum and its liberalization that would allow its use for 4G services. SSTL opted out of the latest telecom spectrum auction in March, 2015, citing high prices and legal issues with the regulator. 

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