Market Insight

Financial stresses show as Ericsson files insolvency proceedings against Reliance Communications

September 18, 2017

Seth Wallis-Jones Seth Wallis-Jones Principal Analyst, Telecommunications
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Ericsson has filed to recover INR 4.9 billion ($77 million) from Reliance Communications, INR 5.3 billion from subsidiary Reliance Infratel  and INR 1.3 billion from Reliance Telecom Ltd.

  • Reliance Communications reported revenues fell by 33% y/y in the quarter ending 30 June 2017 with a profit of INR540 million a year earlier turning into a net loss of INR12.2 billion, while EBITDA shrank 65.2% to INR5.43 billion.
  • The National Company Law Tribunal has adjourned until 26 September with Reliance stating that it will challenge the petitions
  • As across the market, Reliance Communcations has been forced to cut tariffs to compete with new entrant Reliance Jio - which is led by Mukesh Ambani, the brother of Reliance Communications CEO Anil Ambani 
  • The Government is considering some form of financial relief for the debt-laden telecoms sector which has accrued signifcant debt acquiring spectrum and deploying networks in a low ARPU market

Our Analysis

Reliance has already struck an agreement with creditor banks for an interest holiday until December while it restructures debt and processes merger transactions. Reliance Communications is also in the process of merging with SSTl and Aircel. The deal with Aircel will add almost 90 million subscriptions and reduce debt by INR140 billion ($2.2 billion), while also reducing spectrum liabilities by INR60 billion. The merger with SSTL will enhance RCOM’s spectrum position and bring an additional 3.9 million subscriptions to RCOM – based on July 2017 subscription numbers, though they are losing some 200,000 a month in the face of uncertainty and competition from Jio.

The SSTL deal was expected to complete in August, and has received all necessary approvals from the shareholders, the markets regulator SEBI and the Competition Commission of India (CCI). However it has not yet been finalised and is now expected to do so in the fourth quarter. That expected schedule could also be hit by a suspension of merger activity until completion of the next, largely unwanted, spectrum auction by the TRAI. The timing of that auction has not however yet been set as telco’s and some ministers on the inter-ministerial panel for telecoms push for it to be delayed.

Signifier of stresses across the market 

The Telecoms Commission has suggested that the inter-ministerial panel for telecoms examine additional ways to provide some financial relief to the stressed sector, with suggestions already under consideration including an extension of spectrum license fee payment schedules and lower interest on unpaid fees perceived as lacking immediacy. Telco’s have lobbied for lower spectrum usage charges and a moratorium on license fee payments of up to five years.

Weighed down by high spectrum and usage costs

The 2017 auction is still in the consultation phase, but a reading of the consultation document indicates it looks set to replicate issues apparent in last year’s auction which failed to generate interest, particularly in highly priced low band spectrum. That was partly due to what is effectively a price escalator mechanism used by the TRAI to set reserve prices, which in combination with an earlier scarcity of spectrum has led to high prices – and the high debt loads carried by the industry. As a result the 2016 auction failed to sell some 60% of the available spectrum. Revenue and profitably pressure has grown significantly since that auction as new entrant Reliance Jio has rapidly built market share on the back of low cost tariffs and other operators were forced to compete by cutting tariff costs. In the current industry context it can be expected that a 2017 auction would again fail to sell much of the available spectrum.

Infrastructure asset disposal 

In addition to merging operations with competitors, Reliance Communications is in the process of improving its financial position through the sale of the Infratel unit. As operators have faced increased financial pressure the industry has taken advantage of looser regulations on network sharing to sell off infrastructure and cut costs. The infrastructure subsidiary is 96% owned by Reliance, which is set to sell 51% to Brookfield Group for INR110 billion ($1.7 billion). Together with the Aircel transaction RCOM’s total debt is expected to be cut by 60%. It is unusual for such a move as taken by Ericsson last week to take place while a debt restructuring deal is underway, but it is likely to be used as leverage for Ericsson to gain precedence in the repayment of the unsecured debts held by the group. That may however indicate a lack of confidence in the ability of RCOM to remain solvent in the longer term as it manages the consolidations under way in the new competitive landscape, which will also see Vodafone and Idea merging their operations.

Sale as a whole fails for Tata

Tata Teleservices is also reported to be considering the viability of continuing commercial retail operations after DoCoMo pulled out of the investment and it has failed to find a buyer for the business. Tata Teleservices operates both GSM and CDMA mobile networks, but with only 15% of GSM sites upgraded to 3G it has failed to invest in high speed mobile networks as data use has grown rapidly in popularity. In the year to the end of March 2017 Tata Teleservices saw revenues fall by 7.9% y/y to INR27.8 billion while losses for the quarter grew from INR3.6 billion to INR23.6 billion as financing costs bloomed. While that was mitigated by the sale of a 20% stake in ATC Telecom Infrastructure, in such a competitive environment where Tata has already lagged and lost subscribers for years even before the entry of Jio. Despite servicing over 40 million subscriptions, a withdrawal from the increasingly loss making provision of retail mobile services and the sale of assets may prove their best option to minimise losses after merger / sale talks appear to have come to nothing. 

Asia India
Research by Market
Mobile & Telecom
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