THE AMBANI TELECOM DEAL - "WE ARE FAMILY!"
By Ruma Dubey
Indians are sticklers for happy endings and when it happens in real life, that too in one of the richest and most motivating family, the Ambani’s, surely there was reason to rejoice.
The warring brothers were like a slap on India’s, “Hum saath-saath hai” kind of image and now with things seeming to work out between Anil and Mukesh, there is a feeling that they together can conquer the world. And this is not a misplaced notion, it could really work out so as together they own some of the largest companies and projects, not just in India but in Asia.
The Rs.1200 crore deal between Mukesh Ambani’s Reliance Jio and Anil Ambani’s Reliance Communication did not happen overnight. Talks between the two brothers on the same had begun in early January at Antilla, where Mukesh has given a party for the marriage of niece, Nayantara, daughter of his sister, Nina Kothari. And since then, the two brothers have been meeting every two-three weeks and their respective “right hand’s” have been meeting and talking consistently to chalk out the nuances of this deal.
It always made business sense for the brothers to collaborate. There was hope that maybe Reliance Infotel will tie-up with Anil Ambani owned Reliance Communication’s tower subsidiary, Reliance Infratel for use of its towers. But these hopes were dashed when in April 2012, Mukesh announced his decision to set up over 1,00,000 towers for its 4G operations in the next three years.
But surely better sense would have prevailed and this new collaboration is straight out of the business books. For Mukesh-backed Reliance Jio, this tie-up means he will now have to spend less on launching his 4G services across India. Based on the deal struck at Rs.1200 crore, Reliance Jio gets instant access to optical fibre network at a cost of Rs.1 lakh/kilometer. This will speed up the launch on 4G services, which is expected to roll out by this year end.
For Rcom, this is a much needed reprieve. It is sitting on a huge debt of Rs 35600 crore and there has been a 88.5% drop in cash at Rs.550 crore. For over two years, its tower unit, Reliance Infratel, despite getting SEBI’s nod has not been able to raise money from its IPO. It had planned to raise around $3 billion. And in July’12, it shelved its $1 billion Singapore IPO of its undersea cable unit. Its attempt to sell stake in the tower unit continues and it was looking at options of raising around Rs.15,000 crore by diluting 25% stake in its four listed companies – Rcom, Reliance Power, Reliance Infra and Reliance Capital.
And this deal with elder brother comes at the perfect time as this not only means assured income from Reliance Jio but it also elevates its chances of selling its stake at better valuations. Relaince Jio is also said to be negotiating for access to RCom’s 46,000 towers and if that happens, major issues at Rcom will be resolved.
Mukesh Ambani has always done everything king style, huge, larger than life. So this 4G roll out is not small boat ride. It has identified 700 cities which includes 100 high-priority markets. He also aims to make Reliance a TV provider by building a superfast fiber-optic network stretching into homes in urban areas and it has already started laying down underground fiber-optic cables in parts of India that will connect cell towers to the core network.
This has sent jitters down the spine of existing telecom players – Bharti Airtel, Idea Cellular and Vodafone as this means intense competition. That also explains why the two listed telecom stocks – Bharti Airtel and Idea were amongst the top losers on the BSE today. The entry of Mukesh, with Anil is expected to shake up the entire dynamics of the telecom sector and the people of India are indeed in for some exciting times.
Undoubtedly, there are hurdles, especially on the cost front, which is expected to shoot up to $10 billion. Also the technology which it plans to use, known as "TD-LTE" is not standardized in USA and Japan. This means, global smart phone makers, who would want a bite of this big pie would have to develop devices specifically on this platform. Moreover, 3G itself is still in its nascent stages in India and this jump to 4G and its adaptation might take some time. Reliance is expected to roll out its 4G in the second half of 2012 and is slated to be the largest outside USA and Japan. India is expected to have around 37 million 4G subscribers over the next four years. 4G could help connect entire India as internet can enter every house in all parts of India through a mobile device, through broad band services. Currently only Bharti provides 4G but it is restricted to only data, no voice telephony is allowed.
India is expected to have more 4G wireless subscribers in four years—37 million—than Brazil, Russia or Indonesia, according to consulting firm Ovum. China is on the 4G path, too, and it is expected to have a much larger user base than India eventually, but it has yet to commence any commercial 4G rollouts.
The heat is on. Mukesh Ambani will have to roll out 4G and ensure his network reaches 50% of rural India by 2015 – that was the rule laid out when the spectrum license was acquired. Moreover, RIL has taken a beating on the bourses over the past few quarters and the pressure is immense on the elder Ambani to deliver this hugely ambitious project soon to reinstate his supremacy on the bourses.
Earlier, if the battle was fought just between two brothers, it will now include the reigning Indian telecom king- Bharti Mittal. But the winners will be the people of India, who can be assured of cheaper and faster services.