Etisalat will further strengthen its business alliance with the Reliance Communications and expand its strategic relationship while Reliance Communications Limited will receive the much needed additional capital to rapidly expand its 3G service offerings.
The Emirates Telecommunications Corporations (Etisalat) and Reliance Communications Limited (RCom) deal, assuming that it materialises, would be a much needed financial booster for Reliance Communications Limited. The deal will also ensure that Etisalat gains faster entry into India and participate in its economic growth.
Reliance Communications is one of the top telecom companies that won the bid for 13 circles for the third generation (3G) mobile spectrum licences. The final license fee for the 3G spectrum is likely to set Reliance Communications back by over INR 8,500 crores. Reliance plans to borrow the money from various banks to pay the license fees. Further, the company will need additional financial resources as it starts offering the value added services to its customers. This will result in the company's debt levels going up further from the existing levels of approximately INR 20,000 crores.
Commenting on the potential deal, Siddharth Maheshwari, R&A Director, Company and Market Intelligence, Datamonitor India opines - "A high debt level is not the best of situations for the company in current times when the liquidity is likely to become scarce and the interest rates are also likely to go up in the next 6-9 months. This will impact the profitability of the company and also its margins.
Bringing in Etisalat as a strategic financial investor makes a lot of economic sense for Reliance Communications Limited. If Etisalat buys the reported 25% stake in the company for around INR 18,000 crores it would immediately reduce the Debt-Equity level of the company to a very attractive level and will give the company the much needed financial capital to rapidly launch the 3G and other value added services.
The strategic financial investment by Etisalat is a win-win for both the parties involved and is a better option than looking at a merger with other telecom companies such as MTN. A potential merger with MTN is fraught with regulatory uncertainties and geographic risks. Further, the dilution in the promoter's capital is minimal and the existing promoters will continue to govern the company with less interference from other shareholders."
Reliance Communications will also gain from Etisalat's current knowledge and service delivery capabilities and expertise in the 3G space. With operations across in Asia, Middle East and Africa Etisalat has built state-of-the-art telecom infrastructure and has a leadership position in terms of innovation and reliability amongst various regional and international operators. Etisalat currently offers fixed line services over the Next Generation Network and also enables mobile users with a range of services and applications such as GPRS, 3G, 3.5G, 3.75G, BlackBerry, iPhone, MobileCam and others.
In UAE, Saudi Arabia and other markets, Etisalat GSM coverage has reached 100% and 3G coverage reached 99% of populated areas. Offerings include 'triple play' service that includes high speed internet, TV and fixed lines through fiber optic. In addition to voice and data networks Etisalat also offers E-Vision cable TV networks. Etisalat has also completed the nationwide upgrade of its 3G mobile network to enable mobile broadband download speeds of up to 14.4 Megabits per second (Mbps) across the UAE and other benefits. Globally, Etisalat has roaming agreements with over 500 operators. The customers of Reliance Communications will likely benefit from Etisalat's global reach and service excellence.
For Etisalat, the strategic financial investment will mean that it immediately becomes a large shareholder in one of India's large telecom companies with a subscriber base of over 100 million. The launch of 3G services is likely to further increase the revenues of the leading telecom companies in India as customers look forward to an integrated media service offerings for their entertainment and communication needs. Reliance has strong capabilities in this area and participating in the India growth story will be a good strategic move for Etisalat and a strong strategic partner in Reliance Communications Limited will help the company.
However, Etisalat has an existing joint venture with the Dynamix Balwas Group with 45% shareholding in the joint venture company Etisalat DB. Unfortunately, there is very little progress in terms of rolling out of the services when compared with Uninor or Videocon Mobile Services. Therefore, a strategic financial partnership with Reliance Communications makes more business sense as it will mean that the company is a part of an established telecom services provider. However, according to existing regulations the company will not be able to hold more than 10% in more than two entities at the same time. Untangling this complex partnership will require some time and deft maneuvering.
The strategic financial deal, if it fructifies, will be a positive for both the companies and both of them will gain from the partnership in the long term. Although the current telecom scenario looks bleak and hazy, over time the growing Indian middle class population and the potential services from 3G and the next generation services will result in significant growth opportunities.
-Ends-
ABOUT DATAMONITOR
The Datamonitor group (www.datamonitor.com) is a world-leading provider of premium global business information, delivering independent data, analysis and opinion across the Automotive, Consumer Markets, Energy & Utilities, Financial Services, Logistics & Express, Pharmaceutical & Healthcare, Retail, Sourcing, Technology and Telecoms industries. Combining our industry knowledge and experience, we assist more than 6,000 of the world's leading companies in making better strategic and operational decisions.
This press release is based on strategic insights by Datamonitor's Company and Market Intelligence Team. Datamonitor's R&A Director, Company and Market Intelligence, Siddharth Maheshwari is available for comment.
More information is available at the Datamonitor press office. Please contact Aartee Sundheep on + 91 40 6672 9586 or email asundheep@datamonitor.com
© Press Release 2010
