Reliance Communications - Aircell takeover now ?

India’s second-largest wireless telecom firm, Reliance Communications Ltd, is in talks with Maxis Communications Berhad Ltd to potentially take a controlling stake in Aircel Cellular Ltd, the Indian unit of the Malaysian cellular operator, according to executives at the two companies and an independent consultant.

Aircel could be worth about $7 billion, or Rs29,000 crore, in a deal scenario, say analysts. Maxis, Malaysia’s biggest cellular phone firm, owns 74% of Aircel with the remaining 26% held by promoters of Hyderabad’s Apollo Hospitals Ltd.

Anil Ambani, who chairs Reliance Communications’ board of directors and also leads its affiliate, Reliance Telecom Ltd, which runs GSM-based cellular networks, has been trying to secure new licences for starting and expanding GSM cellular services across the country for over a year, but Aircel beat him to it by receiving approvals for the new countrywide licences in December. With new licences and wireless spectrum allocated to it in eight circles, or licensed areas (mostly states), and frequency allocations expected in another 13, Aircel is seen by analysts as among the most valuable telecom assets in India. (GSM stands for global system for mobile systems.)

Executives at both Reliance and Aircel refused details, saying in private that the two companies have been exploring options, such as a buyout or a joint venture. A Reliance official said it is too early to talk of specifics such as valuation ahead of regulatory issues at play. Sandip Das, chief executive of Maxis, referred queries from Mint to a company spokesperson who did not immediately revert with answers. Calls to Sangeeta Reddy, an Apollo Hospitals director, for comment were not returned.

A consultant with extensive experience in arranging mergers and acquisitions in India said Ambani was aiming at management control at Aircel. “The buzz has been that Anil Ambani is looking at a controlling stake,” said a partner at a New Delhi-headquartered consulting firm, preferring that he not be identified. “But whether that will be through a direct stake or a deferred stake, such as a call option, will depend on the changes to the crossholding regulations being put in place by the telecom regulator.”

Under telecom M&A regulations, no phone firm in India can hold more than 10% of a competitor in the same licensed area, preventing Reliance from acquiring a GSM operator to expand in the fast-growing market. Despite aggressive marketing tactics, including handset subsidies, Reliance, which runs services on CDMA networks, has found its wireless customer growth lag at around 1.2 million a month against nearly 2.1 million at its bigger GSM rival Bharti Airtel Ltd. Smaller competitor Vodafone Essar Ltd adds some 1.7 million customers despite being present in just 16 of the 22 licensed areas. (CDMA stands for code division multiple access, a cellular telecom standard.) The Telecom Regulatory Authority of India (Trai) is widely expected to recommend the scrapping or relaxation of the 10% cap this week in a review of the M&A rule.

Trai will also rule on whether or not firms can offer both CDMA and GSM based services under the same operating licence. Despite such a relaxation, Reliance is unlikely to be allocated GSM spectrum as Cellular Operators Association of India, a trade body representing GSM networks, has threatened to go to court if its members are not given the first claim over any spectrum made available in the future.

Analysts saw synergies in a Reliance-Aircel union. “There are many reasons why RCom and Aircel are a good fit,” said a Mumbai-based telecom stock analyst, requesting anonymity as the news of the talks isn’t official. “RCom needs the GSM licence and the spectrum that comes with it, and for Maxis, it is a matter finding the right partner to roll out and compete in an extremely competitive market.”

Though Aircel has licences in all 22 licensed areas in India, it has substantial operations in just one: the Tamil Nadu-Chennai circle, which accounts for nearly five of its 7.1 million customers. Analysts pointed out that without a partner, Aircel will have to build its own network infrastructure, or go for a passive infrastructure partner. Aircel will also have to invest in marketing its brand in the other circles as well as build a new management team.

Aircel’s valuation could command a significant premium compared to recent deals. If valued at the $950 per-user rate as February’s Vodafone Group Plc-Hutchison Telecommunications International Ltd’s deal for a two-thirds stake in Indian cellular operator Hutchison Essar Ltd (before it was renamed Vodafone Essar), Aircel’s value will be $7 billion.

But an expert said valuing a company which has realized only a fraction of its “market potential” in the form of subscribers typically involves two stages. “The first aspect is the circles where the company has been operational for some time and has got a decent marketshare. Here you can apply the traditional per-subscriber or multiple-of-revenues valuation,” said Alok Shende, head of the tech practice at consulting firm Frost & Sullivan in Mumbai. The second stage would take into account the target company’s licences in other areas where it is yet to start operations. “Here, we have to go for a five-years-from-now kind of a model where we expect it to have so much revenues or so many subscribers in five years and work backwards,” Shende said, adding that smaller companies are valued at a discount to ones with operations of larger scale and scope such as Hutchison Essar.