Reliance Jio Infocomm's acquisition of Reliance Communications' assets, including spectrum, optical fiber network, and media convergence nodes, is set to help the Mukesh Ambani-led 4G entrant for a large scale roll-out of its wireless and fiber-to-the-home (FTTH) and enterprise services, Moody's said in a statement.
As part of the transaction, Jio will acquire 122.4 MHz of 4G spectrum, 43,000 towers, 178,000 route kilometer of pan India optical fiber network and 248 media convergence nodes. "RIL considers these assets strategic in nature," Moody's said.
Moody's said that the acquisition also removes the overhang of RIL's ability to access the telecom infrastructure assets of RCOM following the latter's debt restructuring. It also ensures that RCom's 4G spectrum does not fall into hands of RIL's competitors.
Anil Ambani-led RCom is currently undergoing a strategic debt restructuring, is selling these assets to reduce its borrowings and spectrum liability by Rs 250 billion and the transactions will complete in a phased manner between January and March 2018.
"We expect RIL will pay less than Rs 250 billion for the assets it will acquire as it is not buying the real estate, which was part of the Rs 250 billion debt reduction plan of RCom. Even if we assume that the entire RCom's debt reduction of Rs250 billion is derived from the sale of assets to RIL, it will only account for 0.4x of RIL's reported EBITDA for the last twelve months ended September 2017 and 11.6% of RIL's consolidated borrowings as of September 2017. RIL also had cash and cash equivalents of Rs 770 billion on the same day, which can be used to fund the acquisition," said Vikas Halan, a Moody's Vice President and Senior Credit Officer.
The acquisition is the latest instalment in the ongoing consolidation in Indian telecom sector, which is evidently moving from having over 10 active telecom service providers to just about three or four players having the entire market.
"However, the increase in RIL's leverage upfront will likely be partially offset by a reduction in planned capex for its telecom business," added Halan, who is also the lead analyst for RIL at Moody's.
As such, despite a possible increase in RIL's consolidated leverage the acquisition can be accommodated within RIL's rating. However, the acquisition could reduce the cushion under RIL's rating for further increase in its borrowings, especially if the company does not reduce its planned capital expenditure for its telecom business, Moody's said.