Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis
“...RCom said that the proceeds from securitisation have been utilised to repay high cost rupee debt, resulting in significant interest cost savings for the company. The securitisation has been completed with Indian and foreign banks. Deliveries of intercity fibre links to Reliance Jio have already commenced. The total deliveries of 1.2 lakh kms intercity fibre under the Agreement are expected to be completed within the current financial year”
- Press Release, RCom
“...Reliance Jio Infocomm Ltd. and Reliance Communications Ltd. today announced the signing of a definitive agreement for sharing of RCOM’s nationwide telecom towers infrastructure. The agreement provides for joint working arrangements to configure the scope of additional towers to be built at new locations to ensure deep penetration and seamless delivery of next generation services. Reliance Jio Infocomm Ltd. and Reliance Communications Ltd. to derive major benefits from sharing of capital and operating cost.”
– Press Release, Reliance Industries Limited.
In April 2013, Reliance Communication Ltd (RCom) completed its 1,200 crore Inter-city Fibre Agreement with Mukesh Ambani-led Reliance Jio Infocomm Ltd (RJio). Under the agreement, RCom had to deliver 120,000 kilometres intercity fibre links to RJio. The deal involved Indian and foreign banks acting as SPV for the securitization process.
Securitization is a procedure through which an organization/company merges its different financial assets/debts to form a consolidated financial instrument which is later issued to investors. The investors get benefit in the form of interest in return. Securitization is thus transformation of an illiquid asset into a security. There are various steps in the securitization process. The process starts with lender such as homeowner or corporation initiating loan. Then securitization structure is added. A Special Purpose Vehicle (SPV) comes into picture once the firm allocates certain assets like consumer receivables. This structure is legally protected from management. Also credit rating agencies review the securities that are to be floated for investors. The SPV issues debt, divides the benefits as well as the risks among investors (Exhibit I)....................
Indian Telecom Scenario
India is the country with endless possibilities and similar is the case with telecommunications industry. It started to flourish post globalization reforms and now is the second-largest telecom market in the world. During the last two decades, India had a roller-coaster ride; the mobile telephony in particular has revolutionized the way we communicate, share information and through its incredible and unbelievable growth helped millions stay connected. Telecommunication services have been the driving force for overall economic development of country. They are also the prime support services needed for rapid growth and modernization of various sectors of economy..........
Spectrum Auction and Impact on Telecom Operators
The 3G AND BWA auction was held in 2010. The auction generated a series of ripples on various stakeholders of the mobile and wireless market. 3G auction was completed in the month of May and after 183 rounds of bidding clocking in INR67,719 crore of revenues for the Government. The high amount burned deep holes in operator’s pockets and they accumulated a heavy debt to support addition of new spectrum............
Securitization as a Financial Strategy in the International Market
The financial strategy aims at maximising profit and shareholder’s wealth. These objectives are met with three financial decisions i.e., investment, financing and dividend decisions. According to Mr. Narayan Murthy, “Strategy is about ensuring sustained differentiation in a changing environment for better net margins.”..............
Reliance Communication Ltd. Overview
Reliance Communications Ltd, founded in December 2002 by Mr. Dhirubhai Ambani is the country’s first telecom operator to provide Code-Division Multiple Access (CDMA) and Global System for Mobiles (GSM) services for mobiles with digital voice clarity.13 RCom is one of leading companies of Reliance Group which is listed on National Stock Exchange (NSE) as well as Bombay Stock Exchange (BSE)...............
Insights into Reliance Communications
RCom had large asset base both in core and non-core sector, this has also been reason for increase in debt for RCom. RCom asset include large chunk of real estate which also includes 135 acres land in Navi Mumbai, RCom owns 96% stake in Reliance Infratel which has about 43,000 mobile towers...........
The Environmental Scenario (RCom perspective)
RCom launched GSM in 2008, paid INR8,585 crore (Exhibit IV) for winning 13 circles out of 22 circles in India becoming the only existing operator with such high coverage.24 But these 3G spectrum auction added financial debt on the company............
Reliance Jio Infocomm Ltd. (Infotel Broadband Services Limited) Overview
RJio is a result of Mr. Mukesh Ambani’s vision to make broadband and digital services affordable to common man. The vision was to connect masses through a high-speed wireless backhaul, deliver exceptional consumer experience and enhance productivity. The first step to meet the objective was taken by acquiring 95% stake in Infotel Broadband..........
Insights into Reliance Jio Infocomm Limited
RJio had aggressive plans and deep pockets to spend on network and infrastructure. RIL invested around INR4,800 crore to buy Mahendra Nahata promoted Infotel and had plans of investing INR15,000 crore for its expansion.28 RJio strategy was to position itself amongst top players and thus was building up world’s largest next generation IP Multimedia Subsystem and had entered into deal of $100 million with Nokia networks. It also holds spectrum in 2300MHz band in all 22 circles and another 1800 MHz in 14 circles. Some INR10,000 crore investment was done in order to buy airwaves in 800MHz band..............
The Environmental Scenario (RJio perspective)
The Government of India started auctioning the spectrum to regulate the airwaves and earn revenue from the resources. The first 3G/4G auction took place in 2010 where Government collected revenue of INR38,543.58 crore.32 Infotel Broadband emerged as Pan-India winner and bagged spectrum in all 22 circles. The auction put in a lot of strain on companies looking for spectrum and increased their debts..............
Impact of the Securitization from Strategic and financial perspective:
Strategic impact:
RJio after acquiring Infotel broadband was looking to roll out services as soon as possible with minimal investment in infrastructure. The securitization process helped RJio to use the fiber optic network laid by RCom. It reduced the go-to-market time for RJio and gave them an opportunity to leverage first mover advantage...............
Financial Impact:
As the deal was announced in July 2013, its effect can be seen during the second quarter. PAT for second quarter of FY14 was INR675 crore as compared to INR102 crore of previous year’s second quarter................
Conclusion
RCom and RJio successfully completed and delivered the INR1,200 crore securitization deal for 120,000 km inter-city fiber agreement in July 2013. It was one of its kind securitization deals in Indian telecom sector. Subsequently, both the parties were also engaged in securitization deal for RCom’s tower business.........
Exhibits
Exhibit I: Securitization process
Exhibit II: Telephone Subscription in India
Exhibit III: Telecommunication and GDP relationship
Exhibit IV: Results of India’s 3G Spectrum Auction
Exhibit V: 3G Mobile Net Plans
Exhibit VI: Spectrum Share
Exhibit VII: Timelines and Observations of Rcom and RJio Pact
