After their much talked about split in 2005, the Ambani brothers have come together to sign a Rs 1,200 crore agreement through which Mukesh Ambani-owned Reliance Jio Infocomm will share Anil Ambani-owned Reliance Communications' (RCom) optic fibre cable (OFC) network.
After their much-talked about split in 2005, the Ambani brothers have come together to sign a Rs 1,200 crore agreement through which Mukesh Ambani-owned Reliance Jio Infocomm (RJI) will share Anil Ambani-owned Reliance Communications' (RCom) optic fibre cable (OFC) network.
According to the agreement, Reliance Jio will utilise multiple fibre pairs across RCom's 120,000 km of inter-city fibre optic network, while RCom will get Rs 1,200 crore as indefeasible right to use (IRU) fees.
Though the deal is widely believed to be the first step towards integrating telecom businesses of the Ambani siblings, who will benefit more from it, is being acertained by brokerages.
In independent analyst SP Tulsian's view, RCom will benefit more from this deal as it will expedite monetisation of its assets. The firm has been looking at offloading stake in both its telecom towers and optic cable network for quite sometime.
RCom is operating in a tough market environment where sustaining market share is a task given its high debt level. The deal is definitely a big positive for the firm, say analysts on an average.
How does RIL benefit from the deal?
Around three years ago, RIL re-entered telecom business after it gave it up to younger brother Anil during the 2005 Reliance empire split. The company's eagerness to launch 4G services is well known, but it never gave a deadline for the same due to lack of infrastructure.
After this deal, Reliance Jio Infocom will use RCom’s optic fibre cable (OFC) network to possibly speeden up launch of its 4G high-speed wireless broadband services which is rumoured to be launched later this year. RCom has around 50,000 towers, of which a large number is linked with a fibre-optic backbone, critical for high-speed data transfer.
A tower sharing deal between both companies seems likely as it would be economical for RJI to rent out towers rather than build towers on its own to launch its pan-India 4G services, states ICICI Direct in a report released post the deal.
What does it mean for Reliance Communications?
The optic fibre deal would fetch RCom an one-time fee of Rs 1200 crore and a recurring rental revenue depending on the tariff and bandwidth usage by RJI.
In addition to this, a tower sharing deal could generate an annual
incremental EBITDA of Rs 700-750 crore with additional tenancy of 0.4 times on its towers.
Also, with the increase in tenancy Reliance Infratel would attract better valuation making it easier for RCom to hive it off and help reduce its mounting debt burden of over Rs 37000 crore, says ICICI Securities.
Meanwhile, the deal also talks about further sharing of infrastructure in future on reciprocal basis between both companies.