RCom-Infocomm deal a marriage of convenience

Shiv Putcha/Ovum
10 Apr 2013
00:00

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nfrastructure sharing agreement

Reliance Jio Infocomm (RJI), which is controlled by Mukesh Ambani, will pay an upfront fee of $220 million (12 billion rupees) for access to the optic fiber cable (OFC) network of Anil Ambani’s Reliance Communications (RCom).

The announced deal also includes reciprocal rights for RCom to gain access to any optic fiber network that RJI builds in the future. While this can be viewed as some form of family rapprochement, Ovum believes it is more of a pragmatic business decision to take advantage of mutually complementary assets at the best price.

The long-rumored deal is a marriage of convenience and mutual interest

The RJI-RCom announcement makes public what was probably the worst-kept secret in the Indian telecom sector. When the original Reliance Industries empire was split between the two Ambani brothers in 2005, they signed a five-year mutual non-compete agreement. This non-compete agreement expired in 2010, which opened up opportunities for the brothers to compete or co-operate in sectors of mutual interest. Since Mukesh Ambani’s Reliance Industries Limited (RIL) won nationwide 4G spectrum in the 2010 auctions, there has been much speculation about which course of action the brothers would take.

Some will interpret the recent announcement between the two brothers as a family reconciliation that paves the way for an eventual merger, but Ovum believes that this deal falls short of that. We see this as a mutual decision to take advantage of complementary assets at the best price. RCom is not the only major telecom player in India to own an OFC network: Bharti Airtel, Tata Communications, and even public sector giant BSNL all have OFC networks of significant scale and geographic reach.

However, a deal with Airtel was untenable given that RJI and Airtel are competitors in the 4G landscape, while the Reliance and Tata business groups have no history of co-operation in any business sector. Working with BSNL, meanwhile, would come with too many complications, including the threat of political interference.

In the end, a deal with RCom was always likely because it made the most sense for both parties, especially given RCom’s inability to find strategic investors in its highly leveraged operations.

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