Etisalat could buy 25 per cent stake in Reliance Communications

The UAE’s Etisalat is in talks with Reliance Communications (RCom) over the potential purchase of a 25 per cent stake in the Indian firm and has already appointed investment bankers to advise on the proposed deal, according to reports. This would give RCom a much welcomed cash injection which it needs to finance its 3G aspirations, while giving Etisalat access to India’s second largest player with a subscriber base of more than 100 million.

RCom won 3G licences for 13 circles in the recently-completed nationwide 3G spectrum auction and will need to dish out INR 85 billion to cover the licence fees. The operator has said it plans to acquire loans from banks to pay for the licence fees, however it will also need additional finances in order offer value added services to its subscribers.

"A high debt level is not the best of situations for the company in current times when the liquidity is likely to become scarce and the interest rates are also likely to go up in the next six to nine months. This will impact the profitability of the company and also its margins,” commented Siddharth Maheshwari, Datamonitor’s R&A director of company and market intelligence.

"Bringing in Etisalat as a strategic financial investor makes a lot of economic sense for Reliance Communications Limited. If Etisalat buys the reported 25 per cent stake in the company for around INR 18,000 crores (INR 180 billion) it would immediately reduce the debt-equity level of the company to a very attractive level and will give the company the much needed financial capital to rapidly launch the 3G and other value added services," Maheshwari added.

Etisalat already has an investment in India through a joint venture with the Dynamix Balwas Group, where the UAE operator has a 45 per cent shareholding in Etisalat DB. However, it has not made much progress to date with rolling out of services. If Etisalat DB were to be part of a larger established Indian telecoms provider, it would make much more business sense.

“However, according to existing regulations the company will not be able to hold more than 10 per cent in more than two entities at the same time. Untangling this complex partnership will require some time and deft manoeuvring. The strategic financial deal, if it fructifies, will be a positive for both the companies and both of them will gain from the partnership in the long term,” commented a statement from Datamonitor.