Mukesh, Anil Ambani: Back together
Mumbai, April 2: The Ambani brothers have decided to work together once again — almost eight years after they fought publicly and then decided to carve up the empire that their father Dhirubhai built.
On Tuesday, the flagship companies of the once-warring Ambani siblings struck a deal under which Mukesh-owned Reliance Jio Infocomm will fork out Rs 1200 crore for the right to use Anil-run Reliance Communications’ 120,000 km fibre optic network to roll out the country’s first pan-India 4G services later this year.
The deal is the first between them since they scrapped in May 2010 a contentious non-compete agreement between them that matriarch Kokilaben had brokered in June 2005 after marking out exclusive areas of operation for the two brothers.
Under the terms of the deal, Reliance Communications will, in turn, have reciprocal access to the optic fibre infrastructure network that Reliance Jio builds in the future.
But the deal isn’t just confined to a comfortable leasing arrangement of each other’s networks. It also provides for “joint working arrangements” to upgrade their optic fibre networks. But neither side was prepared to discuss the specifics of this arrangement and what it might entail.
Reliance Industries — the country’s largest private sector company in the country — has a 95 per cent stake in Reliance Jio (formerly known as Infotel Broadband).
Infotel Broadband had paid Rs 4,800 crore for broadband wireless access spectrum that the government auctioned in May 2010.
The deal has sparked speculation that the two sides have started to cosy up to each other after burying the hatchet almost three years ago.
It is common for telecom companies to use each other’s network as it saves on the cost of duplicating infrastructure. But the two brothers are the only two players in the telecom sector who haven’t struck a mutually beneficial arrangement of this sort with anyone till date.
Industry now believes there will be a flurry of deals between the two sides in the near future.
Reliance Communications stoked the speculation when it said in its press statement: “This agreement is the first in an intended comprehensive framework of business co-operation between Reliance Jio Infocomm and R-COM for optimal utilisation of the existing and future infrastructure of both companies.”
Is the deal a steal?
It appears that the deal is a steal for Reliance Jio since it will have to fork out just Rs 1,200 crore for the exclusive right to use the network. Sources said the company would have to pay a fee for actual usage of the network and this could inflate costs.
Mukesh Ambani had initially spoken of going in for an “asset light” strategy for its telecom venture at the Reliance AGM in 2011.
“To build this wireless digital distribution platform, we plan to follow an asset light, but partnership-heavy approach,” he had told shareholders in June 2010. The speculation was that the deal would be struck with R-Com back then. But it didn’t happen. Instead, RIL did a quick flip flop and mulled the option of laying out its own network.
One reason that it may have abandoned that plan was because of the heavy cost of rolling out a fresh network.
R-Com officials told analysts at the third quarter earnings call in January this year that the costs of setting up a fibre optic network had ballooned in recent times, especially in networks. They provided some ballpark numbers.
“The right of way costs… have gone up significantly especially in those cities or urban centres where the data really matters. For a fiber cost of Rs 5 to 6 lakh a kilometre, the right of way can be as high as Rs 1 crore a kilometer in main cities. So, you can imagine the execution and the capital expenditure which would be required for any operator to now make those investments,” Arvind Narang, a senior R-Com official, had told analysts at the call.
If these numbers are true, then Reliance Jio appears to have struck a very handy deal.
The buzz is that the next step would be for Reliance Jio to strike a tenancy deal with Reliance Infratel, the Anil Ambani company which owns 55,000 telecom towers across the country. The Anil Ambani group tried to strike a deal for the sale of these assets in August 2010 for $10 billion but it fell through.
It now appears that Reliance Infratel is again discussing a deal with several operators.
At the January earnings call, top R-Com official Gurdeep Singh had said: “Reliance Infratel is in advanced stages of discussion for a large infrastructure deal with three potential operators.”
If the telecom tower deal goes through, Reliance Communications will get the opportunity to pare its outstanding debt of Rs 37,361 crore that has weighed down its profitability.
“The deal is a clear-cut indication that Mukesh Ambani is serious about his telecom plans and that he is set to offer voice and data services in the country,” said an analyst who tracks the sector.
In February, the Telecom Commission permitted companies with BWA spectrum to offer voice services which will allow them to the lower the risks of coming out only with the offer of high speed data services.
Arun Kejriwal, director, KRIS who is also a shareholder of RIL, said today’s agreement was a win-win for both companies. ``It takes time and lots of money to create a nationwide fibre network. And in this business, time is money. For Anil Ambani, he will be able to sweat the assets of his network that are not being utilised fully, thereby earning revenues,” he added.