RCom-Aircel merger ‘complicated’, says proxy advisory

Proxy advisory firm Stakeholder Empowerment Services (SES) is asking shareholders of Reliance Communications to vote against its historic merger with Aircel.

The proposed merger is expected to create India’s third-largest telecom operator, and both companies will be seeking shareholders’ approval in the coming days.

The new merged entity would help both players pare debt by ₹14,000 crore each, which will be transferred to the new entity. At present, RCom’s debt stands at ₹42,000 crore, while Aircel’s is at about ₹18,500 crore.

In a note to investors on Thursday, SES has criticised the terms of the merger saying it is “complicated” and gives insufficient information to shareholders. The new arrangement will help RCom demerge its telecom business and transfer the same to Aircel, after which the company will own 50 per cent stake in Aircel.

As required under law, RCom has obtained a valuation report from an independent valuer and disclosed the same in the notice (to shareholders).

However, SES is of the opinion that valuation report is of little use as it fails to disclose the valuation (monetary value) of the business and only gives the share exchange ratio of 1:1. “Shareholders are at a loss to understand from where suddenly the ratio has been arrived at. SES is of the view that valuation of each company should be provided in the valuation report and brought to the notice of the shareholders,” it added.

Going into further details of the valuations, SES noted that for the purpose of the reorganisation, the valuation reports for both the RCom group and the Aircel Group have been made by the same valuer.

“Aircel’s structuring involves issue of shares and cancellation of shares without disclosing why the same is done. Simultaneously for RCom the valuation report has given a range of 97-105 per cent of value of Aircel. (While) it is admitted that the intention of the merging parties is to hold 50 per cent stake each, the entire scheme is tailored to give 50 per cent equity to each side. Valuation, conversion ratio, and cancellation of shares are so devised that the targeted equity structure is (arrived at). One is forced to ask -- is the final structure of equity the outcome of valuation, or valuation is the outcome of pre-finalised equity structure?”

The report also noted that the proposed scheme gives no details of the assets and liabilities of all the resulting companies and remaining business of RCom.

Responding to the SES report, a spokesperson for RCom said: “The notice and explanatory statement provide all the material information including supplementary accounting statements of all the companies involved in the scheme and the valuation reports. Further, SEBI and stock exchanges have perused the scheme, valuation reports and other relevant documents before granting their approvals... The valuation exercise was carried out by SR Batliboi & Co LLP which is a reputed firm of valuers and they have arrived at the value of both the companies based on the generally accepted valuation methodologies.”

However, Institutional Investor Advisory Services, another advisory firm, has also released its analysis on the merger, and asked RCom investors to vote in favour.