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Reliance Communications (RCOM) is in discussions to merge with MTS, Sistema’s Indian telecom business through a stock swap, RCOM has said, in a BSE filing:

Reliance Communications Ltd has informed BSE that Reliance Communications (RCOM) and AFK Sistema have entered into exclusive discussions on a potential merger between the Indian telecom business of Sistema Shyam TeleServices Ltd. (SSTL) and RCOM through a stock swap. The discussions are indicative and non-binding in nature, and remain subject to due diligence, definitive documentation and approvals, as may be necessary. There is no certainty that any transaction will result.

This isn’t the first time there has been talk around MTS merging with another company. Towards the end of 2013, there was talk of Aircel, Tata Teleservices and MTS merging.

Common ground in Mobile broadband

There is a potential strategic alignment between the two companies: both focus on mobile broadband. RCOM has been pitching itself as a company that focuses on Internet connectivity, which plays well with SSTL/MTS, which has done the same for a few years.

RCOM reported 33.7 million mobile Internet connections for the quarter ended March 31, 2015 (Q4-FY15). What’s particularly interesting is that RCOM’s 3G connection base has surpassed its 2G mobile Internet connection base, and this is probably the only telecom operator for which this has happened. RCOM reported a total 3G connection base of 17.4 million, higher than its 2G base of 16.3 million.

MTS India had 1.8 million mobile data card subscribers for the quarter ended March 31, 2015. It has data services in 850 towns across 9 circles, whereas RCOM offers services across India.

Sistema had sought to buy out its Indian partner last year

It’s not clear whether Sistema has bought out Shyam Telecom’s stake in SSTL. In May last year, Sistema had sought for an approval from the Foreign Investment Promotion Board (FIPB) to increase its 73.71% stake in SSTL to 100% by buying out its Indian partner Shyam Telecom’s stake. This move was expected after India allowed 100% Foreign Direct Investment (FDI) in telecom.

In the last spectrum auctions, RCOM:

– won 900 MHz spectrum in Himachal Pradesh and Madhya Pradesh, a total of 10MHz for Rs 1834.75 crore, paying Rs 1547.5 crore for 5 MHz in Madhya Pradesh
– Won 23.37 MHz of spectrum in the 800 MHz band for Rs 1991.62 crore, in Assam, Gujarat, Haryana, Himachal Pradesh, Kolkata, North East, Odisha, Punjab, UP (West) and West Bengal. It was the only telco to win 800 MHz spectrum in Gujarat, Kolkata, Punjab, UP (West) and West Bengal circles. Its most expensive spectrum: in Gujarat at Rs 694 crore
– Won 11.80 MHz of spectrum in the 1800 MHz band for Rs 402.06 crore, in five circles: Haryana, Karnataka, North East, Odisha and Punjab. Its most expensive spectrum: Odisha at Rs 165.50 crore

14.7% of RCOM’s total connections were on 3G, and around 52% of RCOM’s total data customers were on 3G. The company’s revenue per minute for the quarter increased to Rs 0.444 from Rs 0.432 in the previous quarter.

For MTS, Mobile subscriber base was on a declining trend quarter-on-quarter and reached 8.9 million customers. The mobile subscriber base stood at 9 million in the preceding quarter and was at 9.2 million subscribers in the third quarter. Consolidated revenues increased by 12% Y-o-Y to Rs 357.8 crore, mainly on account of data revenue growth, the company said in its statement. Earlier this year, MTS was looking to pivot its focus from being primarily a dongle driven data company to a WiFi solutions provider with its launch of its Homespot Instant WiFi solution.