The imminent consolidation in the Indian telecom sector is finally taking some shape.  The smaller players have swung into action and announced their merger plans as RJio threat looms large over the industry. The much-talked about Reliance Communications (RCom)-Aircel merger deal is also likely to get consummated soon.

Since last December, both the companies were in advanced discussions to strategize their future plans by creating a merged wireless entity worth close to $6 billion that will have a total debt of about INR 280 billion. This combined entity will become the fourth-largest player in Indian telecom sector, with the amalgamation of wireless businesses of both the entities and remain unlisted for next few years.

The RCom-Aircel entity is likely to acquire 10.5% of revenue market share and command 18% of total subscribers.  As per industry sources, both the companies will posses equal stakes in the new merged entity, implying that RCom will be carving out its wireless mobile business and transferring it to this new entity. And in fact, it will not be a surprise if we may witness this unlisted wireless entity getting acquired by RJio in next few years.

RCom will retain its tower and optic fiber assets, which could be further monetized for further equity infusion in order to keep the net debt/EBITDA ratio low for this new entity.

However, the RCom-Aircel unit is likely to have multi-fold challenges beyond this merger.

Cost Saving Synergies – Leveraging upon the cost savings will take time as integration is likely to be a time-consuming exercise. Given the past history, RCom has been losing revenue market share and execution has been a key challenge for it.

Subscribers Churn – We do foresee churn-out in its current subscriber base. If this new entity with a new brand can keep the subscribers base intact, it could further enhance the profitability, but it’s always easier said than done; any such transition will surely have subscribers churning and more so as the competitors will make an attempt to basket those churn into their fold. RCom had 101 million subscribers and Aircel had 86 million subscribers as of 2015.

Leverage on Data Growth – Even riding on the data growth is likely to be limited as it will have to share a portion of data ARPUs with RJio for using its 4G networks.

Management & Leadership – The new entity will have equal say in the management control from RCom and Aircel who will lead the new entity.  Both the sides should be in consensus to find a leader to lead this entity.

New Brand Identity – This entity will have an uphill task to establish a new brand, which may increase the sales and marketing cost even higher.

It will be interesting to see how they overcome these challenges and emerge as the growing fourth-largest telecom service provider or get merge into RJio in the days to come.