New Delhi : Reliance Communications (RCom) said it will buy Russian conglomerate Sistema’s Indian mobile telephony business in an all-stock deal, valued at around USD 690 million (Rs 4,500 crore).

The deal, which is expected to close in the second quarter of 2016, will lead to a creation of an operator with 118 million subscribers. Sistema Shyam Teleservices Ltd (SSTL) will hold about 10 per cent stake in RCom and pay off its existing debt before closing the deal.

While the two companies did not disclose financial details of the deal, industry sources said SSTL’s equity stake has been valued at USD 290-300 million at current prices.

RCom’s 10 per cent stake comes at around USD 300 million. This is the first consolidation in a highly competitive telecom sector. While RCom is the country’s fourth largest operator with 110 million subscribers, SSTL is positioned at number nine with close to nine million users.

SSTL offers mobile telephony services under MTS brand across nine telecom circles in the country.

“RCom will acquire approximately 9 million customers and approximately Rs 1,500 crore of annual revenues by virtue of the transaction,” the company said .

The deal will give RCom access to spectrum or airwaves in the 850 Mhz band, which can be used for 4G services that it plans to start by the year-end.

Also, it will be able to extend the validity of its licence by 12 years in eight high revenue generating circles of Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, Kolkata, UP (West) and West Bengal.

While SSTL will pay off its existing $500 million debt, RCom will assume the liability to pay the government installments for SSTL’s spectrum, amounting to Rs 392 crore per annum for the next 10 years.     Russian tycoon Vladimir Evtushenkov-controlled AFK Sistema currently holds 56.68% stake in SSTL while Russian government owns 17.14% interest. Shyam Group has 23.98% stake and the rest is owned by small investors.

The deal will make RCom the largest holder of the 800/850 megahertz band for wireless fourth-generation services and help it not just compete with present players but also consolidate its position ahead of Mukesh Ambani’s foray into sector with 4G services under Reliance Jio brand.

RCom had last month announced partnership with Reliance Industries’ telecoms unit, Jio, to trade and share spectrum.

SSTIL had scaled back operations in 2013 when it had to buy new spectrum after its earlier permits were among those cancelled by the Supreme Court.

Gurdeep Singh President and Chief Executive Officer Consumer Business RCom said: “The combination of our wireless businesses, through the demerger of SSTL wireless business into RCom for stock consideration, will generate significant capex and opex synergies for mutual benefit.”

Raja Lahiri, Partner, Grant Thornton India said M&A in the telecom sector is need of the hour and consolidation would provide larger advantages of scale, finance, spectrum to the combined entity as well as the consumer.  “However, like any merger, post-merger integration remains a critical aspect plus the changing landscape of competition given the 4G plans of the existing operators and Reliance Jio plans in the market,” he said.