Big telcos are big gainers from spectrum auction
As debt levels rise, four big telcos could increase their presence, while smaller telcos look for an exit
The 19-day 115-round spectrum auction which concluded March 24 last could redefine India's telco competitive landscape. Three leading telcos, plus the cash-rich newcomer Reliance Jio, accounted for nearly 85 per cent of the winning bids. Talking to Financial Times, Dunigan O'Keeffe, a partner with Bain in Mumbai, says: "Most markets globally have consolidated down to three or four players. The intrinsic driver of this is that it's a scale business".
India's most expensive auction may prompt more formal consolidation, especially if nagging regulatory concerns around spectrum transfers between companies can be cleared up. However, whether India's long-awaited round of mergers happens or not, O'Keeffe argues, the auctions have only served to confirm that the future of Indian telecoms already seems to be a four-horse race.
Not counting India's two "problem child" public sector units, that could well be the case.
The auction was fiercely contested, as continued existence in several circles was involved for some of the telcos. Permits of four companies were expiring in 2015-16. The auction raised a record Rs.1099 billion or nearly $18bn for the Government. The largest outlay came from Idea Cellular, India's third-ranked telco by revenue and owned by the Aditya Birla Group.
The company spent around Rs. 303 billion, followed by Bharti Airtel (Rs. 291 billion) and Vodafone (Rs. 260 billion). Bharti Airtel and Vodafone followed closely behind, while Mukesh Ambani's Reliance Jio, due to launch later this year, came in fourth, investing Rs. 100 billion.
Bharti Airtel, Vodafone and Idea retained and expanded their holding in premium 900MHz, but RCom lost its holding in the same band in five circles. (See below for a more detailed company-wise picture).
Even while operators do not have to pay the full costs up front, the large bid figures are set to add extra pressure to balance sheets, sending the industry's existing $40bn net debt burden up about 50 per cent, according to KPMG. Many in the industry agreed with Vodafone's chief executive in India Marten Pieters, who felt the contest left operators saddled with debt and unable to invest in new services.
"The government has taken too much money and has taken it too early," he wrote. "The industry should first have been allowed to do what it is supposed to do: deliver broadband and connectivity, before being charged so heavily."
Other analysts were more positive. Deepti Chaturvedi at CLSA said the auction did not reach "irrational levels", with prices paid by top operators representing under two years of revenues.
In reality, the proposed payouts are expected to impact different firms differently. Leading firms could take things in their stride. Thus Moodys felt that while market leader Airtel could absorb its payments in its cash flow, Reliance Comm could very probably have to borrow large sums before long. This company is already struggling with a high debt level.
The bigger companies were happy that they broadly got what they wanted from the auction, retaining their existing spectrum licences, albeit at a high cost.
Many players may now look to increase prices to recoup their investments. Ravi Shankar Prasad, India's telecoms minister, has been busy offering back-of-the-envelope calculations suggesting tariffs will not have to rise beyond 1.3 paisa as a result of the auction. That's a tiny sum even by Indian standards.
However, increased competition from new player Reliance Jio may inhibit the move to raise prices. As Ms Chaturvedi says, consolidation by stealth has already taken place: roughly three-quarters of revenues are controlled by the top three operators in India. The smaller companies clearly face a difificult time and at least some are looking for ways to exit the industry
Airtel made successful bids worth Rs. 291 billion in 23 circles. While its 900MHz holdings in six service areas were put up for auction, the company managed to renew all these holdings, and landed up with 900MHz in 10 service areas, in addition to 1800MHz in six service areas and 2100 MHz 3G spectrum in seven service areas. The company already held 3G spectrum across 13 out of 22 telecom circles
The telcom major acquired 1800MHz spectrum across Punjab, Andhra Pradesh, Kolkata, Orissa, Haryana and North East which can be used for 4G services. Airtel says it has now acquired the capability to provide pan-India 4G service like Reliance Jio which has been the only operator so far to have pan-India spectrum for 4G services.
"Post the latest spectrum acquisition, Bharti Airtel's spectrum mix will give it unmatched reach in the mobile data segment across 3G and 4G with a pan India footprint," the company said.
Vodafone defended its 900MHz premium airwaves in seven circles while wining fresh spectrum in another one.
Vodafone also expanded its 3G spectrum footprint from nine circle to 16.
"We remain committed to providing seamless connectivity and superior communication services to our customers and will expand our 3G service from 9 to 16 circles," Vodafone India Managing Director and CEO Marten Pieters said.
Idea retained 900MHz airwaves in nine circles that came up for renewal and account for over 73 percent of the company's revenues. It also made successful bids in seven other service areas.
Idea also acquired additional spectrum in the 1800MHz band in six key service areas, 2100MHz in the strategic metro market of Kolkata, and additional 5MHz on 900MHz in Maharashtra for second carrier of 3G services.
"This will enable Idea to further expand its 3G Services to 13 circles covering 80 percent of its overall revenue and enable 4G roll out on 1800MHz in 10 Service Areas covering 61 percent of Idea's gross revenue," the company said in a statement.
Meanwhile, RIL's telecom arm Reliance Jio Infocomm, which holds 4G spectrum across the country, also bagged airwaves in 800MHz and 1800MHz bands which would enable it to boost 4G offerings with voice services.
Reliance Jio Infocomm acquired 800MHz band or CDMA spectrum across 10 service areas and 1800MHz band, widely known as 2G, in six service areas to expand scope for its planned 4G service. The company committed Rs. 10,077.53 crores in the auction.
"Jio's seamless 4G services using proven multi-band LTE technology and supported by our large spectrum footprint will provide superior user experience for voice, video and data services in line with the best service providers in the world," Reliance Industries Chairman and Managing Director Mukesh D Ambani said.
In the case of RCom, seven permits came up for renewal but it could defend the 900MHz airwaves in two circles only.
However, RCom won spectrum across 18 telecom circles, which include 11 service areas of 800MHz band and five in 1800MHz as well.
Tata Teleservices acquired 800MHz spectrum in six service area and 1800MHz spectrum in Andhra Pradesh only for Rs. 7,851.33 crores.
Aircel made successful bids for 2G spectrum in Tamil Nadu service area only for which it has committed payment of Rs. 2,250 crores.
From Financial Times, Economic Times, Business Standard