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Four private groups lead India's telecom consolidation

Recent M&A and spectrum deals signal that the much-awaited industry restructuring is happening

Four private telecom groups, Bharti Airtel, Vodafone India, two Reliance firms, and Birla-owned Idea Cellular, are likely to emerge the strongest in the shootout in Indian telecom, sparked by the Government's spectrum guidelines a few months ago.

Bharti Airtel and Vodafone India are the current market leaders. Both are going steadily into 4G, since 3G still has a lot of traction in India. Bharti recently announced that it is investing over Rs.600 billion over the next three years in its network transformation programme aimed at improving network quality. It will deploy over 70,000 base stations this financial year, and 160,000 base stations in three years, effectively doubling its presence from what it has today on ground.

Reliance Jio owned by deep-pocketed Reliance Industries and controlled by Mukesh Ambani, has yet to enter the market (it plans to enter by about March 2016), but has caused competitors to enter helter-skelter into 4G, to avoid losing out on the 4G wave. RJio acquired a 2.3GHz TD-LTE licence covering the entire country in 2010. Two auctions later, RJio also controls 800MHz spectrum in 10 circles (service areas) and 1.8GHz spectrum in 18 circles. Moreover, in September RJio announced that it would partner with Reliance Communications, controlled by Mukesh's brother Anil, in the 4G market. RCom's 800 MHz makes up any deficiency RJio has in indoor 4G.

The new spectrum trading norms, announced in October, gave a boost to the Ambani brothers' deal. They appear to have scored an early victory over rivals Airtel and Vodafone after it was decided that telcos can share and trade their spectrum after paying the latest auction winning prices to the government. This meant that the March 2015 auction winning prices would be considered as the market determined price for the 800 MHz band, historically used for CDMA services. GSM players say that due to poor demand the 2015 price for 800 MHz spectrum was too low. This argument apparently did not hold water with the government.

Last month Reliance Communications announced it will buy Russian conglomerate Sistema's Indian mobile telephony business in an all-stock deal, valued at around $690 million (Rs 45 billion). The first consolidation in the highly competitive Indian telecom sector, the RCom-SSTL merger will create an operator with 118 million subscribers. Importantly, RCom's deal with Sistema gave it access to more 4G spectrum that Sistema owned.

On the RCom-SSTL deal, Fitch said it was unlikely to help RCom in meaningfully reducing its $6 billion in net debt. "The payment relates to spectrum, which SSTL acquired in the March 2013 auctions. SSTL will pay down its existing debt of $600 million before the acquisition," it said. However, it emerges that RCom has found another way to reduce its debt. It's selling its telecom tower business, which could bring down its debt to the region of $1.5 billion.

Idea Cellular is owned by the deep-pocketed Birla Group, and has been performing well in the market. In order to enhance its presence in 4G, it spent Rs 33.1 billion to purchase Videocon's 4G airwaves in Uttar Pradesh (West) and Gujarat. Though expensive, it was necessary experts said, reasoning that although the deal will significantly push up the company's debt it will help protect the revenue and customer base from an expected attack from Bharti Airtel and Reliance Jio Infocomm.

Nomura said that the price that Idea paid for Videocon's airwaves in the two circles was almost double the final March 2015 auction price, given that the implied price for 5MHz in Gujarat was Rs 12 billion and UP-W was Rs 5 billion. Goldman Sachs said that adjusting for validity of 17 years of the airwaves, instead of the licence period of 20 years, the deal value implies a 133% premium over the last auction price. JM Financial said that the price of 1800 MHz relative to price of 900 Mhz - which was 35% in A-category circles and 47% in Metro circles, as per March 2015 auction results - were valued by Idea at 55% for Gujarat and UP(W).

"It is not entirely clear why such a premium - perhaps it is due to spectrum contiguity," Sachin Gupta and Pankaj Suri, research analysts at Nomura said in a note to clients. Citigroup said the high price was a reflection of the importance of contiguous spectrum which was critical for 4G. JM Financial termed it as a scarcity-cum-strategic premium.

"Idea's spectrum acquisition of two circles from Videocon at a high premium highlights its need to improve 4G footprint given an aggressive push by Bharti (Airtel) and the imminent launch of Jio," Citigroup said. It added that two of the most important circles for Idea contribute 15% to the company's revenue and the acquisition will help it increase its 4G footprint to 75% of its revenue base, similar to that of market leader Bharti Airtel.

The deal is likely to make the Aditya Birla Group Company's financials messier, said Nomura. "We expect Idea to purchase 3G spectrum in nine circles for Rs 8,300 crore during upcoming auctions. Together we estimate Idea's net debt could potentially rise to Rs 53,300 crore from Rs13, 800 crore at present".

Emerging environment and M&A clues

The larger operators "are likely to seek acquisitions as they require more spectrum to support their fast-growing 3G and 4G service revenues. Smaller loss-making telcos will be willing sellers due to rising competition and the regulator's decision to relax spectrum rules", as a recent Fitch note observed.

"Competition will probably intensify in 2016, as we expect Reliance Jio, a subsidiary of Reliance Industries, to launch its 4G-enabled data services in Q1 2016," Fitch said. "We expect Jio's entry to lead to a decline in average data tariffs by at least 20%. Jio may also offer voice-over-LTE, as compatible and affordable 4G handsets are now freely available".

It said the Indian telecom market is very competitive with about 10 operators. Network quality, on the other hand, is poor due to under-investment and limited spectrum. "We believe the industry can support five or six profit-making telcos in the long term. The top three telcos -- market leader Bharti Airtel, Vodafone India and Idea Cellular -- will gradually increase revenue market share from the current 73%".

Fitch said smaller telcos, potentially including Tata Telecom, Videocon Telecom and Aircel, are likely to feel the impact first and may look to exit as they make losses and lack key spectrum assets or the deep pockets needed to invest in networks.

"Smaller telcos are losing voice market share to larger operators, and competition in the data segment will intensify on Jio's entry," it said. Currently most carriers operate on wafer-thin margins, with 8 of the dozen carriers, including Aircel -- a unit of Malaysia's Maxis Communications Bhd -- and Tata Teleservices, holding a market share of less than 10 percent, according to sector regulator TRAI.

The regulator's decision to allow spectrum sharing and trading, and to relax spectrum caps, could allow these smaller telcos to monetize their under-used spectrum.

Tata Teleservices, the seventh-biggest mobile operator, is, according to sources, looking for a buyer for the stake Japan's NTT DoCoMo owns in the joint venture. DoCoMo decided to pull out last year, as the JV did not meet performance targets.

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