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Cover Story

Ready & Waiting for that Exit Call
Telecom M&As are waiting to happen, but Archaic Regulations are Preventing them from happening. The new Telecom Policy 2011 should provide some reprieve and foster healthy, and less severe competition in the sector
Issue Date - 18/08/2011
The telecom sector in India is still governed by the old and stale National Telecom Policy (NTP), which was announced in 1999, though much water has flowed under the bridge since. India has more than 800 million subscribers. Today, the country is the second largest telecom market in the word after China and the third most attractive Foreign Direct Investment (FDI) destination. As per the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, India attracted $10.5 billion in cumulative telecom FDI from April 2000 to January 2011. Telecom is attracting the largest FDI after services and the IT industry.

Telecom M&As in India gained momentum in 2008, when the government decided to award new telecom licences. Japan’s telecom major NTT DOCOMO acquired 26% stake in Mumbai-based Tata Teleservices (TTSL). The company is likely to buy into a Rs.30 billion rights issue by TTSL. Similarly, Telenor Group of Norway acquired a 67.25% stake in Unitech Wireless for $1.36 billion and Etisalat DB took up 45% stake in Swan Telecom for $900 million; the two deals that really fuelled the 2G spectrum controversy. In 2009, Bahrain Telecom acquired 49% stake in S-Tel for $225 million. Operators like AT&T, Telekom Italia are still looking to invest in India. But M&A activity on the domestic front has been negligible. Though the number of players in the sector has touched 15 unlike the global average of 3-4, consolidation is still not on us. The top six players command a subscriber share of over 86%, while the remaining 9 have less than 14%. Idea’s merger with Spice and Reliance Industries’ 95% stake buy in Infotel Broadband for $1.03 billion are the two major domestic M&As in the past few years.

Sector analysts and industry experts believe that consolidation will happen in telecom once the cap on M&A, as defined by the NTP 1999, is removed. DoT rules stipulate that an operator can’t own 10% or more in another operator in the same circle. “Current M&A rules have many restrictions, and impose heavy costs on M&A; such as rules, which shorten the license terms of spectrum post-merger. These rules must be relaxed to allow the market to return to healthy & effective competition,” says the spokesperson from Vodafone Essar Ltd. Further, policies like unified license for all services, allowing voice calls on 4G, et al are raising fear of more competition. Hurdles in India have led to players looking overseas for greener inorganic pastures. Bharti acquired Zain’s African mobile services for $ 10.7 billion, 100% stake in Telecom Seychelles Ltd. for $62 million and a controlling stake in Warid Telecom.

Another barrier for M&As is the huge investments in 3G licenses, infrastructure, network rollout, et al, due to which telcos are concerned about return on capital investment. Most telcos including leading operators are under huge debts and price wars do not give much hope of reprieve. With uncertainties and irregularities in regulation, operators are uncertain about more investments and so are banks. Even foreign-backed new entrants like Uninor, Sistema & S-Tel have found it hard to be in the black. The picture does not look so good due to the hyper competition and rock-bottom tariffs. “There are many players looking to exit or sell off. This is also obvious from the fact that many have not even rolled out their services yet” highlights Hemant Joshi, Partner Deloittee Haskins & Sells.

Data revenue uplift is expected to help players, and Credit Suisse projects it to be 50% of incremental revenues in the next three years. However, the competitive advantage would still be with players like Bharti, Vodafone and Idea, who have higher net worth subscribers. That is why Credit Suisse has projected an EV/EBITDA ratio of 6.2 for Bharti and 5.1 for Idea for Q1, FY 2012-13, while it projects only 4.2 for RCom. Without the multiple advantages of these giants, many of the smaller players seem to be only sitting on spectrum and assets or maintaining a comfortable growth rate waiting for an exit. It’s time to let the deals flow.

Akhilesh Shukla           

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