A study conducted by the industry body ASSOCHAM revealed that the telecom industry topped the chart in terms of merger and acquisition deals, valued at $22.73 billion (nearly Rs 107,100 crore), across all sectors in the April-June quarter this year.
"Three major outbound and domestic merger and acquisitions deals worth $22.73 billion took place in the telecom sector during April-June 2010, representing 67.19 per cent share in the total valuation of the deals that occurred during that period," the study said.
RecapIn June, we saw Bharti Airtel acquiring Kuwait-based Zain Telecom's African business for $10.7 billion (about Rs 50,400 crore), followed by Reliance Industries returning to the telecom arena with the acquisition of Infotel Broadband for $1 billion (approximately Rs 4,700 crore). Anil Ambani’s RCom also made news when it merged its telecom tower business Rel Infratel with GTL Infrastructure for $11 billion (about Rs 51,800 crore), making it the biggest deal of the year so far.
On the other hand, Mukesh Ambani's return to the telecom arena after nearly five years, on the announcement of his acquisition of Infotel broadband services surprised many, and promised to “usher in a wireless broadband revolution in both the urban and the rural areas”.
RCom's move to merge its tower business with GTL was motivated by an aim to create the world's largest independent telecom infrastructure company, neither owned nor controlled by any telecom operator.
The Zain deal was Airtel's third attempt to enter the African market after the company's failed attempts at a merger with South African telecom major MTN on two previous occasions.
M&A: Need of the hour?Currently, India has almost a dozen operators per circle. In such a scenario, the option of M&A just gets hotter as so many operators will not be able to survive together.
Telecom analyst Mahesh Uppal said, “M&A's are rather urgently required mainly because of unsustainable numbers of player in the market. Benefits of competition are minimal beyond four to five players in the market.”
Sandeep Gupta, director, Protiviti consulting, agreed, “Tariffs have reached rock bottom, making some of the new entrants’ operational plans un-viable. With the extent of spending that has been seen on 3G spectrum, operators cannot base their revenue model on reducing prices. To sustain the level of prices and yet retain a competitive edge, M&A is inevitable.”
Regulatory Framework: A hurdleM&A deals in the telecom Industry are subject to various guidelines and policies. Telecom Regulatory Authority of India (TRAI) has given recommendations on M&As and wireless spectrum. However, the government is yet to frame a policy based on the various recommendations.
The recommendations by TRAI state that mergers and acquisitions should be allowed only if there remain a minimum of six service providers, post-merger, and the market share of the merged entity is not then more than 30 per cent of total subscriber base and/or the adjusted gross revenue in the licensed service area.
Although TRAI has been under fire from operators and industry experts for the recommendations, it has maintained that they would in no way restrict M&A's.
TRAI has also put a cap of 14.4 MHz spectrum on the merged firm. This entails that the merged entity will have to return the excess spectrum (spectrum beyond 14.4 MHz).
The regulator also said that for spectrum in excess of 6.2 MHz, the GSM operator that holds it will have to pay an additional one time charge equal to the market price. The market price is equivalent to the 3G rate of the spectrum.
Further, the merged entity will have to bear a transfer cost amounting to 5 per cent of the difference between the transaction price and the total spectrum price, to be paid to the government.
Uppal says, “TRAI's regulations aren't just restrictive, but also arbitrary. The regulator has not even explained the move or the figures it has finalised. TRAI should give sufficient flexibility to the players for M&A's. It should only restrict abuse of market power and customers, and also prevent profiteering in spectrum acquired from government at administrative prices, rather than through auctions."
Robindhra Mangtani, senior director, GSM Association, echoes Uppal's views, “For us, India is a competitive market and it has proven to be successful for both operators and the subscribers. Not everywhere in the world do we see a market where there are 20 operators and not everywhere does a circle have nine key operators operating. That is not for us to decide. That’s what regulatory policies and the market will decide. Consolidation is very much possible but we will just let the market decide.”
All is not lost?J S Sarma, chairman, TRAI, had earlier said, “We are clearly saying we should consolidate. We are not mandating consolidation, but facilitating it. Our proposals are clearly in that direction."
Maybe there are loop holes in the regulator’s recommendations, but some moves do support TRAI’s motive of enabling M&A deals.
The regulator, for instance, recommended ending the restrictions that earlier prevented telecom firms from selling majority stakes within the first three years of getting a licence. This will help consolidation by allowing mergers and acquisitions in the country.
Gupta, director, Protiviti Consulting, said, “The current development is positive and would not only assist cash strapped telecom service providers to look at options, but also offer mature operators to achieve spectrum efficiency and reach. The consolidation process is likely to commence in the near medium term and will stretch up to three years by which time there will stability in the market and clear strategy on the part of telecom service providers in the use of leading technologies.”
However, he added, “To facilitate and perhaps assist large players, the maximum cumulative spectrum should be relatively relaxed.”
R N Prabhakar, former member, TRAI, is also is of the view that consolidation is the way forward for the Indian telecom industry. He believes that three to four years down the line this sector will be big enough to sustain just five operators. But that the regulators need to make changes to the existing recommendations for that to happen.
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