According to CARE Research, M&As in telecom would take some time to pick up, as players would wait for Lok Sabha election results and clarifications on other issues like one-time charge for excess spectrum and spectrum trading guidelines

Consolidation-hungry telecom sector waited long for clear merger and acquisition (M&A) guidelines as hyper-competition kept bleeding everyone as tariffs nose-dived over the years. Recently, the empowered group of ministers (EGoM) has cleared M&A guidelines which have enthused most of the stake-holders in the industry with increased market-share limits.
 

However, according to CARE Ratings, the M&A activity would take some time to pick up as players would wait for Lok Sabha election results and clarifications on other issues like one-time charge for excess spectrum and detailed guidelines of spectrum trading.

Telecom wireless space in India is getting divided on the following lines (i) Top three incumbents with deep pockets – Bharti Airtel, Vodafone, Idea, (ii) Other incumbents with struggling balance sheets – Reliance Communication (RCom), Tata Teleservices, Aircel, Loop, (iii) Government owned – Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) (iv) the new comers - Telewings and Sistema with backing from their foreign parents and, (v) new players with Indian parent like Videocon.

According to CARE Research, consolidation would be driven to acquire subscriber base or spectrum. Incumbents are the major contenders for the ‘consolidator’ tag. There might be possibilities of a three-way merger among Tier-II players like Tata Teleservices, Sistema, Aircel and Himachal Futuristic Communications Ltd (HFCL).

CARE Research said it believes that the increased market share limit (50% from earlier 35%) would avail enough room for larger players like Bharti Airtel and Vodafone to go for acquisitions in most of the circles. "Consolidation would provide much needed exit to some of the weaker players along with reducing the hyper-competitive environment in the sector. At the same time, with increased market-share larger players would get some pricing power but would not result in substantial change in the dynamics of the sector as voice and, to some extent, the data business being commoditised in nature. It would allow better spectral efficiencies for the sector as there is a large variance in the subscribers per MHz metrics. It will also lead to better utilisation of passive infrastructure like telecom towers and networks," the ratings agency added.

Decisions pertaining to spectrum in 1800 MHz band

After a subdued response to auctions held in November 2012 and March 2013, government is again planning to auction spectrum in the 1800 MHz band associated with cancelled licenses. The spectrum being licensed would include spectrum which had remained unsold during last two auctions and some additional spectrum freed from other agencies such as defence. The incumbent operators (Bharti Airtel, Vodafone, Loop, Idea etc) whose licenses are going to expire over next few years have to participate in the auction to acquire the spectrum. As higher reserve price was presumed to be predominant reason for muted participation, government asked TRAI to come out with new pricing. Telecom Commission has increased the reserve price partially and the same was approved by EGoM.

CARE Research said it believes that the reduction in reserve price is a welcome move for the industry which is already reeling under the debt-burden raised for 3G-BWA auctions and subsequent roll outs. It said, "Government’s decision to put more spectrum on table would help in price discovery as it would remove the artificial scarcity of spectrum. Additional spectrum would help players reduce on network expansion costs as there is a trade-off between spectrum and additional towers. As the data usage increases, players would need additional spectrum. Also, the players whose licenses are expiring over next few years can plan in advance and participate in the auction."

Decisions pertaining to spectrum in 900 MHz band

Telecom licenses issued in 1994 to incumbent players Bharti Airtel, Vodafone (then Hutch) and Loop in Delhi, Mumbai and Kolkata circles would expire in 2014. These operators collectively hold 46 MHz of spectrum in the more efficient 900 MHz band in these three metro circles and were constantly pushing for an extension of another 10 years. Due to the limited availability (around 20 MHz in each circle) of the spectrum in this band, most of it is lying with incumbent operators (first 2-3 operators), which puts them in an advantageous position as against new players. In order to create a level playing field, the government has decided to auction the spectrum as and when the licenses expire.

CARE Research said it believes that removal of reservation for incumbents who already hold the spectrum is slightly negative whereas a cap of 5 MHz for 900 MHz spectrum would act as a dampener for the incumbent players. "Even if the existing holders of the spectrum go for maximum spectrum they can bid for, there would 6MHz, 6MHz and 4MHz spectrum remaining in Delhi, Mumbai and Kolkata circles respectively. This implies expected participation from other operators like Idea and RCom and even slightly stretched possibility of Reliance Jio participating in the auction," the report added.

Decision pertaining to Spectrum Usage Charge (SUC)

In case of Spectrum Usage Charge (SUC), the EGoM has decided to continue with the current cascading SUC charges until the Department of Telecom (DoT) decides on the flat rate. The current SUC ranges from 3 to 8%of the adjusted gross revenue (AGR), depending on the quantum of spectrum held by a licensee. However, TRAI had recommended a flat SUC of 3%for all (including 3G and BWA players) acquiring spectrum through auctions and 3-5 % for spectrum without auctions, so that the disincentive to buy additional spectrum in the existing SUC regime gets eliminated. Currently average SUC collected by the government is around 3.6% of AGR.

CARE said, "If approved, this will be beneficial to the most of the telecom players, especially incumbent players, who are paying more than 5% SUC on Administered spectrum. BWA players like Reliance Jio will however be at a disadvantage as it implies an increase of SUC from the earlier 1% to 3% of AGR. On the flip side, approval of the flat 3-5% SUC rate would result in a loss of nearly Rs13.56 billion for the government."