The Indian telecom industry witnessed a wave of consolidation through 2017, driven mainly by increased competition, reduced profitability and an urgent need to trim debt. The industry also saw some big-ticket merger and acquisition (M&A) deals. In what can be termed as the biggest merger in the history of the Indian telecom industry, Vodafone India and Idea Cellular decided to merge their operations. The deal, which is valued at $23 billion, will result in the formation of the country’s biggest telecom operator. The merger, which is currently awaiting approval from the nodal agencies, is expected to be completed by March 2018. Meanwhile, Bharti Airtel merged its wireless operations with Tata Teleservices Limited (TTSL) and Telenor India. Towards the end of 2017, Reliance Communications (RCOM) completed the merger of its mobile business with Sistema Shyam TeleServices Limited (SSTL). Meanwhile however, its merger with Aircel fell through. This deal would have led to the formation of a combined entity with an asset base of over Rs 650 billion and a net worth of Rs 350 billion, but it had to be cancelled as RCOM cited legal and regulatory uncertainties. Consequently, Canada-based Brookfield Asset Management backed out of the agreement to buy RCOM’s tower business, as the deal was subject to the merger of the two operators. The deal, valued at $200 million, was expected to reduce RCOM’s debt. Eventually, RCOM found a partner in Reliance Jio Infocomm Limited (RJIL), which bid for most of the strategic assets of the debt-laden operator, helping it avert insolvency proceedings.
The year also saw the listing of Tejas Networks on the local bourses. Equity worth Rs 7.76 billion was sold by way of fresh issuances and an offer for the sale of existing shares. Apart from Tejas, no other major company went public. A number of companies tried exploring the debt route to secure financing during 2017, but no concrete activity was recorded on this front. Idea Cellular was the only key player that managed to raise funds through the launch of debentures during the year.
Meanwhile, foreign direct investment (FDI) into the telecom sector continued to look up. According to the Department of Telecommunications (DoT), FDI in the sector reached $6.08 billion in the first half of 2017-18, an increase of around 10 per cent compared to the same period in 2016-17. Earlier, the Department of Industrial Policy and Promotion had stated that the FDI in the industry from 2014-15 to May 2017 stood at $9.79 billion.
tele.net takes a look at the key financings that took place in the telecom sector during the year…
M&As and stake sales
Vodafone India-Idea Cellular merger: In March 2017, the boards of Vodafone India and Idea Cellular approved the merger of the two companies. The entire business of Vodafone India and Vodafone Mobile Services Limited, excluding its 42 per cent stake in Indus Towers, is being merged with Idea Cellular. The merger is valued at $23 billion and is expected to be completed by March 2018. It will result in the formation of the country’s largest telecom service provider with one-third subscriber market share. On completion of the merger, Vodafone will own 45.1 per cent of the combined entity, post the transfer of 4.9 per cent stake to the Aditya Birla Group for Rs 38.74 billion in cash. The Aditya Birla Group will hold 26 per cent stake in the combined entity while the remaining 28.9 per cent stake will be held by public shareholders. The Aditya Birla Group will have the right to acquire 9.5 per cent stake from Vodafone over the next five years to equalise the holding of both companies. As per the existing M&A rules, an entity is not allowed to hold more than 25 per cent of the total spectrum in a given circle and more than 50 per cent of total spectrum in a particular band in a service area. This means that the combined entity will have to sell or surrender some of its spectrum holding to avoid violation of the rules.
However, the Telecom Commission has recently approved the Telecom Regulatory Authority of India’s proposal to relax these spectrum caps. If the union cabinet approves the proposal, it will strengthen the merged entity’s play in the telecom market. The companies are currently awaiting approvals from the National Company Law Tribunal and DoT.
Bharti Airtel-Telenor: In February 2017, Bharti Airtel signed a definitive agreement with Telenor South Asia Investment Pte Limited to acquire Telenor India. Under the agreement, Airtel will take over Telenor India’s running operations, including its assets and customers in seven telecom circles: Andhra Pradesh, Bihar, Maharashtra, Gujarat, Uttar Pradesh (East), Uttar Pradesh (West) and Assam.
Bharti Airtel-TTSL merger: In October 2017, TTSL decided to sell its consumer mobile business to Bharti Airtel. The merger will result in the transfer of all the customers and assets of TTSL in its 19 circles of operations to Bharti Airtel. It will also result in the transfer of TTSL’s 178.5 MHz spectrum (of which 71.3 MHz is liberalised) in the 850 MHz, 1800 MHz and 2100 MHz bands to Airtel. Further, the cash-free, debt-free merger involves a mix of share swap and debt through the issue of equity and preferences shares to various stakeholders. Airtel will issue and allocate 500 unlisted redeemable preference shares with a face value of Rs 100 each to all equity shareholders of TTSL in proportion to their holding. Meanwhile, the holders of compulsory convertible shares and optionally convertible preference shares in TTSL will get 10 listed redeemable preference shares at a face value of Rs 100 for each share they hold. Further, the shareholders of Tata Teleservices (Maharashtra) Limited (TTML) will be issued one share of Rs 5 face value for every 2,014 equity shares they hold in the company. The holders of TTML’s redeemable preference shares will get 10 similar unlisted redeemable securities in Airtel.
RCOM-RJIL asset sale: In December 2017, RCOM signed binding definitive agreements with RJIL for the sale of its wireless spectrum, towers, fibre assets and media convergence nodes. These assets, reportedly worth over Rs 250 billion, are strategic in nature. As per the agreement, RCOM will sell 122.4 MHz of 4G spectrum in the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands, over 43,000 towers, approximately 178,000 route km of fibre with a pan-Indian footprint, and 248 media convergence nodes covering 5 million square feet of space used for hosting telecom infrastructure. Further, RCOM’s liability of deferred spectrum payments to DoT will now be transferred to RJIL. The deal consideration comprises cash payment. RCOM will utilise the proceeds of the cash deal purely for the prepayment of debt to its lenders. The companies expect transactions to close in a phased manner between January and March 2018.
Besides the signing of new merger deals, the year saw the successful conclusion of several ongoing merger deals. For instance, in February 2017, Bharti Airtel completed the acquisition of Augere Wireless Broadband India Private Limited. The operator had signed a definitive agreement to acquire 100 per cent equity stake in Augere Wireless in August 2016. The deal size is estimated to be worth Rs 1.5 billion.
In September 2017, the operator completed the acquisition of Tikona Digital Networks. The deal to acquire Tikona’s wireless broadband business in four telecom service areas – Gujarat, Uttar Pradesh (East and West), Himachal Pradesh and Rajasthan – was signed in March 2017. However, the transaction pertaining to spectrum in the Rajasthan circle is still awaiting approval from DoT.
Meanwhile, RCOM completed the merger transaction with SSTL in November 2017, after receiving approvals from all relevant regulators and authorities. As a result, SSTL will receive 10 per cent equity stake in RCOM’s fully diluted equity share capital. RCOM will be liable to pay annual instalments of Rs 3.9 billion to DoT for SSTL’s spectrum for the next eight years.
Bharti Airtel carried out multiple rounds of stake sale in its tower arm, Bharti Infratel, during the year. The proceeds were reportedly being used to pare debt and fund its expansion. In April 2017, Airtel completed the secondary sale of 10.3 per cent stake in Bharti Infratel Limited to a consortium of companies including private equity (PE) firm KKR and the Canada Pension Plan Investment Board for Rs 61.94 billion. In the same month, Bharti Airtel sold 11.32 per cent stake in Bharti Infratel to its wholly owned subsidiary, Nettle Infrastructure, for Rs 68.06 billion. It further divested 3.65 per cent stake in Bharti Infratel for more than Rs 25.7 billion in August 2017.
In another key development, Vodafone India and Idea Cellular separately agreed to sell their respective stand-alone tower businesses to American Tower Corporation Telecom Infrastructure Private Limited (ATC TIPL) for an aggregate enterprise value of $1.2 billion. The transaction is expected to conclude during the first half of 2018, and is subject to customary closing conditions and regulatory approvals. Meanwhile, Ardom Telecom, a telecom infrastructure operations and maintenance company, acquired Quanta Towergen Private Limited in an all-cash deal. The acquisition will enable Ardom to provide solar power to telecom tower sites in the Uttar Pradesh (East), Uttar Pradesh (West), Bihar, Jharkhand, Madhya Pradesh, Assam and Northeast circles. Also, China-based Transsion Holdings entered into a joint venture (JV) with Spice Mobile to gain a larger market share in the Indian handset market. As per the agreement, Transsion will hold 80 per cent stake in the JV, while the Spice Group will hold the remaining 20 per cent.
PE deals: In March 2017, US-based PE firm Providence sold its entire 3.33 per cent stake in Idea Cellular for Rs 12.88 billion through an open market transaction. The deal marks the firm’s complete exit from Idea Cellular. Meanwhile, in December 2017, global PE firm Warburg Pincus’ affiliate Lion Meadow Investment bought Bharti Airtel’s 20 per cent stake in Bharti Telemedia Limited, the operator’s direct-to-home business arm. The deal is valued at $350 million. On closure of the transaction, Airtel will own 80 per cent stake in Bharti Telemedia.
Debt deals: In May 2017, Idea Cellular secured a loan worth $215 million from Export Development Canada. The loan has been offered under a pre-existing $500 million uncommitted financing arrangement for Idea’s parent company, the Aditya Birla Group. Idea Cellular will use the financing to diversify its funding sources and enhance the maturity profile of its long-term debt in a cost-effective manner.
Issue of CCPSs: In December 2017, LAVA International raised approximately $30 million from Hong Kong-based UNIC Memory Technology, an affiliate of the state-backed Chinese technology group, Tsinghua Holdings. To this end, LAVA has issued 500,000 compulsory convertible preference shares (CCPSs) to UNIC Memory Technology. This is the second such instance of an Indian handset company partnering with a Chinese entity.
Going by the current industry estimates, financial stability in the sector may still be a few quarters away. Operators will continue to explore new strategies to pare their debt and revive earnings. The Telecom Commission’s recent approval to several recommendations of the inter-ministerial group constituted to look into the financial health of the sector will bring some respite to the debt-laden companies. These recommendations include approval for the relaxation of spectrum holding caps, deferment of spectrum payments and reduction in interest rates on penalties. The launch of the National Telecom Policy, 2018 may also bring in key policy and structural changes, which are likely to prove beneficial for the sector’s long-term sustainability.
Akanksha Mahajan Marwah with Aditya Kumar