The government recently issued revised guidelines for intra-service area mergers among unified access service licence holders, making consolidation more difficult and expensive. tele.net speaks to telecom analysts about how the new norms will affect competition, the growth plans of the new telecom licensees, and the consolidation landscape…
Will the revised guidelines on mergers and acquisitions (M&As) increase competition within the service area?
Rajesh Chharia: The competition will definitely increase.This will be very good for the telecom sector, because the new service providers will come with new technologies. It will be beneficial for the customers too.
Earlier, there were only two incumbent operators, but now, all the existing operators have become incumbents and will try their best to block the new entrants from penetrating the market.From the point of view of a consumer, a new operator can bring a lot of valueadded services to the market.Subsequently, the existing operators will also have to offer innovative services at a very reasonable price to the consumer.
Sourabh Kaushal: Yes. According to the guidelines, there will have to be at least four players in each circle, which will ensure competition. With regard to the new players, they would have to operate for at least three years before selling their spectrum or licence. This will be another driver of competition.
Romal Shetty: According to the revised guidelines, after a point of time, a player will be allowed to sell spectrum. So the new guidelines will not increase competition but will rather lead to consolidation. Increasing competition implies more players, but I do not think the number of players will increase any more.
Prashant Singhal: Yes, there is no doubt that the new guidelines will increase competition within the circles. By specifying that a merger can happen only if the market share of the combined entity is not greater than 40 per cent (in terms of both subscriber base and the adjusted gross revenues) from the earlier 67 per cent, it rules out a large proportion of possible mergers. What this means is that the big operators cannot merge.
Second, it has specified that no mergers will be allowed till the new licensees have operated for three years. Many of the large operators had hoped that they could buy out the smaller operators soon after they received spectrum. Now that cannot happen for three years.
Third, even in case a merger happens, the merged entity will get additional spectrum only if it meets the subscriber norms within three months of the merger. This can prove to be tough.
In all, there will be more players in each circle. The real gainer will be the subscriber. However, there is no mention in the guidelines of acquisitions. The government needs to specify details for this too.
Mahesh Uppal: The new norms might increase the chances of competition. Actual competition will increase only if the new players deploy networks. It is still not clear whether they will do so.
How will the guidelines affect the growth plans of the existing operators and foreign players looking to enter the Indian market?
Rajesh Chharia: The Indian telecom market is an open market. Being a part of the developing world, we should not restrict ourselves by distinguishing between foreign and Indian companies. All companies that want to come and add value to the market should be free to provide services.
Sourabh Kaushal: Foreign companies can still acquire stake in the existing or the new operators. However, given the criterion that a merged entity cannot have more than 40 per cent market share, M&As have become more challenging for the existing operators.
Romal Shetty: What the new norms will do is actually allow companies that have not taken the normal licensing route to enter the Indian market, by taking stake in companies that are already here. An existing foreign partner can make more investment and acquire further stake in the domestic company. Moreover, the norms will enable the new operators to roll out networks in partnership with a foreign operator, thus gaining significant technological know-how.
Prashant Singhal: This is a great opportunity for global telecom operators who are looking to enter India. Many European and Middle Eastern telcos are keen to enter India. Considering that the new entrants’ need access to technology, this will be an opportunity for the global players to leverage. Depending on the financial clout of the new licensees, international operators can acquire up to 74 per cent stake in the new players.
Mahesh Uppal: The existing operators would be affected the most, because for them, the new licensees would have been a source of additional spectrum. Now, however, the transfer of spectrum through mergers has been delayed by three years. The merged companies will need to meet TRAI’s spectrum criteria, which are much tougher now than they were a year ago. So, the existing players will find it hard to acquire spectrum in the next three years.
After three years, the situation might get a little better. Mergers would be possible. The current guidelines have removed the obligation to deploy networks. The foreign players could find it easier to buy out the existing licensees.The new M&A norms will make it easier for unlicensed players to set up new networks, especially if they do not get spectrum in the first round of auctions.
However, life cannot be easy for player number six or seven in a circle, especially since there is no clear time-frame in which the seller will get the full 4.4 MHz due to it. At the moment, there are only four circles where spectrum seems to be available ?? three in the south and one in Orissa. In very competitive markets, by the time the network is in place, the other operators would have added several million subscribers. So while the new players will be marginally better off due to the M&A norms, they will nevertheless find the going tough.
To what extent will the norms help the new telecom licensees?
Rajesh Chharia: The new M&A guidelines are the same as the old ones, and will have no significant effect on the plans of the new licensees looking to get strategic partners. However, in the process of facilitating competition in the sector by allowing the entry of foreign players, the government should make sure that existing players are not sidelined.
Sourabh Kaushal: The new norms will help the serious new licensees, those who actually want to launch services in the market, to start operations. On the other hand, those who bought licences to sell off the spectrum to the existing operators might find it difficult to do so now, since the new norms have made launching operations mandatory.
Romal Shetty: It is obvious that the licensees cannot go and sell their spectrum immediately; they have to roll out their networks by a particular date. If they have sufficient cash reserves to manage their business for some time, I think the norms will help them.
Prashant Singhal: This is an opportunity for the new telecom licensees to quickly build a footprint across India. They can do so in collaboration with an international partner. They can build their network quickly by sharing the infrastructure of the existing operators. Depending on how successful they are, it will be an opportunity to exit on a high valuation in three years.
Mahesh Uppal: The norms will not help the new licensees significantly, because the options available to them in the near term have narrowed to a large extent. The new players will be forced into less attractive deals. It may be possible and legal to sell licences to new players, but without the required spectrum in the bag, buyers will offer little. The new operators will find that even though they acquired licences for close to $400 million, the existing players, who need spectrum, are not interested.
How will the new rules impact consolidation in the sector?
Rajesh Chharia: The revised M&A guidelines include many clauses that do not facilitate consolidation. Consolidation is not desirable in the telecom sector. If it happens, a monopoly-like situation would arise. Therefore, in my opinion, there should not be any consolidation amongst the service providers.
Sourabh Kaushal: Consolidation is bound to happen; if not now, then after three years. However, even after three years, we will see consolidation more at the lower levels than amongst the leaders. This is because the leaders, restricted by the 40 per cent market share criterion, will still not be able to acquire smaller companies.
Romal Shetty: It is unviable to have 12 telecom players in a circle. So, consolidation has to happen. A company, rather than shutting down operations, can be acquired, and in this way, 12 or 13 players can consolidate into four or six.
Prashant Singhal: What this means is that the big Indian players will not be able to merge with the smaller operators for at least three years.But it will all depend on the government’s policy on acquisitions in the sector.
Mahesh Uppal: I think the norms will most unambiguously hurt consolidation. They will encourage a large number of operators, who will stay in the market because exiting will not be easy.
