Telecom sector - On the cusp of consolidation

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Hindu Business Line

Prashant Singhal
Telecom Industry Leader, EY India

The hyper-competitive telecom industry, reeling under the pressure of stressed margins, has been eagerly awaiting a policy around mergers and acquisitions, to initiate consolidation.

The draft of the National Telecom Policy 2011 (NTP), provided some direction on the mergers and acquisition policy. TRAI's recent recommendations on spectrum management and licensing framework, is expected to fuel consolidation in the industry.

The revised recommendations state that the market share of the resultant entity should not be above 35 per cent of the total subscriber base or the AGR in a licenced service area.
However, if the subscriber market share/AGR exceeds 35 per cent and is below 60 per cent, the authorities will decide on case-by-case basis.

Additionally, on the spectrum front, the move to allow the merged entity to retain 25 per cent of the total 2G GSM spectrum allocated in the service area, is a step forward in the right direction. This would lead to a host of permutations and combinations, which may transform the face of the telecom industry in India. The wave of M&As will have a far-reaching impact and help consolidate the fragmented revenue and subscriber market share in India.

Spectrum sharing

Even if consolidations do not work out as envisaged, the directional draft of the NTP 2011 and recommendations stated by TRAI, would definitely lead to spectrum-sharing in the country.

Spectrum-sharing will help generate additional revenues for the government through spectrum usage charges, and allow operators to achieve the much-needed spectral efficiency, by reducing the burden on the cramped network. Spectrum-sharing can lead to a transformation of the industry, with new and improved business models.

The 12-14 operators present in each circle will then try to leverage on their assets and sweat them to maximum utilisation and efficiency to drive revenues.

In fact, the draft of NTP 2011, clearly states that the new policy will enable the operators to undertake spectrum sharing and even open the market to MVNOs (Mobile Virtual Network Operators). Such business models are already in existence in the developed and mature telecom markets such as United States, The United Kingdom and Japan.

TRAI is also propagating a ‘spectrum for anything' philosophy, or spectrum in any band being used for any service. This would entail the use of spectrum in the 800 MHz and 900 MHz bands for 3G or 4G. This could be a significant step in the liberalisation process especially for India, which is trying to make its mark in the developed telecom market.

The recommendations are progressive and forward-looking in nature and can put consolidation on a fast track, resulting in an oligopolistic market. However, the price for the spectrum to be shelled out by the merged entity for acquiring the airwaves can be a major roadblock in the way of consolidation. The entity will be required to pay the difference between the current price of the spectrum and the sum already paid, on the entire spectrum above the start-up limit of 4.4.MHz / 2.5MHz (GSM/CDMA).

Price for spectrum

Further, they will incur an additional charge for transferring the spectrum at 5 per cent and would be required to surrender excess spectrum beyond the prescribed limit of 25 per cent.

Moving forward, the promoters, whose net worth or equity has been taken into consideration for determining the eligibility of the licence, will not be permitted to dilute their equity below 51 per cent for a period of five years, or till the roll-out conditions have been fully accomplished. Such conditions can have a counter impact on the M&A activity in India.

The country's telecom revenue as a percentage of the total GDP has contracted during the past two years from 2.9 per cent to 2.4 per cent of GDP in FY11, primarily led by significant price erosion.

Any additional burden on the operators, such as the one-time spectrum charge for M&A, high prices for additional spectrum, or any other spectrum charge, can deter the consolidation; ultimately leading to the natural death of telecom companies in India.

The recommendations are optimistic and encouraging, though the ability of India to be a six-or-seven operator market or a 12-14 operator market can only be judged once the final policy is implemented.

The author’s views are personal.