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MEGA MERGERS......
If someone had slipped into a coma in 1992 only to wake up 25 years later, he would find India’s telecom sector unrecognisable in more detail than what Rip Van Winkle found America following the Revolutionary War. It’s wartime now. First up came the announcement of a merger between Vodafone and Idea. By the time one digested this news, Bharti Airtel had announced it was gobbling Telenor’s India operations. Then comes the merger of RCom, Aircel, MTS and Tata Telecom. Phew. Clearly, the big boy of corporate India, Mukesh Ambani, has their hair lock firmly in his hand, following Jio’s capture of a 100 million users in 100 days. There is the prospect of yet another big ticket. The multi-pronged merger is the biggest wave of consolidation in telecommunication after the sector was opened to private players, 20 years plus ago, in 1995.

The idea fone...

Vodafone-Idea

The board approval for the merger, once it gets the regulator’s nod, will make the unnamed new entity India’s largest telecom player. It will have a market share of 40 per cent viz., catering to 390 million customers, hold 1850 MHz, and will have the largest broadband spectrum portfolio across the country.  It will also make it globally second only to China Mobile. 

Without getting into the math part of it, let me tell you that the implied value of Vodafone is Rs 82,800 crore and that of Idea is Rs 72,200 crore.  The merger will take 24 months to complete and will be subject to necessary regulatory approvals. Over a period of five years, the stake of Idea and Vodafone in the new entity will be about 35 per cent each. 

The major hurdle that the merger faces is regulatory. First one relates to liberalising administratively allocated airwaves. The companies expect an Rs 3000 crore impact of spectrum liberalisation costs on valuation. The new entity would hold 1850 MHz. Next, according to Telecom M&A guidelines, revenue market share of the merged entity should not exceed 50 per cent in any circle. In this case, while the overall market share is expected to be around 43 per cent, it would exceed 50 per cent in six circles. Finally, spectrum holding of the merged entity should not exceed 25 per cent of spectrum for access services and 50 per cent in each group. About five circles in the 9000 MHz band could witness a spectrum cap breach. The combined entity’s share of spectrum in the market is expected to cross these numbers, and the organisation will have to sell about one per cent to fall in line. 

 

Synergy gains...

There will be a series of synergy gains from this merger. Vodafone India has spectrum in seven circles and Idea has in two circles that are expiring in 2021-22, which are not common circles. The cost and spectrum liberalisation payments are expected to save approximately Rs 1000 crore and run-rate savings of Rs 210 crore annually by the end of fourth year from merger completion with expected savings in operating cost to the tune of 60 per cent of expected run-rate savings.

The management of Vodafone Plc. has been contemplating to separate the Indian unit due to inability to sustain the heavy price war in India. The loss from Indian unit has been a drag on the group’s earning, with the group having to slash its global profits by half because of the India operations. The parent company pumped USD 7 billion after writing down USD 5 billion in November 2016. Vodafone will contribute to a net debt of Rs.55,200 crore in the merged entity, compared to Idea’s Rs.52,700 crore net debt. 

 

Airtel – Telenor

Airtel’s acquisition of Telenor’s Indian assets awaits regulatory approvals and the moment that happens it would mark the exit of the Norwegian major from Indian soil. It operates in 13 countries, has 214 million subscribers with revenue of NOK 131 billion in 2016. Deutsche Bank estimates the deal size to be worth Rs 2200 crore, including Rs 1600 crore worth spectrum. The Telenor acquisition will give Bharti Airtel an additional 52.5 million subscribers, taking the total number of its subscribers to 321.90 million -- a massive increase of 19.5 per cent from the current figure of 269.40 million! It also gives Airtel access to 43.4 spectra in the 1800-band MHz and a foothold in seven circles including Andhra Pradesh, Assam, Bihar, Gujarat, Uttar Pradesh and Maharashtra.

Airtel will take over Telenor’s outstanding premium payments, tower lease and other contracts, plus its borrowings of Rs 1500 crore and may not pay out any cash. Telenor’s Indian stint has been rough since its entry in 2008. The Supreme Court cancelled the licences and ruled that these were obtained illegally. After Telenor’s acquisition of Unitech, it won licences for seven telecom areas. Although its revenue was Rs 4800 crore in 2016, its accumulated losses in India are a whopping Rs 19,200 crore against tangible assets of Rs 240 crore.

 

RCom-Aircel-MTS-Tata Tele

The next big merger announcement is the Tata Teleservices and Reliance Communications-Aircel-MTS. If the CEOs crack the deal, the merged entity will become the third largest telecom company in India. Tata Teleservices has a subscriber base of 53 million and if the merger goes through, it will increase to 260 million customers and a revenue market share of over 18 per cent. Two significant hurdles remain, including Tata Tele’s book debt of Rs 30,000 crore and legal issues on DoCoMo’s exit from India. 

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