The merger and acquisition (M&A) guidelines released in early 2014 have failed to trigger consolidation in the Indian telecom industry. The parameters for merging and the regulations relating to entry-exit policies have deterred many companies from going ahead with their M&A plans. Industry experts comment on the guidelines and the changes needed to facilitate consolidation in the sector...

How has the competitive landscape of the telecom market evolved in the past few years?

Rohan Dhamija

Over the past few years, major developments in the Indian telecom sector have led to some operators closing down their businesses or scaling down operations. Etisalat has shut shop, Uninor has exited certain circles post the cancellation of its licences and Loop Mobile is exiting the market due to financial pressures. However, competition is still fierce with 12 operators present in the market, and one more (Reliance Jio Infocomm Limited) slated to launch services in 2015. This has resulted in increased pressure on operator margins, especially owing to the high prices they are paying to acquire spectrum in the 900 MHz and 1800 MHz bands.

Sathish Gopalaiah and Romal Shetty

The hypercompetitive telecom market has witnessed several changes over the years and a clear demarcation is visible today among operators. Airtel, Vodafone and Idea have separated themselves from the rest and are preparing for the future by actively focusing on customer service and investments in newer technologies. This focus has helped them improve the quality and stickiness of their subscribers. The past couple of years have also seen some specific focus by Indian operators in terms of shutting down loss-making operations in order to ensure the profitability of the overall business. Further, some new entrants have limited their operations to a few circles with the intention of increasing their share in these markets. Over the past few years, the Indian market has also seen a fair bit of stabilisation in voice prices. However, the battleground has now moved to data services and these services have seen significant investments from operators.

B.K. Syngal

The telecom sector has witnessed rapid changes in the last few years. As in most other countries, separate licences are issued in India for basic, cellular, internet, and satellite and cable TV services, each with a distinct industry structure and terms of entry. However, with the convergence of these markets and technologies, and operators being allowed to use their facilities to deliver some services reserved for others, a relook at the existing policy framework is necessary. No other country in the world has 10 to 12 operators. Most of them have two to four players. For this to happen in India, stronger and clearer M&A guidelines are required.

What are the key reasons for the limited M&A activity in the Indian telecom space despite the finalisation of M&A guidelines?

Rohan Dhamija

Although the government has revised its M&A guidelines and increased the limit of the merging operators to a combined market share of 50 per cent, the move has not incentivised operators to consolidate. A key deterrent has been the guideline that requires the operator to pay the government the difference between the old rate at which the acquired company had bought spectrum and the prevailing market rate of that spectrum. The guideline requires an additional payout on the part of operators who are already highly debt-ridden. Moreover, operators are not interested in acquiring the entire company, along with its huge debt, and prefer to take over just the assets.

Sathish Gopalaiah and Romal Shetty

In India, a combination of stringent M&A guidelines and the unclear stand of the government have contributed to the poor M&A activity in the telecom space. The current M&A regulations have restrictions on the market share and spectrum holdings of the new entity, which could prohibit consolidation amongst market leaders. On the other hand, consolidation involving other competitors (apart from the market leaders) is not simple, considering their financial debt. Also, any such migration could involve an additional spectrum fee, which would be linked to the market price for spectrum.

Rajiv Luthra

The telecom M&A guidelines were much awaited, but did not result in any activity because of various provisions, such as buyers having to pay market-linked prices for spectrum held by the company being acquired, which amounts to paying twice for the same spectrum. Most potential acquisition targets have heavy debt loads owing to the high payouts made by them for spectrum. Finding buyers willing to take on this debt as well as pay again for the spectrum is proving difficult.

Menaka Sawhney

The M&A guidelines have failed to excite the industry. One of the reasons for this is that, as per the spectrum pricing norms, the buyer will have to pay a heavy amount to the government in addition to what it would pay to the seller. Such a move will not only push up the cost of acquisition but also act as a deterrent and limit the options for new entrants. The guidelines also appear to have made it tougher for bigger incumbent telecom companies to merge among themselves. The need of the hour is consolidation, so that the number of players can be reduced. This would enable players to take advantage of a larger scale of operations, which, in turn, will cut costs and tariffs.

B.K. Syngal

The M&A policy for the sector was released by the government in early 2014, but it seems to have disappointed the industry for more than one reason. A major problem in the guidelines is that a merged entity cannot have more than 50 per cent market share in terms of both subscribers and revenue in any of the 22 circles. Since the ultimate objective is to prevent the formation of monopolies and restrictive practices, the big operators are complaining that it leaves them with no scope for mer-gers between them.

Another major dampener is that if an operator acquires a telecom company that owns spectrum allotted by the government, the acquirer has to pay the price difference to the government. This would only escalate the cost of acquisition in the telecom sector.

The new M&A guidelines also limit the exit options for new entrants. These guidelines state that there is a lock-in period of three years during which the company cannot sell its spectrum.

How different are these guidelines from those in mature markets?

Sathish Gopalaiah and Romal Shetty

Across the globe, regulations have played a significant role in M&As involving telecom operators. In China, for example, consolidation in the telecommunications industry was driven by the government’s mandate to reduce the number of telecom operators from six to three. This amalgamation was facilitated by the operators being mainly state-owned entities. Currently, the US market is dominated by four players (AT&T, Verizon, Sprint and T-Mobile). However, with approximately 80 per cent of the combined market share and earnings before interest, taxes, depreciation and amortisation, AT&T and Verizon dominate the industry, which, to some extent, has led to a duopoly. Hence, the merger of the two smaller operators, Sprint and T-Mobile, was viewed as a strong case to dilute the duopoly by many. However, considering its anti-competition concerns, the Federal Communications Commission ruled out this merger too. The European market is also on the brink of consolidation. However, stand-alone regulatory bodies for individual countries, in addition to a common European Union regulator, are seen as a major roadblock.

Rajiv Luthra

The natural equilibrium that has been achieved in most mature telecom markets is to have three-four major carriers, with a few smaller carriers and mobile virtual network operators serving niche segments.

How is the failure of the Bharti-Loop deal being perceived by the industry?

Rohan Dhamija

The deal could not go through because of a delay in government approval. The industry is viewing this as a setback to the supposed easing of M&A norms, as this shows a lack of clarity on the government’s part on how to execute these guidelines and iron out the issues to enable such deals.

Sathish Gopalaiah and Romal Shetty

The acquisition was intended to augment Bharti Airtel’s subscriber base and move the company closer to the top position in the Mumbai circle. Further, access to Loop Mobile’s cell sites, electronic equipment and fibre optic cables would have facilitated network roll-outs in the 900 MHz band. The failure reflects poorly on the telecom sector in India, which urgently needs consolidation.

Rajiv Luthra

Bharti Airtel’s acquisition of Loop Mobile has fallen through partly due to regulatory delays and uncertainty. Loop’s loss of customers during the deal negotiation period was a major factor in making the transaction unviable.

B.K. Syngal

The failure of the Bharti Airtel-Loop deal reiterates the fact that regulatory clarity is needed in the M&A guidelines to ensure that deals like these do not fall through. The case never looked like a typical mer-ger and the Telecom Regulatory Authority of India’s opposition to the deal probably reflects the confusion surrounding telecom mergers in the present system.

There have been many mergers in the past with licence and spectrum transfer being the most essential part of the deal. The Loop sale should have been easier because only the customer base and other assets mentioned in the deal were being transferred to Bharti and not the licence. Although there is ambiguity in the current system, there is a possibility that the mer-ger was a bad business decision and not a victim of policy paralysis on the part of the government.

How are these guidelines different from those in mature markets?

Rohan Dhamija

In no other telecom market around the world does the government require the acquiring company to pay an additional amount in lieu of higher spectrum prices.

B.K. Syngal

India’s telecom sector is one of the most regulated industries in the world, and the cost of airwaves is far higher than in other telecom markets around the world. The Indian telecom industry has been demanding lower base prices for airwaves and it wants the government to not demand hefty upfront payments on account of airwaves.

What policy, regulatory and industry measures are required to facilitate M&A deals in the Indian telecom industry?

Rohan Dhamija

With 12 operators in play and some of them in dire need of financial resources, the Indian telecom market requires favourable policies and guidelines to facilitate consolidation. The enablers are in place with the incumbent operators looking to become pan-Indian 3G players, GSM-only operators looking to enter the mobile broadband market, and long term evolution operators requiring GSM spectrum for voice fallback.

The government should ease its guidelines on charging the acquiring company an amount equivalent to the differential between the current market price and the price at which the target company had acquired spectrum. It should also allow operators to selectively trade spectrum.

Sathish Gopalaiah and Romal Shetty

The Indian telecom sector is undoubtedly on the cusp of consolidation and M&A regulations will be a decisive factor in determining the rate at which this industry consolidates. Currently, the Department of Telecommunications is taking initiatives to revive the telecom industry through consolidation and protecting the state’s interests by treating spectrum as a national resource and maintaining competition. In order to facilitate activities in the M&A space, policies need to focus on service providers benefiting from operational synergies soon after merging. Having said that, attention should be paid to the fact that consolidation at a circle level and inadequate competition may lead to the formation of monopolies and higher tariffs.

Rajiv Luthra

The M&A guidelines clearly need to be revisited, and it is essential that effective consultations are undertaken with the industry before coming out with revised guidelines. Furthermore, long-term con-sumer interest is served not just by bringing in healthy competition in the market but by ensuring business viability. Moreover, as the emphasis shifts from voice to data, huge infrastructure investments are required to keep up with consumer demand for cheap and fast data. In order to enable operators to make such investments, policies must ensure that the market forces that promote efficiency are allowed to prevail.

Menaka Sawhney

The Indian telecom sector is one of the most regulated industries; however, there is still need for clarity on several issues so that telecom companies no longer struggle. Such clarity will help the sector realise its potential in the long run.

B.K. Syngal

There is an urgent need for consolidation in the telecom sector, be it in terms of market consolidation, legal consolidation, or network and asset sharing, etc. Telecom companies are hopeful that the new government will help them maintain a clear, stable, development-oriented and investor-friendly policy regime, which will attract long-term investments and cater to the long project maturity requirements of the telecom sector.