Over the past decade, the telecom industry has undergone massive transformation, driven primarily by deregulation, the increased demands of a "networked economy", and the emergence of innovative services and business models that have fuelled competition. Consolidation has followed with a spate of mergers and acquisitions (M&As) taking place over the past few years.

Major recent deals

Last year, soon after the two networking giants Alcatel and Lucent agreed to form a joint venture to compete against Asian rivals like Huawei and ZTE, mobile phone-maker Nokia and German tech giant Siemens announced their decision to combine their phone equipment units.

Although no cash changed hands in the 50:50 deal, Siemens, which was holding on to a losing telecom business, had to offer a discount to Nokia, which runs a profitable network equipment business. Siemens contributed $11.57 billion and Nokia $8.3 billion to the new business. The merger gave Nokia access to fixed line equipment (it has so far focused on wireless equipment while Siemens' telecom business includes both fixed line and wireless equipment).

The Alcatel and Lucent and Nokia and Siemens mergers reflect, better than anything else, the forces that are currently driving the global telecom industry: consolidation, lower costs and prices, the need for scale, the move towards convergence, and the challenge from Chinese vendors who benefit from the lower equipment costs.

Recently, Thailand-based telecom service provider Telephone Organization of Thailand (TOT), acquired CAT Telecom's 42 per cent stake in loss-making GSM operator Thai Mobile for about 2.4 billion Thai baht. The buyout will increase TOT's stake in Thai Mobile to 100 per cent. Thai Mobile has debt of around 6 billion Thai baht. TOT plans to grow Thai Mobile's subscriber base and invite foreign partners to invest in building Thai's W-CDMA network. After selling the stake, CAT will be able to focus more on the countrywide rollout of CDMA2000 1xEV-DO services.

Meanwhile, China Mobile completed its purchase of 100 per cent share in Pakistan-based Paktel for $460 million and renamed the company CMPak Limited. This was the company's first overseas acquisition.

In June 2007, Saudi Arabia-based telecom service provider Saudi Telecom Company (STC) acquired 25 per cent stake in Malaysia's Maxis Communications for $3 billion. The purchase was undertaken through the indirect route with STC picking up 51 per cent direct stake in Natrindo Telepon Seluler (NTS), Maxis's principal shareholder. The purchase will be financed through internal funds and borrowings. The acquisition will enable Saudi Telecom to expand its operations in India, as Maxis owns controlling stake in Indian telecom operator Aircel.

May 2007 saw Qatar Telcom (Qtel) acquire a 51 per cent stake in Kuwaitbased telecom service provider Wataniya Telecom for approximately $3.7 billion.Following the acquisition, Qtel will have an equity interest in operations in 11 countries in the Middle East and Asia.

In the beginning of 2007, Swisscom AG repurchased a 25 per cent stake in Swisscom Mobile from UK's Vodafone Group for $3.5 billion.

Emerging Indian market

The year 2007 has so far seen sizeable equity moves in India. Global telecom and financial companies have turned their attention to the Indian telecommunications business as never before. UK-based Vodafone's bold $10.9 billion move to acquire controlling stake in India's fourth largest cellular operator Hutchison-Essar in February this year confirmed India's position as an important investment destination. The deal brought in $801 million as foreign direct investment, making the world's largest mobile company the top investor in the country up to May this year.

In July 2007, the Bharti Group acquired a 4.99 per cent direct holding in Bharti Airtel from Vodafone for about $1.4 billion. This took the Bharti Group's holding in Bharti Airtel to over 50 per cent.

In June 2007, France Telecom acquired the enterprise and managed services divisions of GTL for about Rs 2.5 billion. GTL is planning to use the funds to take over companies in the network services space. Orange Business Services, the business communications arm of France Telecom, carried out the transaction. The move, which marks France Telecom's reentry into India, will enable Orange Business Services to address the enterprise network space in India.

Another emerging trend is Indian companies acquiring foreign firms. Reliance Communications Limited (RCOM) recently acquired the US-based data communications company Yipes Holdings for $300 million. Yipes will reportedly function as a subsidiary of Flag Telecom, RCOM's submarine cable company. Yipes, which hasa 40 per cent share of the US data communications market, will enable RCOM to penetrate the global enterprise and institutional data market. The company reportedly owns over 22,000 route km of fibre across 14 cities in the US and is also present in London, Hong Kong and Tokyo.

Growing interest by private equity firms

No doubt, M&As are playing an increasingly important role in the sector across markets. Yet another important trend is the emergence of private equity funds as key contenders in the pursuit of global telecom assets. Of late, private equity companies have been looking at telecom businesses with growing interest.

Amongst the largest private equity deals in the wireless sector this year was the $27.5 billion acquisition of US-based Alltel Corporation by Goldman Sachs' private equity arm, GS Capital Partners and the Texas Pacific Group (TPG). The TPGGoldman Sachs offer placed a 10 per cent premium on Alltel's value.

Recently, Telecom Italia sold its stake in Brazil's fixed and mobile operator Brasil Telecom for nearly $515 million to a group of Brazilian pension funds including Previ, Petros and Funcef.Telecom Italia owned 38 per cent stake in Solpart, a holding company with 51 per cent stake in Brasil Telecom. The 38 per cent stake sale resulted in a net gain of $269 million for Telecom Italia.

In April 2007, a consortium comprising Italian financial institutions and Spain-based telecom service provider Telefonica acquired a 23.6 per cent stake in Telecom Italia. The consortium purchased Olimpia, Telecom Italia's holding company, from Italian tyre company Pirelli for 3.1 billion euro in an all-cash deal. The group has formed a new holding company called Telco.

A similar trend can be witnessed in the Indian telecom industry as well. In July 2007, RCOM sold a 5 per cent stake in its tower company, Reliance Telecom Infrastructure Limited (RTIL), for $337.5 million to seven international investors from the US, Europe and Asia at Rs 135 per share. The transaction valued RTIL at $6.75 billion and resulted in capital gains of $280 million for RCOM. RCOM's residual 95 per cent stake in RTIL is valued at $6.4 billion, and the company is planning to further unlock its stake through an RTIL IPO and/or strategic sale of RTIL's shares.

In February 2007, the US-based private equity firm New Enterprise Associates (NEA) purchased 40 per cent stake in HFCL Infotel for Rs 3.75 billion.The deal valued the single-circle operator at around Rs 9.5 billion. HFCL Infotel reportedly intends to use the proceeds to offer triple-play services in Haryana, Himachal Pradesh, Jammu & Kashmir and, at a later stage, in Uttar Pradesh.

In November, four private equity players –­ GLG partners, ChrysCapital, UKbased TA Associates and Citigroup –­ picked up a combined 18 per cent stake in Idea Cellular. This was in addition to the 15 per cent stake acquired earlier by Providence Equity Partners. The Aditya Birla Group reportedly sold 1.25 per cent stake in Idea Cellular to UK-based Spinnaker Capital, 0.5 per cent to Australia's Macquarie, and 1.5 per cent to Sequoia Capital. Another 2.15 per cent was purchased by foreign institutional investors.

In October 2006, ChrysCapital invested Rs 5-5.5 billion in Idea Cellular. Its current stake in Idea is expected to be 4-5 per cent. In a similar deal, Singapore's Temasek Holdings picked up a 9.9 per cent stake in Tata Teleservices through its wholly owned subsidiary Aranda Investments. The deal size was Rs 15-20 billion.

But what does the new interest by equity firms mean for the sector?Although such transactions infuse large capital into the sector, how the scenario changes over time is yet to be seen.According to Sridhar T. Pai, CEO, Tonse Telecom, "The service provider business is like that of a power or water utility's. A service provider understands the consumer's requirements and provides service accordingly. Once a private equity firm comes in, it becomes an overtly commercial transaction, making consumer satisfaction a subdued priority."

Deals on the horizon

India has already witnessed one big wave of consolidation. "Now the second wave of consolidation has started showing signs with large Asian operators like Telekom Malaysia and others entering the Indian scenario," observes Pai. "The focus will not only be on India but there is a huge possibility that an Indian operator may acquire a big operator in an emerging market."

Videsh Sanchar Nigam Limited (VSNL) has already paved the way for acquisitions abroad. Over the last few years it has acquired international companies like Tyco Global Network, TeleGlobe and Genplex. VSNL also holds a 26 per cent stake in the South African Second Network Operator (SNO) and has started rolling out services in the country. It also attempted to acquire a 26 per cent stake in South African telecom company, Infraco, but has now been denied permission to acquire the stake.

Recently, Bharti Airtel has also entered the Sri Lankan mobile market. It has formed a subsidiary, Bharti Airtel Lanka, to offer cellular services in the country.

Further, Mahanagar Telephone Nigam Limited (MTNL) is close to acquiring Sri Lanka-based fixed line operator Suntel. So far, MTNL is the highest bidder, quoting between $160 million and $180 million.The PSU has reportedly sent a delegation to Sri Lanka to begin technical assessment of the company.

RCOM, meanwhile, is planning to sell stake in Flag's undersea cable unit through a private equity placement and an international listing of shares by the end of 2007.

Shyam Telecom is looking for acquisitions in Europe and Asia and has earmarked $40 million to $50 million for the purpose. The company is reportedly already negotiating with consultants for the acquisition and expects to complete talks within the next six months.

Meanwhile, speculation continues regarding Idea Cellular's merger with Spice Telecom.

Consolidation, quite clearly, is set to continue yet, as telecom operators iron out their strategies and line up M&A deals in pursuit of global or niche ambitions. Customers, too, are not complaining. They stand to benefit not just from global products and greater choice but also better quality service as operators achieve economies of scale. As the telecom industry is proving: quality, not quantity is what matters finally.