After months of deliberation, the government has cleared the merger and acquisition (M&A) norms for telecom companies. The move is expected to encourage consolidation in the stressed and debt-laden sector.

Broadly, the M&A guidelines state that if a telecom company acquires another one, it will have to pay the market price for spectrum held in the 4.4 MHz GSM and 2.5 MHz CDMA bands. However, if the acquired spectrum is liberalised (bought through government auction), spectrum-related payouts are not required.

An empowered group of ministers (EGoM) constituted to finalise the M&A guidelines has agreed to increase the proposed 35 per cent cap on market share (in revenues and user base) for the merged entities in a circle to 50 per cent. If the merged entity breaches this 50 per cent ceiling in any circle, the companies will have to reduce the share to below 50 per cent within a year.

This proposal is expected to benefit large companies such as Bharti Airtel, Vodafone India and Idea Cellular. According to the Cellular Operators Association of India (COAI), Bharti Airtel accounts for 29 per cent of the total GSM subscriber base of about 683 million, while Vodafone India and Idea Cellular account for 23 per cent and 19 per cent respectively.

For the spectrum auction slated for early 2014, the EGoM has approved the availability of a higher amount of spectrum in the 1800 MHz band. It has increased the availability to 403 MHz as compared to the estimated 286 MHz that was to be put on sale earlier. “The quantum of spectrum available in an auction plays a very important role in determining a fair price for airwaves, capacity of operators to pay for the acquired spectrum, quality of service, etc. The EGoM’s decision to increase the quantum will have a positive impact on the industry,” says Hemant Joshi, partner, Deloitte Haskins & Sells.

The majority of spectrum offered for sale has been derived from the airwaves released as a result of 2G licence cancellation in February 2012. These additional airwaves approved by the EGoM for sale were earlier kept aside for refarming.

Instead of the Telecom Regulatory Authority of India’s recommendation of a flat 3 per cent spectrum usage charge (SUC) for all telecom services, the EGoM has decided to introduce an SUC of 5 per cent of revenues for spectrum acquired in the upcomig auction. Further, companies already holding spectrum will have to pay  SUC at a weighted average of old and new spectrum fees. The cabinet is yet to approve these decisions.

The EGoM has decided to maintain the status quo on the contentious issue related to sale of equity, which entails a mandatory three-year lock-in period. “This clause was part of the notice inviting applications (NIAs) and the lock-in period will continue. The issue needs legal consultation,” says an EGoM member. The EGoM has referred the matter to the attorney general.

Concerns

One of the issues is related to spectrum trading. Norms on spectrum trading are important as large companies such as Bharti Airtel, Vodafone India and Idea Cellular have a pan-Indian presence and would not like to acquire companies with debt and duplicate infrastructure. However, they would be interested in purchasing specific assets of companies.

Meanwhile, CDMA operators like Sistema Shyam TeleServices Limited (SSTL) also feel that they have been short-changed. SSTL has alleged that Telecom Regulatory Authority of India has favoured GSM players by not recommending the auction of CDMA spectrum and suggesting that part of 800 MHz CDMA airwaves be used for GSM technology. “We still await clarity on the pricing of spectrum in the 800 MHz band, which would help in implementing our voice-enabled, data-centric strategies. It would be ideal if auctions for all spectrum bands including 800 MHz, 900 MHz and 1800 MHz are undertaken concurrently in early 2014,” Dmitry Shukov, chief executive officer, SSTL, notes.

Analysts say that clarity on these issues will truly drive industry consolidation.

Expected consolidation

Overall, the industry is satisfied with the new M&A guidelines. According to most operators, it is a step forward. “With more spectrum available in the 1800 MHz band, operators are likely to shift their voice business in this band and use 900 MHz spectrum for long term evolution. Also, the new M&A guidelines are likely to offer telecom companies room for some cherry picking,” Mathews says.

According to Mathews, the EGoM’s acceptance of the Telecom Commission’s recommendation to increase the M&A limit to 50 per cent would drive long-term growth in the industry.

Delinking spectrum from telecom licences, introduction of unified licences and increasing the foreign direct investment (FDI) limit were key steps taken by the government in 2013 to take the sector to the next level of growth. “The year 2014 is likely to be a year of consolidation and business strengthening for most operators,” notes Sigve Brekke, chairman, Uninor.

Meanwhile, the decision taken in August 2013 to allow 100 per cent FDI in the telecom sector has helped companies like Aircel, Vodafone India and Telenor to source investments from their foreign promoters. While Aircel and Telenor are making further investments to strengthen their local operations, Vodafone is buying stake from its Indian partners to consolidate its Indian business.

Foreign investors are keeping an eye on these developments. Ministry officials say that SSTL and SingTel, which holds 32 per cent stake in Bharti Airtel, have been awaiting the M&A rules, which will allow the firms to merge or buy smaller players, provided the market share of the merged entity does not exceed 50 per cent in a circle. SingTel has stated that it would fund any M&A to help consolidate Bharti Airtel’s position in the Indian telecom market.

Recently, Malaysia’s Maxis Berhad, which owns 74 per cent stake in ailing wireless operator Aircel, provided more than Rs 60 billion as “quasi equity” in order to finance the latter’s annual interest outgo of Rs 25 billion. Also, Tata Teleservices Limited, which has a debt of approximately Rs 260 billion, will require funds to bid for spectrum in the upcoming spectrum auction.

Meanwhile, Vodafone has applied for approval to buy a stake worth Rs 100 billion held by minority shareholders, including the Piramal Group, in Vodafone India. The UK-based company holds 64.38 per cent stake in Its Indian arm. Norway-based Telenor is also investing Rs 10 billion in its Indian venture in order to remain competitive in the Indian market.

In all, after two years of controversies and lack of clarity in the sector, telecom companies are now looking at business revival through consolidation.