M&A norms may not excite telecom companies

Policy does not give any clarity on sharing and trading of spectrum

The recent mergers and acquisitions (M&A) guidelines for the telecom sector might not, for now, excite companies into deals.

On the one hand, any deal would come with a certain additional cost for spectrum acquired at an administrative price beyond a limit, while the decision to consider both revenue and subscriber base to determine eligibility for M&A would reduce chances of deals. Third is the decision to maintain the lock-in period. Most important, the policy does not give any clarity on sharing and trading of spectrum.

The sector has huge debts. Any acquisition would mean buying the debt of the target company. So, the payment for the spectrum would be an extra burden.

A company acquiring another would need to pay the difference between the entry fee and the auction-determined price for spectrum for 4.4 MHz in GSM band and 2.5 MHz in CDMA band, if the spectrum was originally acquired by paying the entry fee of Rs 1,651 crore.

Experts said a buyer would require paying upwards of Rs 8,000 crore for the acquisition of one that has a higher quantum of spectrum at more than 6.2 MHz.

"Deals would continue to face challenges, from the requirement of paying the market price for acquired spectrum to the high debt of targets," said an analyst with Motilal Oswal.

On the other hand, determining the 50 per cent market share cap, both in terms of adjusted gross revenue and subscriber base, would bar all the big telcos from mergers. "Taking revenue as the parameter could discourage companies. The subscriber market share can be adjusted by cutting inactive customers. Companies would be interested in increasing their revenue share, instead of reducing it," said Jaideep Ghosh, partner (telecom), KPMG India.

Based on data published by the Telecom Regulatory Authority of India, the top two companies, Bharti Airtel and Vodafone India, together cross the 50 per cent cap in 15 of the 22 circles (70 per cent in Rajasthan) by combined AGR, and in three circles in terms of combined subscriber base. This means they will be unable to explore an M&A.

Both on subscriber and revenue market share, mergers are possible between Vodafone and Aircel, Idea Cellular and Aircel, and Reliance Communications and Aircel, where the merged entities do not cross 50 per cent market share in any of the 22 circles.

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However, the new norm has increased scope considering the fact that the earlier guidelines had kept the ceiling at just 25 per cent, and the initial proposal was to increase that to just 35 per cent.

“The M&A guidelines may not provide full benefits of the consolidation in terms of costs especially of spectrum. The larger question is whether the so called ‘market discovered price’ of the auction is a fair price for determining the differential to be paid at the time of the merger considering that auctions were held when the telcos where under compulsion to bid aggressively for the spectrum to remain in business,” said Hemant Joshi, Partner, Deloitte Haskins & Sells.

Also, the decision to continue with the lock-in period even after the merger may also come as a hurdle. “There is no justification of the lock-in period when the spectrum is bought at market determined price,” said Rajan Mathews, director general, Cellular Operators Association of India (COAI).

The industry has also sought clarity on the spectrum usage charges. “The Government needs to give more clarity on whether the weighted average method would be applicable on SUC,” said Mathews.

However, the only relief that the new guidelines offer is the provision that if a lock-in period exists, the cross-holding norms would not apply in the first year. The cross-holding norms bar any entity or individual from more than 10 per cent equity in two competing telcos.