It’s the age of big fish with big pools

With the the announcement of the National Telecom Policy of 1999 last year, moving private telecom operators from a high licence fee regime to a new revenue sharing one through a migration package, viability of projects has begun to show now. And consolidation is the new mantra of the market place. And consolidation is taking place through mergers and acquisitions of smaller companies by larger ones.

The telecom growth was so far limited to just the four metros out of which also Mumbai and Delhi hogged the limelight. License holders in these metros were so far the market leaders and were perceived to have a strangle-hold over the telecom scene. But the migration package and movement to a revenue sharing arrangement has changed all that. Telecom circles in states have now occupied centrestage and there is a mad rush for consolidation in these areas. The new window of opportunity has emerged from a variety of steps taken by the government in the last few months.

The NTP’99 increased the licence period from 10 to 20 years, revenue sharing has improved viability of projects, reduction in cellphone tariffs have expanded the market and the latest move in the Budget this year reducing duties on cellphones has given yet another push to these markets. Volumes are now driving businesses which has led to a spurt in the last few months in acquisitions and mergers.

What started off with the Bharti Group’s take-over of JT Mobiles in Karnataka and Andhra and Skycell in Chennai in November last year, was closely followed by Hong Kong-based Hutchison Whampoa picking up the Essar stake in the Delhi licence. But the one announcement that shook the telecom industry was a decision to merge between the Tatas and Birla AT&T last month.

Apart from the traditional reasons of consolidation, which centres around benefits arising out of economies of scale, the above mentioned advantages have changed the dimensions of future growth envisaged in the telecom sector. Forthcoming opportunities like the opening up of National Long Distance (NLD) with opportunity for sharing revenue with government monopoly the DoT and other players, also has a major role to play in the game of consolidation.

Consolidation helps in building volumes which means a larger customer base and more airtime usage for operators. Further, contiguity of licences is another determining factor. For example, Maharashtra and Gujarat together make a lot of business sense just as Andhra Pradesh and Karnataka together. But Tamil Nadu and Uttar Pradesh will not make business sense. This is because not only will contiguous networks help when NLD opens up, there is exchange business between states.

But then there will be circles and circles. Currently, the circles considered as brides for which several suitors are doing the rounds include the Hinduja-promoted Fascel which has Gujarat and Karnataka and Punjab, currently with B K Modi’s Modicom. While, Hutchison, Bharti and BPL are said to be in the race for the Gujarat circle, Hutchison, Birla AT&T-Tatas and Bharti are said to be in the race for the Modicom circles.

Then there is a second category of circles like Madhya Pradesh and Rajasthan which have assumed importance owing to the impending opening up of NLD. The geographical locations of these circles make it strategic for companies to obtain this. Amongst the metros, Chennai is on the shopping list of a few companies. Though Calcutta is up for grabs, it is not too hot with the suitors.

Consolidation has assumed significance as perceived valuations of businesses in the telecom sector are going to be as important as in the dotcom businesses. Companies are going to look at the stock market as an important place for getting returns on investment, apart from realising values just from the customers. Financial analysts predict Nasdaq having an appetite for at least two or three good Indian telecom companies, and this is where businesses will be headed.

For this, pedigree of partners in the telecom business is going to play a key role which will differentiate between blue-blooded companies and the other `not-so-happening’ ones. So far, companies have been financing their network building and other operations through equity infusion. Now is the phase when debt will be required from financial institutions. For this, pedigree of partners will be important and companies with partners having a global presence and domination of the telecom scene worldwide, will clearly lead the pack.

Not only this, for consolidation, large purses will be required as companies would have to take over the debt burdens of acquired companies as well as their own. Also, to enter the Third Generation telecom technology, huge capital investments and great technical capability will be required.

However, the basic underlying principle in all future consolidation through the acquisition route is going to be governed by is that there will be no crazy bidding. This is because the NTP allows for a fourth operator apart from the DoT/MTNL as a third operator in all circles. This means, if a circle is available at decent valuations, it may be bought, but fancy purchases will not happen as companies have the option of trying a licence in the fourth operator slot.

However, the test during this phase which the entire country is so gung-ho about, is going to depend on how competition laws and regulatory issues are settled. The grounds on which the DoT and MTNL enter the cellphone business is still going to be the single largest factor determining the sentiment in this sector in the months to come. The new TRAI’s commitments to tariff reforms balanced by their approach to provide the Universal Service Obligations and the Appellate Tribunal’s competence in painlessly resolving some nagging problems of the migration package, will have a large role to play in maintaining the optimistic sentiment in the telecom sector.