Idea Cellular stunned the telecommunications sector earlier this week by agreeing to pay Rs 3,310 crore to Videocon Telecommunications for the right to use spectrum in the 1800 MHz band in Gujarat and Uttar Pradesh West (2x5 MHz contiguous blocks of 1800 MHz in each service area).
What has come as a surprise to the industry is the price that Idea paid for the spectrum, three times the price that Videocon paid in November 2012 (Rs 1,330 crore), if one factors in the price for the full tenure of the spectrum over 20 years.
Idea's move has worried the industry, as it is likely to set a floor of sorts for the government and others for future transactions. However, Idea clarified on Thursday that the deal should be viewed as an one-off event because the company is not planning to strike similar deals in the near future. In a conference call with analysts, Idea's deputy chief executive, Ambrish Jain, said: "Spectrum spends from hereon would be discretionary. We had a compulsion to buy as we are in a leadership position in these two circles. We were clear we wanted these two circles, but we will wait for the auction to happen for the rest of the circles."
Given that such large contiguous blocks are scarce and were not auctioned in March 2015 auctions, analysts are using the premium that operators paid for 1800 MHz band when compared to the price paid for 900 MHz band.
Operators paid 35 per cent more than the 900 MHz band in category-A circles and 47 per cent more in metro circles. JM Financial says Idea has effectively valued spectrum in Gujarat and UP West at 55 per cent premium to price paid for the 900 Mhz band. Idea has paid this due to the scarcity of contiguous large blocks in this band and for strategic reasons.
The company has a leadership position in these two circles (No. 2 in Gujarat and No. 1 in UP West) and, therefore, it was critical for the company to ring-fence these two markets with a service offering that spans across 2G, 3G and 4G.
Idea now has spectrum to offer 4G services in 12 circles, which covers 75 per cent of the company's revenues and possibly a lion's share of its operating income. Analysts are surprised that Vodafone did not pick up the spectrum, as it is in a leadership position in Gujarat with 39 per cent revenue marketshare, while Idea comes second with a revenue marketshare of 23 per cent. Either Vodafone was unwilling to pay such a high price for it or Idea managed to outbid.
Despite this purchase, Idea needs to acquire spectrum in five circles (Rajasthan, Bihar, West Bengal, Assam and Mumbai) where it does not have broadband spectrum. However, the company is willing to wait for future auctions as far as acquiring fresh spectrum is concerned. The company's chief financial officer Akshaya Moondra, told analysts: "This transaction should not be seen as anything else we can pay in auctions. These circles were critical as they are leadership circles. Having completed our footprint in all leadership circles, no other circle has a time criticality and we can wait for auctions to happen."