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Sunil Jain: No more phon(e)y deals

If a few more deals like Telenor start looking shaky, it changes investor perception

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Not too many, except those following realty firm Unitech’s fortunes, would have paid attention to news items about Norwegian telecom firm Telenor scrapping its $1.8 billion rights issue to fund its acquisition of a 60 per cent stake in Unitech Wireless. Instead, Telenor plans to fund its purchase by taking on more debt ($1.2 billion) and not paying dividend to its shareholders ($0.9 billion, according to the Financial Times) this year.

So why did Telenor scrap the rights issue and why does it matter? Several explanations have been given and, of them, investor scepticism over entering India (more on that in a bit) seems the most believable. If so, it has worrying portents for future investments in a sector which, right now, is one of the few that continue to grow at a scorching pace — if nothing else, it is a warning that investors, in equity today and perhaps debt tomorrow, are going to be asking tough questions. Why should Telenor’s, or indeed any other telecom firm’s, investors be sceptical about investing in India? The reasons are obvious.

 

 

  • India already has around 350 million mobile phone subscribers, so by the time Telenor is ready with a full network which will take around a year, there will be 450 million or more subscribers, around 300 million of whom will be in urban India — so, till urban India’s expansion picks up in a big way, it will be largely saturated by the time Telenor begins its business. There are expansion possibilities in rural India, but these have to be at a higher cost and will generate lower revenues.

     

  • By the time Telenor is ready, there will be three or four mobile players in India — Bharti, Reliance, Vodafone, BSNL — which will have world-size operations. In which case, competing with them is going to be very difficult.

     

  • Though Telenor’s presentation to investors (http://www.telenor.com/en/resources/images/presentation_entering_india_tcm28-34978.pdf) on its new investment says India has a transparent regulatory framework and spectrum allocation is done according to customer base, only the naïve can believe this (or Unitech’s marketing team is truly brilliant!). Unitech got its licence, a piece of which Telenor is paying $1.1 billion for, only due to blatant favouritism by Communications Minister A Raja. Raja did this by refusing to follow the law which said auctions were the only way to allot new licences. And if Raja had allotted existing telecom firms like Bharti and Vodafone the spectrum long overdue to them on the basis of the very subscriber base Telenor talks of, there wouldn’t even have been any extra spectrum for him to allot to firms like Unitech on a preferential basis!; to ensure Bharti and Vodafone didn’t qualify for spectrum for a long time, Raja hiked the subscriber-allocation criterion by three to five times on average. If Arun Shourie could change the law for Reliance, and Raja for his favoured bunch of firms, investors are right in asking why the next government can’t change the rules all over again? By the way, the Central Vigilance Commission is inquiring into the allotment of the licences to firms like Unitech and there is a case in the Telecom Dispute Settlement and Appellate Tribunal challenging this — so that’s another big risk Telenor has taken.

     

  • It’s been more than a year since Unitech got its licence but it still hasn’t got its spectrum in all the country’s telecom circles. It took a year or more after they’d paid their money for Idea (nine circles), Vodafone (six circles) and Aircel (14 circles) to get their spectrum — they could afford to wait since they had running businesses, but waiting is not a luxury a newcomer can afford.

     

  • There is also no guarantee Unitech will get more than the initial 4.4 MHz of spectrum it already has, and certainly no guarantee of when it will get it. In which case, what happens to its business case? Telenor’s presentation suggests it is aiming at an 8 per cent market share — that’s around 48 million subscribers in another couple of years. The existing spectrum it has is enough to service roughly around just a fourth of this. So there needs to be clarity about how a company will get this — it can’t be left to the whim of a minister, and the requirements can’t be tripled overnight.

     

  • Under the law, if Unitech is not able to roll out at least 10 per cent of its network, its licence can be revoked — this is something Raja is trying to change, but there’s no certainty that it will happen and none that, if he manages to do it, this will not be challenged or reversed. So, political goodwill is very important to do business.

     

  • If Telenor has valued a business with 4.4 MHz of 2G spectrum at Rs 8,500 crore and the government’s reserve price for 5 MHz of the more efficient 3G spectrum is Rs 2,020 crore (granted, auction prices can go higher, but how much?), clearly one of them is incorrect. Which one is it? It’s a thought probably uppermost in the minds of Telenor’s investors.

    This is what India needs to be worried about. If a few more deals start looking shaky, it changes investor perception about the country’s most-happening investment area. The next government, with hopefully a new minister and a prime minister who counts for something if it is the UPA once again, needs to think long and hard about this; and to clean up the huge mess that Raja’s leaving behind. This could, indeed should, include revoking licences of firms that have not met their first year rollout obligations — this will not even result in a big legal wrangle.

     

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