How Idea-Vodafone to be the biggest gainers from easier spectrum caps

The relief measures announced by the government for the debt-ridden telecom sector would benefit the Idea-Vodafone combine the most among large players, as the merged entity could retain spectrum in key markets and significantly boost cashflows, analysts said.

According to a Deutsche Bank report, the Idea-Vodafone combine will have to pay a 30 per cent lower annual installment on spectrum due to the longer duration of the payment tenure. The merged entity will also have the highest leverage among large players.

“The Idea-Vodafone merged company’s annual installment stands at around Rs 160 billion compared to the current annualised EBITDA of Rs 100 billion. For Bharti (Airtel), the installment and annualised EBITDA for India operations stand at around Rs 90 billion and Rs 230 billion, respectively,” the report said. Reliance Jio’s annual installment stands at around Rs 45 billion.

The Cabinet on Wednesday extended the tenure for spectrum payments to 16 years from the current 10 and relaxed the spectrum holding limits for mobile operators. The overall spectrum holding limit for operators has been increased to 35 per cent from 25 per cent. The ceiling on spectrum held by operators within a particular band has been removed, and instead a 50 per cent cap has been proposed on the combined spectrum in the sub-1 gigahertz (GHz) band.

The Idea-Vodafone combined entity was exceeding the limit in Maharashtra, Gujarat, Kerala, Haryana and Uttar Pradesh (east). These markets account for 32 per cent of the total Indian mobile market and the merged entity has a leadership position in all of them. “The ability to retain spectrum aids its competitive position,” Deutsche Bank said in the report. According to estimates, the total spectrum holding of Airtel is 2,200 megahertz (MHz), Idea-Vodafone combine is 1,860 MHz and Reliance Jio (including Reliance Communications) around 1,650 MHz.

Morgan Stanley said the deferred spectrum payment tenure would provide some relief for operators in the near term. “Airtel's annual spectrum payments would decline by Rs 14-17 billion,” Morgan Stanley said. 

During the last three auctions, the government had allowed payments for spectrum bids as a combination of upfront amount (25 to 33 per cent of the bid) and the balance via 10 annual installments after a two year moratorium. The new policy extends the installments to 16 years.

Goldman Sachs said the increase would aid consolidation and help Idea the most, and potentially Jio as well. “Idea and Vodafone, as per earlier regulations, had 45.4 MHz of excess spectrum across all service areas put together (2.5 per cent of total spectrum), which they would have had to surrender, given the previous government’s merger and acquisition guidelines,” it said in a report.

The excess spectrum was in the bands of 900 MHz and 2,500 MHz, and worth around $800 million at current market prices. With the increase in caps, such spectrum could be retained by Idea, Goldman added. It also said the relaxation of the spectrum cap could make it easier for smaller operators, including Aircel, to sell their spectrum to incumbents, and also help entities in the middle of a merger and acquisition to retain spectrum. RCom, for instance, has announced the sale of some assets to Jio, but continues to retain some of the spectrum in the 800 MHz band. Earlier, the sale of such 800 MHz spectrum would have breached Jio’s spectrum caps of 50 per cent.

“None of Bharti’s (Airtel) ongoing acquisitions breach any spectrum caps, excluding un-liberalised spectrum, but the increase in spectrum caps could provide Bharti with capacity to acquire some of Aircel’s spectrum, if the latter were to sell them,” Goldman said.