M&A proposals fail to cheer telcos

The Telecom Commission on Wednesday broadly accepted the proposed guidelines for the merger and acquisition (M&A) policy.

The commission has agreed to increase the cap of market share up to 50 per cent for each circle for the merged entity from 35 per cent proposed earlier, which is expected to be beneficial for the existing operators.

However, the commission's decision did not bring cheer to the industry.

Telecom majors - Bharti Airtel, Vodafone India and Idea Cellular - together hold 54 per cent market share across the country. But the dampener is: The commission has said the acquirer will have to pay the market rate in case it buys out a company which has got its spectrum bundled with the licence, as is the case with incumbent players.

Earlier, operators were given spectrum up to 4.4 MHz in GSM bundeld with the licence and this is known as an administered price. In such cases, the acquirer would have to pay the difference between the market price of the target company's airwaves and its administered price.

AUSPI secretary-general Ashok Sud said, "The decision that the acquirer has to pay the market price for spectrum, which has been given based on an administered price, will not encourage many M&As to happen."

COAI chief Rajan Matthews said, "I think there will be some cherry picking of assets by telcos: You will see a lot of deal happening at all."

Prashant Singhal of EY said the raising of sector cap on market share to 50 per cent from 35 per cent proposed earlier is a positive development. "Some incumbent telcos already have 25-26 per cent market share in a few circles. With this, they can consolidate by buying up smaller telcos. India is essentially a five-six operator market because that is the only way this industry would become profitable."

According to the final draft of the proposed policy, if a transferor company holds a part of spectrum which (4.4 MHz for GSM and 2.5 MHz for CDMA) has been assigned against the entry fee paid, the transferee (acquiring) company or the resultant merged entity, at the time of merger, will be required to pay to the government the differential between the entry fee and the market-determined price of spectrum, pro rata for the remaining period of the validity of the licence.

The entity, after merger, will be entitled to hold only one block of 4.4 MHz of spectrum in the GSM band and 2.5 MHz in CDMA band for the entry fee the companies have paid earlier.

This is likely to benefit incumbents such as Bharti Airtel and Vodafone, if the merger happens between two operators which got spectrum by paying the entry fee. In such a case, the merged entity will be able to retain 4.4 Mhz spectrum for the entry fee paid earlier.

On the other hand, if a new operator, which has bought spectrum through auction, buys an incumbent operator, which had bought spectrum by paying entry fee, the resultant entity will have to pay the differential price for 4.4 Mhz. So, for new operators, the cost of the entire spectrum holding is auction-determined. But, if two incumbents merge, the companies get the benefit of retaining 4.4 Mhz at a much lower cost. Also, if two operators which have acquired spectrum through auction get merged, they will not need to pay anything extra.