Dropping a call

Half-hearted merger norms for the telecom sector

Consolidation is urgently required in India's telecommunications sector. There are 10 to 12 telecom companies, or telcos, in each market (the country is divided into 22 telecom circles). As a result, tariffs have reached rock bottom. Coupled with the fact that telcos now need to acquire spectrum in auctions, this has made the outlook bleak. Most telcos are laden with debt and their profits are wafer-thin. The new merger and acquisition guidelines for the industry were supposed to facilitate consolidation, but analysis shows that the objective may still be hard to achieve.

To begin with, the guidelines say that the merged entity cannot have more than 50 per cent market share in terms of both subscribers and revenue. The issue is not with the subscriber criterion: each telco has a long tail of inactive subscribers who can be pruned to achieve the target of 50 per cent. But there is no way to prune revenues. This effectively rules out consolidation between the two largest telcos in the country, Bharti Airtel and Vodafone. In 15 circles, their combined share of revenue is more than 50 per cent; and in three circles, their share of subscribers exceeds 50 per cent. There is little chance of the top three telcos - Bharti Airtel, Vodafone and Idea Cellular - merging their all-India operations because their revenue market share stands at 69 per cent. This keeps the door open for only mid-sized and small mergers: Aircel with Vodafone or Aircel with Reliance Communications.

Two, the guidelines will push the cost of acquisition very high. That's because if a telco is acquiring another telco that owns spectrum allotted by the government (at Rs 1,658 crore for an all-India reach, a huge discount to the market price), the acquirer has to pay the price difference. For Tata Teleservices, which is supposed to be a takeover target, the additional burden on this count would be Rs 3,700 crore. For Aircel, the acquirer will have to pay Rs 4,900 crore to the government. In addition, the sector is burdened with debt of Rs 2.5 lakh crore. So, debt will undoubtedly be a part of most deals. These two factors will make acquisitions expensive.

Moreover, the guidelines have said that the lock-in period of three years, during which the telco cannot sell its spectrum, will hold in cases of acquisitions. In other words, an acquirer will have to run the acquired company as an independent entity till the lock-in gets over. Economic benefits of an acquisition flow in only after a merger. This could dampen the enthusiasm for mergers and acquisitions in the sector. Given all this, it is more likely that mergers and acquisitions may happen in circles rather than all over the country. As it is, nine or 10 circles contribute to the bulk of the business of most telcos. Also, once the government allows spectrum sharing and trading, there will be no incentive left among telcos to merge. It will be cheaper and less cumbersome for telcos to take spectrum on lease.