Merger as the last resort: Vodafone-Idea union points to stress in telecom

Vodafone and Idea Cellular have decided to merge in order to survive in an industry that is seeing its fortunes dip with each passing quarter. The high debt burden caused by steep spectrum prices and the tariff war unleashed by Reliance Jio have left the industry gasping for breath. The numbers are startling: Of the five listed networks, four (except Bharti Airtel) reported losses in April-December 2016. In the unlisted space, all five telecom companies were in the red in 2015-16. The return on equity for the listed networks was 5.6 per cent in 2015-16 and is learnt to have turned negative in the first nine months of the current financial year. Their debt-equity ratio stands at a whopping 2.2. For the first time, their combined debt exceeds their market capitalisation.

The Vodafone-Idea merger will create the country’s largest network with 400 million subscribers and 41 per cent share of industry revenue, ahead of Bharti Airtel (268 million subscribers and 36 per cent share of revenue) and Reliance Jio (over 100 million subscribers). The combine will have a stronger balance sheet and will be able to cut down on expenditures. Yet the business scenario will stay bleak. Thanks to the unappetising outlook, there is no way the networks can raise money from the stock market. The banks are increasingly worried about their exposure to the sector. Overseas investors have seen the bloodbath in the market and want to stay away.

For relief, the Telecom Regulatory Authority of India (Trai) has from time to time made a case for reducing the various levies imposed by the government on the networks. It has suggested that the spectrum user charge be reduced from an average of 6 per cent of adjusted gross revenue to 3 per cent and then 1 per cent; the licence fee be lowered from 8 per cent to 6 per cent; and the contribution to the Universal Services Obligation Fund be reduced from 5 per cent to 1 per cent. It has also suggested that networks be allowed to pay for spectrum over 20 years instead of the current 10 years. Sunil Mittal of Bharti Airtel has suggested shared active infrastructure, including spectrum, to restore the sector’s profitability and credibility. Thus spectrum could be jointly owned by what Mr Mittal calls a network operating company from which all service operators can take it on lease. This will transform telecom operators into purely marketing companies and strengthen their balance sheets.

However, the department of telecommunications is yet to act on any of these suggestions. Till that happens, networks see mergers as a way out. Bharti Airtel has bought the assets of Telenor. Reliance Communications and Aircel are also coming together. Much of the pain has been caused by Reliance Jio’s offer of free lifetime voice calls and free data till March 31.  Its tariffs from April 1, too, are extremely low. The Telecom Commission has said that Trai’s inability to stop Reliance Jio from offering back-to-back promotional schemes for six months, against the norm of 90 days, has caused the current turmoil in the industry. The Competition Commission, too, failed to take notice of the disruption caused by Reliance Jio. Clearly, if telecom is in crisis, there are many that need to share the blame.