[vc_row][vc_column][vc_column_text]No longer wise to wait for valuations to rise before selling out; market reset likely to yield three main players
By Sindhu Bhattacharya
The valuation at which Norwegian telecom operator Telenor agreed to sell off its Indian operations to Bharti Airtel last week reveals a lot more besides just the seller’s desperation to cut losses and run. It shows why all other small telecom operators still braving it out in the world’s second largest telecom market may need to also hasten their exits.
This is no longer a game for the weak hearted, and as the Telenor deal shows, it is also no longer wise to wait for valuations to rise before the small guys start thinking of selling out. Yes, the changed telecom market reality has partly been engineered by the arrival of Reliance Jio Infocomm last September in an already crowded market. Another reason could also be the abundant spectrum availability for major telcos after the last round of auctions which has cooled the appetite of big operators to pay any premium to acquire the smaller rivals. Telenor did well to absorb its losses and exit while there was still a taker. And Bharti has gained not just in money terms but also by stocking up on spectrum for future wars with RJio on the data front.
According to analysts, the Bharti-Telenor deal was concluded at just about Rs 2,000 crore when they were expecting the deal size to be up to four times more for Bharti to acquire Telenor’s spectrum, customers and employees. Telenor had said while announcing the deal that Bharti would only acquire outstanding spectrum payments and other operational contracts including tower lease, which led analysts to conclude that Bharti will invest just Rs 2,000 crore in the deal.
Analysts from brokerage Motilal Oswal said in a note to clients this morning that after the recently-concluded auction, there were limited takers for incremental spectrum in the market. This made it difficult for Telenor to get any premium whatsoever for its significant spectrum holding in some of India’s most populous telecom circles. Given the impending merger of number two and three telecom operators, Vodafone and Idea Cellular; the already inked RJio-RCom spectrum sharing terms; and the fact that no sizeable operator was willing to take its spectrum, Telenor was anyway left with limited options. This may have led to the low valuation in its deal with Bharti. The bottomline is that the deal worked in Bharti’s favour because it came so cheap.
These analysts further said that at a potential investment of about Rs 2,000 crore for Bharti, generating operating cash flow of Rs 32,000 crore and net debt of Rs 102,000 crore, “the investment would add hardly 2% to net debt, which would be offset by the EBITDA contribution from the merger.”
Also read: Telenor’s painful exit and the writing on the wall
This piece points out that as consolidation has picked up pace in India’s telecom market, sellers are settling for lower and lower valuations. “Telenor even settled for nothing, despite having 44 million customers and nearly Rs 5,000 crore in annual revenues; leave alone the value of its spectrum.”
The Motilal analysts quoted earlier said the Bharti-Telenor deal bolsters Bharti’s defence against RJio. While the incremental spectrum Bharti gets as part of this deal may not be presently required, given the large-scale data traffic on RJio’s network, holding high quantum of spectrum would allow Bharti to compete with RJio in a fixed-cost-driven market. “We believe Bharti’s strategy to remain ahead of the curve in data-rich spectrum investments should hold it in good stead”.
Not just the Bharti-Telenor deal, smaller telcos need to also take a lesson from other M&As being lined up. Already, the number two and three telecom operators in India. Vodafone and Idea Cellular, are in merger talks. If this merger happens, then the merged entity and Bharti will together control over 70% of India’s telecom market share by revenue. This obviously spells doom for remaining small players. Industry estimates peg post-merger market share for Tata Teleservices at 6.5%, BSNL and MTNL combine at 5%, Aircel at 5.7% and Sistema at 4%. Reliance Communications (RComm) is estimated to be close to Sistema’s share at 4.2%.
Also read: Vodafone, Idea merger plans leave Tata Tele in a fix
The market has space for four or at best five strong operators to play. Any more and it will become a very uneven playing field. Already, RJio’s freebies have spurred others to enter a bruising price war. As RJio’s commercial launch nears its April one deadline, competitors like Bharti and Vodafone will start offering competing plans – RJIo has promised voice calls for free and no charges for national roaming and there are already indications that at least Bharti will match these offers.
Also read: Tata in early talks to join RCom-Aircel-MTS combine to take on Jio
This piece speaks of a possible merger of Tata Teleservices with the RComm, Aircel, MTS combine and goes on to say that such a move could create a strong number three telco behind the proposed Vodafone-Idea combine and Bharti Airtel.[/vc_column_text][/vc_column][/vc_row]