Telecom: The Dust Settles

TELECOM
The Dust Settles

With licencing hackles set to go, it's the end of cellular M&As.

By Suveen K. Sinha

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The deal's fallen through,'' a voice at the other end of the line whispered. It was an investment banker who got his kicks from sharing every scrap of information he received-and he did plenty-with friends in the media. When he'd calmed down enough, the facts emerged: a bid of $200 million had been received for the Chennai cellular licence held by the RPG Group, just when it had seemed set to pass into the hands of the Birla-Tata-AT&T combine for $140 million. Hong Kong's Hutchison Whampoa, it was rumoured, was the bidder.

That event may have just extended the stay of M&As in the Indian cellular services market. For, the acquisition of RPG Cellular will be last episode in the Indian cellular soap opera. That isn't a rash claim: many of the reasons that triggered manic-M&A activity are no longer relevant.

Soon after cellular services started in India six years ago, it dawned upon many companies-mostly those that had won licences to offer cellular services in areas other than the metropolitan cities-that they should have displayed a little bit of prudence instead of committing to pay licence fees that ran as high as Rs 1,000 crore in some cases.

The Indian Cellular Industry

Why M&As happened in the past

ť Some companies that acquired cellular licences were ill- equipped to invest in and run operations
ť Those who could, wanted to grow to achieve economies of scale
ť Acquisition was the only way to procure licences

Why M&As won't happen in

Licences will become freely available once fourth operators are invited and the restriction on the number of players goes
ť It will be cheaper to acquire a fourth cellular licence than one of the existing ones
ť The cellular industry is already dominated by a handful of players and no one is up for sale

The huge investments needed to set up networks-the technology was new and costly in those days-did not help matters. Customer acquisition costs were high, the market didn't grow to projections, and the 49 per cent ceiling on foreign holding, and a booming telecom market in Europe tempted many transnational telcos to look elsewhere. Companies that did manage to succeed looked to expand their operations to achieve economies of scale, but the duopoly regime ensured that acquisition was the only way to do so.

That caused a spate of M&As. Today, the market has two kinds of companies: the real biggies like Hutchison, Bharti, BPL, and Birla-AT&T-Tata, and smaller companies like Escotel and Spice Telecom. Courtesy the migration to revenue sharing last year, the financial health of most operators is looking up.

True, more deals were supposed to happen. Vinay Rai's Koshika (licencee in East and West Uttar Pradesh, Bihar, and Orissa, not very attractive areas) has been on the block for some time. And the Essar Group has been trying to find a buyer for AirCell Digilink (Haryana, Rajasthan, and East Uttar Pradesh) and Evergrowth (Punjab). Hutchison was expected to buy Digilink, but seems to have suddenly gone cold. Worse, the licences of Digilink, Evergrowth and three of the four Koshika ones are not operational owing to licence fee defaults.

The GoI's decision to award fourth cellular licences (the state-owned monopolies are the third), however, means M&As no longer remain the only avenue to expansion. And if the Prime Minister is serious about his talk on unlimited cellular licences, M&As are likely to become redundant for some time. All attractive targets have been acquired, the global consolidation of telcos seems to be tapering off, and it may make more sense to acquire the fourth licence and start operations afresh rather than souping up a poorly set up and shoddily-managed network. Says Mittal, who has spent Rs 400 crore in upgrading JTM's network: ''It will be much, much cheaper.''

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