Monthly update on the Indian telecommunications market - Part 2

Full article: Part 1, Part 2 , Part 3, Part 4

Update on consolidation of the 12-operator telecom market to four groups

Group 1 - Bharti Airtel plus Telenor

Bharti Airtel to acquire Augere Wireless, Telenor India and possibly some spectrum from Tikona

On February 17th Bharti Airtel, the current Indian telecom market leader, which as of December 2016 served 23.57% of Indian mobile subscriptions, closed the acquisition of Augere Wireless, a company which holds 20 MHz of spectrum in the 2,300 MHz band spectrum in the Madhya Pradesh circle.

Also, as previously reported by OND, on February 23rd Bharti Airtel and Norwegian multinational operator Telenor, whose Indian subsidiary at the end of 2016 served 4.83% of mobile subscriptions,
announced an agreement whereby Bharti Airtel would acquire most of the assets of Telenor India, including access to 44 million customers (nominally increasing its user base to over 320 million, though the final figure is likely to be less), 43.4 MHz of spectrum in the 1,800 MHz band and 20,000 base stations. The cashless deal, which is expected to close in April 2018, will include Airtel acquiring Telenor India's running operations in seven circles: Andhra Pradesh, Bihar, Maharashtra, Gujarat, UP (East), UP (West) and Assam.

On March 24th persons familiar with the matter told the LiveMint news-source that Bharti Airtel was in the final stages of talks with Tikona Digital Networks of Mumbai to buy the latter's 4G spectrum in a transaction which could be worth in the range of INR 800-1,000 crore (excluding debt, which Airtel would assume, raising the total value to INR 1,500-1,700 crore). Tikona's 4G spectrum consists of 20 MHz in the 2,300 MHz band in Gujarat, Himachal Pradesh, Uttar Pradesh (East), Uttar Pradesh (West) and Rajasthan, which would be particularly useful for Airtel in UP (East), UP (West) and Rajasthan, where it has no airwaves in the 2,300 MHz band, and in Gujarat and Himachal Pradesh, where it has only 10 MHz each. The arrangement would not include Tikona' wireless broadband business, Tikona WiBro, which it would continue to run independently.

On March 28th Bharti Airtel said it had sold a 10.3% stake in its tower company, Bharti Infratel, to a
consortium of funds (including private equity firm KKR and Canada Pension Plan Investments Board (CPPIB)) to raise INR 6,193.9 crore. The company said it would us the proceeds of the sale to further pay down its corporate debt, which as of the end of September 2016 stood at INR 98,813.50 crore.
As a result of all these moves, Bharti Airtel will end up with an important increase in its share of subscriptions which, based on the December 2016 numbers, would be 28.40%, with a significant improvement in its 4G spectrum holdings and slightly stronger financial position.

Group2 - Vodafone plus Idea Cellular

$23bn merger of India's No. 2 and 3 operators to create world's second largest company by mobile subscriptions

As previously reported, Vodafone India, the country's second largest operator which as of the end of 2016 served 18.16% of Indian mobile subscriptions, and third-ranked Idea Cellular, with a 16.90% share, announced they were in merger talks. For some time Vodafone, which has had continuous problems locally for many years including poor profitability and major taxation disputes with the Indian government, had made it clear it was interested in modifying its position in India. Idea Cellular is currently owned 49.05% by the $41 billion sales level Indian conglomerate group Aditya Birla (chaired by Kumar Mangalam Birla) and 19.96% by the Axiata Group of Malaysia, and for its 2016 financial year reported revenue of INR 394 billion.

On March 21st it was announced that the boards of Idea Cellular and Vodafone India had approved a $23 billion merger (excluding the latter's 42% stake in Indus Towers), which if completed in FY 2018 would, based on the latest TRAI numbers, become India's largest telecom company with a pro forma mobile wireless subscriptions market share of around 35.06%, revenue share of the Indian communications market of around 41%, and about 395 million actual mobile subscriptions, making it the second largest company in the world after China Mobile.

The new company's pro forma revenue would be around INR 81,600 crore and it with operating profit of INR 24,400 crore and combined debt of INR 1.08 trillion. The mechanics of the merger, which is expected to take about 24 months to complete, will be evolutionary as outlined in the following from LiveMint:

- 'The deal will see Aditya Birla Group, the promoters of Idea, gradually raising its stake in the combined entity while Vodafone Group will reduce its own, with the aim of both holding equal stakes over a period of time'.

- 'As a first step, the Aditya Birla Group will acquire 4.9% from Vodafone for INR 3,874 crore, or INR 108 a share, to take its stake to 26% with Vodafone holding 45.1%, while AB Group will have the right to buy another 9.5% from Vodafone at INR 130 a share or the prevailing market price, in the combined entity over four years'.

- 'Kumar Mangalam Birla will be the chairman of the new entity, Vodafone will name the CFO, while the two companies will jointly name the CEO and operations head before the closure of merger, expected within 24 months. The new entity will remain listed and be renamed at a later stage, with the promoters of Idea and Vodafone having the right to nominate three members each on the board, which will have 12 directors, six of whom will be independent'.

Interim comment on the risky nature of the above merger

Although LiveMint reported very thoroughly and professionally with minimum comment on the terms and mechanics of the proposed Vodafone/Idea merger on March 21st, it swiftly followed up on March 22nd with an extremely acerbic article by consulting editor Sundeep Khanna (entitled A crown of thorns awaits the Vodafone-Idea merged entity), who left few doubts about how negative he felt about the deal, pointing out that:

• Mergers of equal-sized companies were typically disastrous (because of constant turf squabbles), and the way the top jobs were due to be filled looked messy.
• Both brands would continue to be promoted in parallel making this an inorganic, i.e. incomplete,
merger.
• Mergers generated in a panic as a reaction to threatening outside events (in this case the massive
disruptive incursion of RJIO) were often put together very badly.
• Despite the aggressive public language about the new JV setting out to dominate the Indian
communications market, he felt that Idea had settled for 'bronze position' and that Vodafone's real focus was now on consolidating its position in Europe as the leader in fully converged communications and that it was no longer committed to the Indian market, noting that 10 years after it first entered the Indian market with its acquisition of Hutchison Telecommunications International stake in Hutchison Essar Vodafone seemed ready to get off the roller-coaster ride that has witnessed two write-downs, an aborted IPO and a pending $2.5 billion retrospective tax charge with little to show in terms of profits.

Nonetheless, as a coda to the above its worth noting that on March 24th India's Foreign Investment Promotion Board (FIPB) announced that as of February 21, 2017 in its 243rd meeting it had retrospectively approved the acquisition by Vodafone India of 100% of the stock of YOU Broadband, an Indian cable operator with 600,000 customers. So perhaps Vodafone still sees a long term opportunity for its Indian operations.

Full article: Part 1, Part 2 , Part 3, Part 4