Wednesday, October 20, 2010

The Hunters & The Prey in the Indian telecom Jungle

Goldman Sacs made a presentation to Vodafone titled Hunt or be Hunted. Vodafone chose to Hunt and hunt they did. They grew their subscriber base from 5 Mn to 350 Mn around the globe. Just by inking partnerships. They grew into a GLOBAL GIANT.

Today, there are 14 telecom operators in India. Do you think the Indian market is big enough to accommodate all 14 players and help them grow profitably? Russia has about 20 operators and USA over 50.

Even though India has the second largest population, 14 operators is a bit too much according to industry veterans. While most of the industry seeks regulatory clarity on certain aspects of mergers or acquisitions in the sector -- for example, fee for excess spectrum, the 40% market-share cap on an operator in a circle.

The sure survivors in this telecom jungle include leaders Bharti Airtel, Vodafone and state-owned BSNL. Investment bankers are already lining up before the first two Indian giants to get a piece of the multi-billion dollar acquisitions that are expected in the future.

The Hunters

Vodafone Plc

Vodafone entered India in 2007 by acquiring 67% in Hutchison Essar — back then the second-largest Indian operator by subscribers. It has since slipped to number three –Airtel & Reliance being the first two.

Max Touch> Orange> Hutch> Vodafone> ( I wonder who’s next)

This company has a history of acquisitions and it might be open to acquiring some more. If the objective is synergies with its existing operations, Vodafone will look for assets that give it high-value, post-paid subscribers, additional 2G spectrum, and 3G spectrum that complements its own holding. However, some acquisitions may be difficult because of a government rule that disallows M&As in a circle if it leads to the market share of an operator exceeding 40%.

Vodafone may also choose to wait for the outcome of two big payouts. One, the Essar Group holds 33% in Vodafone India. It has an option to offer that stake, reportedly valued at $5 billion, to Vodafone by May 2011. Two, Vodafone’s $2 billion income-tax liability case related to its Indian acquisition is currently in the Supreme Court. Both these decisions could reduce its buying power significantly.


Japan’s leading telecom company entered India in November 2008, by acquiring 26% in Tata Teleservices. It has a representative driving the strategy of the Indian company and it is expected to increase its stake further.

NTT DoCoMo has nearly seven years of experience in 3G services in Japan, which it hopes to capitalise on in India. Customers in ‘A’-class circles, who are expected to show the highest growth in 3G services, will be key to that strategy, say bankers. The company, along with Reliance, is one of the two operators with both CDMA and GSM technologies. This gives it wider access and more capacity to offer data services, which are better supported on CDMA.

It may look at an acquisition of an equally-sized company. It might even complement that with a new telecom company that has 2G spectrum, but minimal operations like Videocon’s Datacom.

New Entrants: France Telecom, Telefonica, Telstra, Vivendi & STC

These five foreign players have shown an interest in the Indian telecom market. If they do chose to enter, it will have to be through a massive acquisition of an existing operator/ operators. as the Uninor and Sistema experiences have shown that starting operations in the market can be extremely difficult.

France Telecom has a past relationship with Loop Mobile, which could help in a potential transaction. Uninor’s Norwegian parent Telenor has cash on its books. Now that it’s invested in the India, it could look at buyouts to capture a larger customer base.

The Prey

Idea Cellular

Market cap $5.5 bn
Fair enterprise value* $7.5-8 bn
Deal enterprise value** $10 bn

Kumar Mangalam Birla has said that Idea is not up for sale, but some of the investment bankers say Birla and its foreign investor Axiata might reconsider if the price was attractive. The Idea stock already trades at a premium to its larger peers on that expectation.

Idea has a loyal customer base, particularly in its eight original service-areas. Since August 2008, when it got additional spectrum, Idea has gone into expansion mode, and now has an all-India presence. Its average revenue per subscriber (ARPU) is among the highest in the industry, which is today viewed as a measure of subscriber stickiness.

This May, Idea bagged 3G bandwidth in 11 circles, mostly in premium locations, though it did not get Mumbai and Delhi. Given scarcity of this spectrum, and the value associated with it as data consumption is expected to explode, this can prove to be a substantial asset for an acquirer.


3 million subscribers
Fair enterprise value* $550-600 m
Deal enterprise value** $1-1.5 b

The company has two arms. Loop Mobile, formerly
BPL Mobile, operates solely in Mumbai. Loop Telecom has an all-India licence, but it is yet to report significant subscriber numbers. Its attractiveness lies in its Mumbai operations, where Loop Mobile has a first-mover advantage. BPL Mobile was one of the original licencees in the nineties, and thus has high-spending, loyal customers; they, typically, also use premium data services.

Of late, Loop has succeeded in capturing younger customers as it offers plans that cater to specific needs of customers in Mumbai rather than having to launch plans for all of India.

However, Loop Mobile is caught in an arbitration case with Vodafone Essar. Before Vodafone bought a majority stake in Hutchison Essar, the latter entered into a buyout pact for BPL’s operations. Hutchison (now Vodafone) says the agreement also included BPL’s Mumbai operations. BPL says it excluded Mumbai. The largest shareholder in Loop Mobile is the Essar group, which has just less than 10%.


110 million subscribers
Market cap $8.4 bn
Fair enterprise value* $14.5 bn
Deal enterprise value** Up to $15 bn

Reliance is the second-largest operator in the country by subscribers. Besides Tata Teleservices, it is the other operator with both CDMA and GSM technologies. On the flip side, it is burdened with a debt of Rs 30,000 crore. Hence, promoter Anil Ambani is looking to raise money by selling equity through a private placement.

The company may also look for a new deal to sell its telecom towers — its last deal with
GTL Infrastructure fell through due to differences in valuations — to raise these funds. Investment bankers say there aren't many suitors for Reliance because of its stiff asking price. The most likely transaction, they add, is a minority stake sale in the near term, possibly to a financial investor.


43 million subscribers

Market cap NA (unlisted)
Fair enterprise value* $4 bn
Deal enterprise value** $6 bn

It has a strong footprint in South India, where data consumption in states like Kerala and Andhra Pradesh is expected to take off first. The company has 3G spectrum in circles where it is the strongest. Having recently sold its towers, Aircel's debt is among the lowest in the sector. So, the liability of an acquirer will be lower.

Aircel's main promoter, Malaysia's Maxis, has historically exited investments in a finite timeframe with good returns. Both international and local buyers are interested in Aircel. Many bankers say Aircel might be merged with a mid-sized operator like Idea or Tata Teleservices, in a cash-and-stock deal.

*Estimated by analysts ** Estimated by investment bankers

Market cap as on October 15. Since bankers quoted enterprise-value estimates in dollars, we have converted the rupee value of market cap into dollars at the Friday exchange rate (Rs 44.09) to enable comparison

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