Has India finally settled down? After a series of false starts, we think so.
Last year was looking really good in India with mobile broadband investment going gangbusters, but LTE deployments that started at the end of 2015 came to a halt in the first half this year as a result of delays in spectrum auctions, spectrum trading deals between operators and looming consolidation. And though outsourcing and managed services were bright spots, those were the only areas to shine.
But then in September, a lot happened—and in the same week!
The auction is finally coming…
India’s spectrum auction is due to start October 1, involving a total of 2,200 megahertz (MHz) of spectrum spread across the 700, 800, 900 and 1800 MHz bands as well as in the 2.1, 2.3 and 2.5 gigahertz (GHz) bands. Licenses will be valid for 20 years, and rollout obligations will vary according to the frequency band.
During the week of September 11, India's Department of Telecommunications (DoT) revealed that seven telcos—including Aircel, Bharti Airtel, Idea Cellular, Reliance Communications (RCom), Reliance Jio Infocomm, Tata Teleservices and Vodafone—had all applied to take part in the upcoming spectrum auction. As expected, the state-run service providers, BSNL and MTNL, gave various reasons that would have kept them from bidding on financials and others, but perhaps Telenor was the biggest absentee from the DoT's list. On top of re-evaluating its options as to its presence in India, the Norwegian incumbent said in July that the proposed spectrum prices do not give an acceptable level of return.
New Delhi has set high expectations on raising a minimum of 5.44 trillion rupees ($81.1 billion) from the auction, prompting a flurry of questions over whether bidding will reach that target. Based on historical data about spectrum auctions in India, particularly at the stage of a 1 billion-strong mobile subscriber market, I believe the DoT should be very happy to raise even 1 trillion rupees!
…and consolidation is happening: RCom and MCB are merging their wireless businesses
After months of intense negotiations that negatively affected telecom investment, RCom and Aircel finally reached a deal on September 15 to merge their mobile businesses into a 50:50 joint venture, creating India's third-largest operator by subscriber. Though we stayed on the side, just doing the math of the capex drought, RCom entered into exclusive merger negotiations with Aircel’s parent, Malaysia-based Maxis Communications Berhad (MCB), back in December 2015. Tie-up talks between the two continued during the first half of the year, with the exclusivity period routinely extended to allow more time to hammer out the final deal.
Named "MergedCo," the newly merged entity will have the second-largest spectrum holding among service providers, with an impressive 448 MHz of spectrum spread across the 850, 900 and 1800 MHz band, as well as the 2.1 GHz band. According to figures from the Telecom Regulatory Authority of India (TRAI), MergedCo will have approximately 187.6 million mobile subscribers, putting it in third place behind Vodafone and ahead of Idea Cellular, which at the end of June had 199.4 million and 176.2 million subscribers, respectively. Meanwhile, with 255.7 million subscribers, market leader Bharti Airtel will maintain its share with a comfortable margin.
MergedCo will also be one of India’s largest private sector companies, with an asset base of over Rs 65,000 crore (US$ 9.7 billion) and net worth of Rs 35,000 crore ($5.2 billion). RCom and MCB will each hold a 50% stake in MergedCo with equal representation on the board of directors and all committees. The company will be managed by an independent professional team under the supervision of the board.
Bottom line: India is not yet back in business, 2017 looks better
As the auction process gets under way, investment in telecom network gear may stay low until the winners are known. At the same time, a merger is in process. As typical for a deal like this one, we expect this combination to generate significant cost savings and debt reduction, which was becoming a concern and was perhaps the main cause of the slowdown. RCom expects the merger to generate capex and opex savings totaling 200 billion rupees ($3 billion). The deal is anticipated to reduce RCom's debt by the same amount, while MCB will see its debt cut by 40 billion rupees ($596 million). The merger is subject to shareholder and regulatory approval, and will likely close in 2017.
If all the above goes through as planned without any glitches, 2017 is shaping up as a strong investment year in India. Let’s just hope this is the last spectrum auction in India for some time to come! And, of course, we’ll be monitoring the situation and inform you of any major events.
is Senior Research Director, Mobile Infrastructure & Carrier Economics, within the IHS Technology Group at IHS Markit
Posted 27 September 2016