The Hindu Business Line : Setting off ripples

WHEN the promoters (and co-investors) of BPL Communications sealed a deal recently with Hutchison Essar, it heralded the biggest merger and acquisition deal in the Indian telecom space so far.

Its implications will also be equally dramatic for other players in this sector.

The consolidation activity in the mobile telephony sector that had hit a rough patch over the past year is poised to gather momentum once again.

Consolidation as a theme is known to shake up the incumbents, and players from the GSM and CDMA mobile camps such as Bharti, Reliance, Tatas and Bharat Sanchar Nigam will be gearing up for another round of bruising turf battles.

As the BPL Communications deal gets consummated, the focus will be trained on four key areas in the coming months:

Valuation yardstick

Drawing out any valuation yardsticks based on the BPL Communications (BPL Mobile operating in Mumbai and BPL Cellular in Maharashtra, Kerela and Tamil Nadu) deal will be difficult and probably, even erroneous.

On an enterprise value (equity and debt) of Rs 4,400 crore, the BPL Communications deal works out to Rs 16,700 per subscriber, on a total subscriber base of 2.63 million.

Whether Hutch has paid a heavy price is tough to reckon as the Indian mobile market stands at the threshold of a potential boom in subscriber base.

At this point, all one can infer is that given the superior quality of circles under BPL Mobile's fold, it has attracted a much richer valuation compared to a couple of earlier deals.

For instance, Hutch-Aircel deal for Chennai and Tamil Nadu circles worked out to Rs 14,300 per subscriber. But this deal was called off earlier this year on account of regulatory factors.

Similarly, the Idea Cellular - Escotel/Escorts Telecommunications deal worked out to Rs 14,500 per subscriber for six circles (three operational and three to be rolled out) that was concluded in the first quarter of 2004.

Even the Cingular Wireless 33 per cent equity stake sale in Idea Cellular to ST Telemedia and Telekom Malaysia International was valued at about Rs 13,000 per subscriber. This deal also fell through recently.

From this it is clear that valuations will hinge largely on the quality of circles that are on sale.

But one obvious inference is that with the BPL Mobile sale, it is only a matter of time before the smaller operators such as Aircel and Spice sell out and Idea Cellular, promoted by Tatas, Birlas and AT&T, explores other options for sale of this combined stake.

Changing mobile landscape

Following the BPL Mobile deal, the Hutchison - Essar mobile subscriber base at 11.1 million will be within striking distance of Bharti and Reliance and inch marginally higher than Bharat Sanchar Nigam (BSNL). The combined market share will also be in excess of 20 per cent in the all-India mobile subscriber base.

Since Hutchison - Essar is said to have a better-postpaid subscriber base, a robust net subscriber addition in the 13 circles that it operates in and higher average revenue per user (ARPU), it will be in a position to consolidate its presence in Mumbai and mount a competitive challenge to its peers in three circles (Maharashtra, Kerala and Tamil Nadu) in which BPL operates.

Considering the recent ownership changes in the Reliance empire and the latest acquisition by Hutchison Essar, the battle for mobile market share is going to intensify in the near future.

With five players having a nation-wide footprint (assuming Essar adds seven circles for which it has a licence to the Hutchison-Essar stable), it is only a matter of time before an all-mighty tariff war starts in the mobile landscape. This is even more likely as the metros and A circles are slowly getting saturated and new subscribers will come in only by penetrating the more price-sensitive B and C circles.

Pure play vs integrated mobile strategy

So far, the Hutchison-Essar combine has remained a contrarian within the telecom industry. Employing a pure play mobile strategy that has kept away from investing in fixed line and long distance business (domestic and international), the challenge for Hutch will be to make this work in the future.

The philosophy of Hutch has been that fixed line/long distance is a commodity business and that it will be able to lease out long distance capacity from infrastructure providers depending on its needs, whenever required.

It, however, is competing with an array of integrated operators - BSNL, Bharti, Reliance and Tata groups, which have invested considerable investment resources towards an integrated strategy.

Considering their combined clout, direct inter-circle connectivity (connectivity between adjacent circles for long distance mobile traffic) may not become a reality in the near future, though the right noises have been made in the telecom circles about this move.

The biggest challenge for Hutch will be to carve out an alternate strategy that will counter the competitive intensity from the integrated players, if they start a price war using packages that bundle long distance minutes for mobile users.

The IPO race begins

Assuming that the BPL Mobile deal is in Hutch's bag, the formalities for the initial public offering (IPO) from Hutchison Essar that was deferred to the second half of this year will be speeded up again.

With this deal, Hutch will be in a position to command a better valuation in the mobile marketplace and timing will become crucial for the IPO.

More so, as the settlement of ownership structure for Reliance Infocomm within the Reliance fold has paved the way for a possible IPO towards the end of this year.

Among several options, Idea Cellular is also mulling over the possibility of an IPO.

Considering all these factors, the race will be on to be the first to hit the markets with an IPO and avoid the possibility of `new paper' overhang acting as a drag on the mobile sector valuations.

Picture by S. Mahinsha

maverick@thehindu.co.in

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