The spectrum trading deal between Airtel and Videocon is an indication of the consolidation that will happen in the telecom space this year. The main trigger is the need for more spectrum for offering bandwidth guzzling data services using 4G technology.

“4G services will be consumed by high-end users initially. They will move to the operator which has the highest quality so telecom companies are rushing in to acquire more and more spectrum to take the first mover advantage in this space,” said Prashant Singhal, Global Telecommunications Leader, EY.

“This will trigger consolidation which is good for the sector. There were 9-10 operators last year which should come down to 5,” he added.

Big ticket deals

There are at least two big ticket M&A deals expected to be closed in the new few months. This includes a possible three-way merger between Reliance Communications, MTS and Aircel. That will leave Tata Teleservices and Telenor as the only two smaller players in the market and their spectrum holdings may attract suitors.

“A lot of the spectrum is yet to see meaningful monetisation (particularly spectrum in the 2300 band) but given the potential launch by 4G entrants, consolidating data spectrum is a step in the right direction in our view,” said analysts at HSBC Global Research. The deal between Airtel and Videocon, for instance will improve the former’s 4G capabilities significantly.

“Post today's deal, Bharti will have 4G coverage in 19 circles versus 15 previously, it has the strongest spectrum bank now across incumbents and being the first to launch 4G provides it a significant first mover advantage,” said analysts at UBS. For Idea, losing the deal would mean marginal negative as the deal would have improved its 4G coverage from 61 per cent to 75 per cent of revenue base.

Key factors

But one of the key factors of the consolidation would be valuation of spectrum and the financial impact on the operator’s balance sheet. “The financial impact of any stand-alone acquisition isn’t straight-forward – the debt levels increase right away, but there will be future benefit in terms of better networks, which can lead to higher share, or even lead to less competition,” said analysts at Nomura.

The transaction amount for Airtel, for example, is 2x what Videocon paid in 2012 and 1.6x the last auction price. But despite the higher valuation the deal is being seen as positive as the 6 circles, which it has bought from Videocon, contribute 23 per cent to Bharti’s overall revenues.

“We view this deal as a positive for Bharti because in the six circles where Bharti has acquired spectrum, Bharti did not have any contiguous or liberalised 1800 MHz prior to this transaction. Consequently, its 1800 MHz 4G footprint increases from 11 circles to 17 circles. Including 2300, Bharti has 4G in 19 circles that account for 92 per cent of industry revenue. Prior to this deal, Bharti already had 27-38 per cent higher spectrum than Vodafone/Jio/Idea at the pan India level (using industry revenue weights), which now increases to 37-49 per cent,” said GV Giri of India Infoline.

social-fb COMMENT NOW