Consolidation: good for telecom industry, better service for customers

From having 9-10 mobile operators in each circle just a few years ago, Indian telecom sector is all set for a major consolidation that would reduce the number of players to 3-4.

After Reliance Communications announced its move to do a three-way merger with MTS and Aircel, the latest proposal to merge Vodafone and Idea Cellular augurs well for an industry that is still reeling from hyper competition.

According to analysts at HSBC Global Research, if the merger between Vodafone and Idea Cellular were to proceed, the number of private players in the Indian telecom space would decline to three, with state-owned telco BSNL the fourth significant operator.

“In our European research, we calculated that a three-player market should generate the optimum balance of competition and investment. In-market consolidation would likely help sector-level Average Revenue Per User and Return on Equity and encourage infrastructure-based competition,” HSBC Global Research said in a report.

The four players expected to remain are Airtel, Reliance Jio, Vodafone-Idea combine and BSNL. The ongoing merger between RCom, Aircel and MTS has hit regulatory hurdles and could be gobbled up by Reliance Jio. Norwegian major Telenor has been exploring a merger with Airtel and Vodafone and could ultimately be part of the Vodafone-Idea combine.

Analysts at Philips Capital said the industry will see consolidation benefits of reduced competitive intensity, stable long-term realisations and significant improvement in capital efficiency.

Morgan Stanley Research said, “The industry would become even more competitive with Bharti, RJio and a potential behemoth combination of Idea+Vodafone in the short term. However, it also would remove competition from the incrementally smaller players altogether, for a better longer-term picture.”

While consolidation is good for the industry, for consumers it would mean less discounts as the level of competition dwindles. “Industry consolidation could lead to increased pricing discipline for telcos,” said analysts at Goldman Sachs. Consumers though can hope to benefit from service providers that are on a stronger footing to invest in new network expansion and quality of service. As data usage grows, operators need billions of dollars in fresh investments to meet user demands.

However, the spate of M&As in the telecom sector could be is negative for tower companies like Bharti Infratel as merged entities will cut down on overall cell sites. Given existing footprints, a Vodafone+Idea entity would likely have a large amount of tower overlap, potentially leading to lower network operational expenditure and improved margins, in addition to faster rollout of coverage potential.

Bank of America Merill Lynch said that the impact of the merger between Idea and Vodafone could to be negative for Bharti Infratel as approximately 85 per cent of its revenues come from the top-three telcos. “If we assume the business is proportionate to market shares, we estimate 45 per cent of Bharti Infratel’s revenues would come from Idea/Vodafone in a hypothetical merger scenario. We think this would be a significant overlap and see the potential for pressure on 10-15 per cent of Bharti Infratel’s revenues in an Idea/Vodafone merger scenario.”

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