New Delhi: In a move that could give Bharti Airtel Ltd, India’s largest telecom service provider by subscribers and revenue, significant first-mover advantage in rolling out high-speed wireless data services, the company announced a two-step acquisition of US-based technology firm Qualcomm Inc.’s India subsidiary.
The deal will, in the first phase, entail the acquisition of a 49% stake in Qualcomm’s India-based broadband wireless access (BWA) companies for an initial investment of approximately $165 million (around Rs 920 crore). It will also make Bharti the principal rival to Mukesh Ambani-promoted Reliance Infotel Ltd in fourth-generation (4G) telecom services.
The deal values the equity of the company at $336 million, but the acquired entities also have debt of $1-1.2 billion, which Bharti will assume in the second phase of the transaction in 2014 when it acquires the rest of the stake; the debt was used by Qualcomm to pay for the spectrum.
“They have kept the debt out of their books for now. This allows them to invest in the rolling out of services immediately, especially in key circles of Delhi and Mumbai,” a Mumbai-based analyst with a multinational brokerage firm said, requesting anonymity as his company does not authorize him to speak to the media.
The deal envisages that “once commercial operations are launched, Bharti would assume complete ownership and financial responsibility for the BWA entities by the end of 2014”, a statement from Bharti said.
After the acquisition, Bharti will be in a unique position, being able to offer communication services using 2G, 3G and 4G technologies in the key circles of Delhi and Mumbai, as well as in Karnataka.
With 13 circles where Bharti has 3G spectrum, the telco is in a position to offer high-speed wireless data services in 18 of the 21 circles in the country.
Officials in the two companies involved said the deal was being discussed for a long time, but could not be closed because it was not clear whether Qualcomm would get the promised spectrum. At the time it had successfully bid for the spectrum, Qualcomm had stated that it would opt for a 3G partner to roll out the services and then eventually exit the company once the services had achieved a certain threshold of commercial deployment. The investment was, the company indicated, purely to showcase the LTE TDD (long-term evolution time-division duplex) technology to the world. Ownership of the technology gets the company royalty from handset manufacturers. Qualcomm’s LTE TDD is being used by several companies that are deploying 4G services. Bharti is the only Indian company to have started 4G services—they are being offered in Kolkata and Karnataka currently. The company hasn’t said when the service will be rolled out in the remaining territories, including those that have just come under its remit.
After a protracted battle with the department of telecommunications (DoT), Qualcomm got the spectrum it had won in the 2010 auction on 8 May. The company had paid Rs 4,912.5 crore for spectrum in four circles of Delhi, Mumbai, Kerala and Haryana, but due to issues with the company’s application, the allocation of the spectrum was delayed by nearly two years. Bharti paid Rs3,316.4 crore for spectrum in four circles of Maharashtra, Karnataka, Kolkata and Punjab in the same auction. DoT has, however, cut the validity period of the spectrum held by Qualcomm by 18 months.
According to a statement from Bharti, the 49% stake includes 26% held equally by enterprise communications service provider Tulip Telecom Ltd and Global Holding Corp. Pvt. Ltd, which owns tower company GTL Infrastructure Ltd. “On the face of it, it looks like they have sold their stake at a significant premium of around 50%, but that would mean that Qualcomm has got only some $70 million for its stake, which seems unlikely,” the analyst cited above said.
The acquisition essentially doubles the total number of circles in which Bharti can offer 4G services. The deal also makes Bharti the biggest rival in the 4G market to Reliance Infotel; the newly acquired circles account for 40.9% of Bharti’s total mobile revenue. In fact, the four acquired circles account for 22% of total mobile revenue.
On the day of the conclusion of the BWA spectrum auction in 2010, Reliance Industries Ltd announced that it had acquired 95% of Nahata family-promoted Infotel Broadband Ltd, signalling the revival of its interest in the telecommunications sector after a decade.
Infotel was the only firm to successfully win BWA spectrum in all 21 circles in the country. The company is expected to launch LTE TDD-based data services by the last quarter of the current fiscal year or the first quarter of the next.
“The deal shows that the spectrum in the 2300 megahertz (MHz) band is valuable, especially given the Trai (Telecom Regulatory Authority of India) recommendations on the reserve price for spectrum to be auctioned in the coming years,” a Mumbai-based analyst with a multinational brokerage firm said on condition of anonymity as he’s not authorized to speak to the media.
Earlier this month, Trai had proposed pan-India reserve pricing per MHz for 1800MHz at Rs 3,622.18 crore, for 800/900MHz at Rs 7,244.36 crore, for 700MHz at Rs 14,488.72 crore, for 2100MHz at Rs 3,773.24 crore, and 2300MHz at Rs 723.52 crore.
“The pressure on (telecom) companies to acquire spectrum in the 700MHz band, when it is launched, comes down significantly,” the analyst said.
The circles of Delhi and Mumbai have a mobile penetration of more than 150%, suggesting that the only room for growth in these markets is in data services.
Not all analysts are bullish about the prospects of 4G at this time. “The adoption rate will totally depend on the price points at which 4G services/devices are launched. It depends on whether operators will go for premium pricing or penetration pricing, availability of choices of devices. and the coverage of 4G services in different areas,” said Hemant Joshi, partner, Deloitte Haskins and Sells.