New Delhi: The relaxation of the cap on cross-holding in the telecom sector is likely to set off a bout of consolidation, say industry participants and observers.
Targets are likely to be smaller players such as the Punjab and Karnataka cellular operator Spice Telecom Ltd, Mumbai operator BPL Mobile Ltd and Chennai-based Aircel Cellular Ltd, with the two CDMA operators, Reliance Communications Ltd and Tata Teleservices Ltd, and the GSM operator Idea Cellular Ltd expected to be the buyers.
As reported in Mint on Monday, the only remaining “non-national” GSM player, Chennai-based Aircel’s majority owners and Anil Ambani-owned Reliance Communications were exploring potential stake sale options. On Monday, a Maxis Communications spokesperson denied there were talks, saying the report “is speculative, having no basis whatsoever.”
The Telecom Regulatory Authority of India is likely to come out with a set of recommendations on liberalizing the merger and acquisition rules in the telecom sector next week. Under current rules, set in place to prevent the emergence of cartels, no telecom operator can hold more than 10% of a rival in the same licence area.
“Unlike in many other areas, the acquisition game is not likely to revolve around big GSM players Airtel and Vodafone,” says Sheriar Irani, head of research and telecom analyst for broking house ASK-Raymond James Ltd, citing their relative large sizes and market valuations.
Indeed, valuations in the fastest growing cellular market, where an average customer generates revenues of just around $8 (Rs332.8) per month, vary from a high of around $940 per subscriber paid by Vodafone Group Plc. for acquiring a majority stake in Hutchison Essar Ltd, to around $260 per subscriber attributed by the stock market to the two-circle operator Spice Communications Ltd.
While GSM players may find it cheaper to grow organically rather than by acquiring another company’s customers at such high valuations, for CDMA operators such as Reliance and Tata, the driving for-ce would be a desire to spread their presence into the faster growing GSM-based market.
Subscribers on GSM technology-based networks are increasing at the rate of around 5.5-6 million per month, while CDMA operators, who cannot address the GSM subscribers due to technological constraints, are seeing a monthly increase of less than two million per month. The total GSM subscriber base is also substantially higher at around 142 million, compared to around 47 million for CDMA users.
“For us, it is a matter of addressibility,” said a Reliance spokesperson who didn’t want to be named. “If we can’t address 72% of the market, we can’t grow as fast as we want.”
Analysts said the proposed changes to the merger and acquisition rules, including scrapping the cap of 10% holding that a company can have in its competitor in the same circle, will alter the landscape, mainly for local companies.
“It changes the game for Indian firms, especially for the smaller ones like Spice, BPL and Aircel,” said Prashant Singhal, director for telecom industry services with consultant Ernst & Young. “If a foreign operator wants to enter the Indian market even under the old rules, the only obstacle was price... and the targets wo-uld have been operators with a national footprint. The new ru-les, on the other hand, are ideal for either cross-technology expansions or for players who want to buy out another GSM player for subscribers alone.”
While Spice officials could not be reached for comment, a senior Idea Cellular official claims he sees the company as “neither an acquisition target nor an acquirer.” An official with one of the bigger GSM operators speculated that BPL Mobile, the Mumbai-based operator owned by the Essar group, will also enter the “acquisition target market” once it resolves the legal tangles that enveloped the company after the Hong Kong-based Hutchison Essar went to court claiming ownership rights over the company. Both officials didn’t want to be named.
Interestingly, the Essar group, which controls BPL Mobile, also has a 33% stake in Vodafone Essar, a GSM operator in the same circle of Mumbai. While there are two small CDMA players—Shyam Telelink Ltd and HFCL Infotel Ltd—analysts were not very upbeat about their prospects due to the slower growth of the CDMA market.