Last November, when Idea Cellular Ltd agreed to pay top dollar for Videocon Telecommunications Ltd’s spectrum, it looked like the much-awaited consolidation in the industry was becoming a costly exercise. But Idea Cellular has walked out of the deal, and while Videocon has found another buyer in Bharti Airtel Ltd, valuations have come crashing down.
It’s premature to conclude that rationality has returned to the industry. Even so, the Videocon deal has some heartening takeaways—of course, for everyone except Videocon. The delay in Reliance Jio Infocomm Ltd’s launch means companies can breathe a bit easier. And the likelihood that the government will harmonize spectrum in 1800 megahertz (MHz) band before this year’s auction means that this resource may not be as scarce as was earlier feared.
Idea Cellular had agreed to pay Rs.3,310 crore for contiguous 1800MHz spectrum in Gujarat and UP (West) circles. This effectively worked out to a 133% premium vis-à-vis the latest reserve price recommended by the Telecom Regulatory Authority of India. By the same measure, Videocon may have expected another Rs.3,000 crore for the remaining four circles in which it has similar spectrum. That means the amount for all six circles would be about Rs.6,610 crore. Instead, it has agreed to sell spectrum in all six circles to Bharti Airtel for a much lower amount of Rs.4,428 crore. While Videocon has settled for lower valuations vis-à-vis last November, the sale price represents a 100% premium to its purchase price.
Another way to look at the deal is that Bharti Airtel is acquiring the spectrum at 34% of the last discovered price for 900MHz spectrum in these circles, whereas Idea Cellular had agreed to pay as much as 55% for the two circles it had agreed to buy. According to analysts at JM Financial Institutional Securities Ltd, the price of “1800 relative to the price of 900” was 35% in A-category circles and 47% in metro circles in the March 2015 auctions. Bharti Airtel, therefore, appears to have struck a reasonable deal, especially keeping in mind that the entire spectrum is contiguous and hence suitable for deploying 4G services. The six circles contribute to 23% of Bharti Airtel’s revenue. Also, it will now have 4G spectrum in 19 circles, versus 15 earlier. “Bharti’s 4G-1800 spectrum footprint is now slightly better than that of Reliance Jio”, JM Financial’s analysts wrote in a 17 March note.
Interestingly, while Bharti Airtel shares rose 1.3% on the National Stock Exchange on Thursday, those of Idea Cellular gained 3.15%. Of course, investors will be relieved that Idea Cellular backed out of the expensive deal. And as far as the gaps in its 4G footprint go, the auction later this year is likely to provide opportunities to fill them. Besides, as pointed out earlier, with the delay in Reliance Jio’s launch, companies have been able to breathe a bit easy. Having said all this, the industry is far from being out of the woods. At best, Idea Cellular may have ended up saving about Rs.1,000 crore, which isn’t much, considering that it had paid as much as Rs.30,000 crore in the March 2015 auction. Recent data suggests that growth in data revenue is falling and is calling to question the high amounts firms have spent on spectrum purchases and network roll-outs. It’s little wonder that since April last year, Idea Cellular shares have nearly halved.
The writer does not own shares in the above-mentioned companies.