Bharti Airtel Ltd, India’s largest mobile phone operator, has agreed to buy rival Videocon Telecommunications Ltd’s entire spectrum for 4,428 crore, the second such acquisition in India’s fragmented telecom sector after the government allowed trading of airwaves in October.

The deal gives Airtel additional spectrum in the 1,800 megahertz (MHz) band in six licence areas—Bihar, Haryana, Madhya Pradesh, eastern Uttar Pradesh, western Uttar Pradesh and Gujarat. It also signals the exit of Videocon, which acquired the spectrum in a November 2012 auction, from telecom services.

The spectrum trading rules have finally spurred consolidation in India’s telecom sector, where as many as 11 operators are competing, driving down prices and profits, even as the high cost of spectrum is adding pressure on already stressed balance sheets. The operators have a combined debt of more than 3.5 trillion on revenue of more than 2 trillion.

The deal will give Airtel the rights to use 2x5MHz spectrum in the 1,800MHz band in the six circles, Airtel said in a statement on Thursday. The spectrum to be acquired by Airtel is valid up to 18 December 2032.

“In all the markets where Bharti has added spectrum with this transaction, Bharti had 3G coverage but 4G capabilities were missing in 5 out of 6 circles," Rajiv Sharma, an analyst with HSBC Securities and Capital Markets (India) Pvt. Ltd, wrote in a report.

Airtel’s move to buy the spectrum trumped Idea Cellular Ltd’s smaller bid to buy Videocon’s airwaves in two telecom circles. On Wednesday, Idea Cellular called off the deal entered in November to acquire Videocon’s spectrum in Gujarat and Western Uttar Pradesh for 3,310 crore.

Analysts said the price paid by Bharti looks a bit high even though it may be worth it in the longer term. The deal is also an example of moves that India’s leading telcos are making to defend their marketshare after billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd enters the market later this year.

“With this, Bharti’s coverage of 4G spectrum increases from 72% to 94% of revenues—from 15 circles to 19 circles," Sunil Tirumalai and Chunky Shah, analysts with Credit Suisse Securities Research and Analytics, said in a note to clients on Thursday.

The Credit Suisse analysts said Bharti may have got a better deal given that they have bought all the circles rather than the two that Idea planned to buy.

“The fact remains that operators appear to be willing to pay significant premiums to get hold of spectrum for 4G services. Bharti’s deal values this spectrum at 2.4 times the original price at which Videocon bought in 2012, and 1.8 times the price established in the last auction about a year ago. This indicates a very rapid inflation in spectrum prices in the sector," the Credit Suisse report said.

This shows that spectrum scarcity is a real problem and the situation has worsened with the imminent entry of Reliance Jio, the report added.

The Airtel-Videocon deal is the second such transaction since the department of telecommunications issued guidelines for spectrum trading on 12 October.

On 2 November, Anil Ambani-promoted Reliance Communications Ltd announced that it was acquiring Sistema Shyam TeleServices Ltd, which operates communications services under the MTS brand name. The deal gave Reliance Communications access to spectrum in nine circles.

Airtel’s shares rose 0.56% to 341.55, while those of Videocon Industries gained 1.33% to 110.85 on the BSE on Thursday. The benchmark Sensex shed 0.02% to close at 24,677.37 points.

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