Bharti Airtel scraps Loop Mobile merger deal5 min read . Updated: 06 Nov 2014, 12:46 AM IST
Bharti Airtel had planned to buy Loop's assets in February, but the deal did not get regulatory approvals
New Delhi/Mumbai: Bharti Airtel Ltd abandoned its ₹ 700 crore plan to buy Loop Telecom for its Mumbai operations after the country’s largest telecom operator failed to secure regulatory approval for the acquisition, a situation that prompted most of Loop’s mobile phone subscribers, the company’s most valuable asset, to desert the network.
“Given that we did not receive regulatory approval until the end of October, and a lot of Loop customers ported out of the network, Airtel decided to call-off the deal," said Surya Mahadevan, chief operating officer of Loop Mobile, a company controlled by the Khaitan family.
Loop, which has around 1 million active subscribers, will stop operations on 29 November and has asked its remaining subscribers to switch to a rival network.
It was too late for the company to negotiate with other operators, he said.
Bharti Airtel had agreed to buy Loop Mobile in February to strengthen its position in the lucrative Mumbai circle, where smaller rival Vodafone India Ltd has the largest number of mobile phone users. The transaction, however, failed to get approvals from the telecom regulator and the telecom department. Telecom Regulatory Authority of India (Trai) objected to the deal on the grounds that Loop subscribers can’t be restricted from porting to another network, while the telecom department said a slump sale, the nature of Bharti’s acquisition, was not part of India’s telecom policy
The deal was a bad idea from the start, say analysts.
“It makes no sense to buy subscribers in a market where MNP (mobile number portability) is an available option. By announcing the deal, they alerted Vodafone who then went after the subscribers aggressively using MNP," said a Mumbai-based analyst, requesting anonymity. “Bharti could have also done that, given the resources it has available in that market, instead of waiting for the deal to go through and buying subscribers. The deal was doomed to fail."
Bharti Airtel said the agreement with Loop was subject to approvals from the telecom department which have not been received.
“In light of this update and the fact that Loop’s mobile licence is to expire at the end of this month, we have decided to terminate the discussions with regard to the transaction for acquiring subscribers of Loop," the company said in a statement to stock exchanges.
Meanwhile, Loop has requested the telecom regulator for assistance to wind up its operations.
“We are planning to generate individual porting codes to all our existing Loop customers to facilitate their easy port out to other networks before the 29 November deadline. We have approached Trai for permission to generate these special porting codes, and expect a reply by Friday," Mahadevan said. “Loop will also refund all post-paid customers’ deposits by crediting the deposit amount in their last bill and any remaining deposit amount will be refunded to the customers within two-three weeks."
The abortive end to the transaction also underscores regulatory gaps in India’s telecom industry.
“The failure of the Airtel-Loop deal just reiterates what we have been saying all along about the regulatory clarity needed for merger and acquisition guidelines to ensure that deals like these don’t fall through and the customers are not left in limbo," said Rajan Mathews, director general, Cellular Operators Association of India, the lobby group for telecom operators that use the GSM technology standard. “From a practical perspective, the impact of the failure of this deal on the telecom sector will be muted."
“We expect consolidation in the telecom sector to continue in various forms, be it in terms of market consolidation, legal consolidation, network sharing, asset sharing, etc. Also, we do not think the failure of this deal will impact foreign direct investment (FDI) in the sector, as telecom is a long-term play and FDI gets impacted by much larger factors than this usually."
Bharti Airtel’s agreement with Loop entailed transfer of business assets and liabilities, including Loop’s then three million subscribers, using the slump sale mechanism, in which businesses are transferred for a lump-sum, without values being assigned to individual assets and liabilities.
The Khaitan family is exiting the business as Loop’s right to use radio spectrum, allotted to it in November 1994 (when the company was part of the BPL group), is set to expire this month. Loop attempted to expand its business outside Mumbai through telecom permits and spectrum that the company received in January 2008. These permits were part of the 122 licences, awarded to nine companies, that were cancelled by the 2 February 2012 Supreme Court verdict. Other infrastructure owned by Loop, including more than 2,500 cell sites, were also part of the transfer but would be largely redundant given Bharti Airtel’s more than 4,000 cell sites in the city.
The only asset that Bharti Airtel was paying for was Loop’s subscribers, some of the oldest and most loyal in the country and valuable because of their high usage pattern. Bharti already provides mobile phone services to more than 4 million subscribers in Mumbai. Loop enjoyed an average revenue per user of ₹ 225, higher than the ₹ 190 for Bharti.
At the end of August, Loop was left with around 1.7 million subscribers. Bharti Airtel had 4.6 million subscribers at the end of August in Mumbai, up from 4.4 million in February, while Vodafone had 7.8 million in August, an increase from 7.5 million in February.
Had Bharti Airtel successfully got most of Loop’s subscribers, it would have been a close second to Vodafone in Mumbai.
In return, the deal would have enabled Loop to pay off its debt of more than ₹ 300 crore owed to financiers and around ₹ 700 crore owed to the telecom department in spectrum usage fees and licence charges.
“It seems like Bharti’s dream to be the largest network in the metropolitan city is likely to remain a dream for some more time," said Sanchit Vir Gogia, founder and chief executive officer of Greyhound Research, said. “Loop is going to face choppy times ahead with heavy debts to clear with Indian banks."