3G bids set stage for shake-out

3G bids set stage for shake-out

New Delhi: The auction for high-speed third-generation (3G) mobile spectrum saw bids close on Wednesday at a total Rs70,000 crore, twice the amount the government had expected to get, but without any operator winning a nation-wide licence, setting the stage for industry consolidation.

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The unexpectedly high bids mean that companies have to raise a huge amount of cash to pay for licences, after which they will have to find more funds to buy equipment and roll out services.

This is reminiscent of the pre-1999 phase, when companies got into trouble over having to pay for the first round of mobile licences, forcing the government to change the payment method to a revenue-share model.

Operators that have won spectrum will have to pay for it within the next 10 days. Companies will have get rid of some of their assets to pay for 3G.

“To fund the buys, they will look at selling equity in the tower arms as well as debt financing, but a lot depends on their profitability," said a Mumbai-based analyst with a multinational brokerage firm on condition of anonymity. “Taking into account the Zain acquisition, Bharti (Airtel Ltd, the country’s biggest phone company) will see its debt-to-equity ratio rise to 2.3 times from far less than the one that they have now. RCom (Reliance Communications Ltd) and Idea (Cellular Ltd) will see their debt-equity ratios rise to 3.5 times."

The same analyst said it was surprising that the market leader didn’t get a pan-India licence. “I don’t understand why Bharti did not go pan-India and let important circles like Gujarat slip away," he added.

Bharti Airtel said prices were too high to be able to go nation-wide.

“The auction format and severe spectrum shortage along with ensuing policy uncertainty drove the prices beyond reasonable levels. As a result, we could not achieve our objective of pan-India 3G footprint in this round," the company said in a release.

Also See Bidding War (Graphic)

The notional value of a pan-India slot amounted to Rs16,828 crore, almost five times the reserve price of Rs3,500 crore. The auction that began on 9 April ended on Day 34 after 183 rounds of bidding.

Vodafone Essar Ltd expects to launch 3G services before the end of the year, chief executive and managing director Marten Pieters said in a release, adding that “a significant proportion of our customer base in these markets already has a 3G-enabled device".

Operators have won spectrum in a maximum of 13 circles out of the total 22 that India is divided into.

Bharti Airtel will pay almost Rs12,300 crore for spectrum it has won in 13 circles, including Delhi, Mumbai and Karnataka, which earned the highest bids.

The auction money may be used to pay for government expenses not accounted for in the February Budget, according to an official who spoke before the auction ended. This includes a reimbursement of Rs14,000 crore to the oil marketing companies for selling fuel at below cost price between January and March this year.

The government’s borrowing programme for the first half of fiscal 2011 is, however, unlikely to change, the official had said.

Nine operators had entered the auction for 3G spectrum for which three slots were available in most states, while four were available in Punjab, Bihar, Orissa, Jammu and Kashmir and Himachal Pradesh.

3G spectrum is needed by the telecom companies to offer high-speed data services on a mobile phone such as video streaming as well as real-time applications such as mobile share trading.

Operators that have not won any spectrum will have to wait till the next auction, which is expected to take place in 2013, when frequencies from the defence forces becomes available.

“There is no clarity on whether the firms will be allowed to buy spectrum from each other as yet," a senior executive with one of the telecom companies that won spectrum said on condition of anonymity.

The companies will need to work out how to handle inter-circle roaming given that no operator has won spectrum across the country.

“Everyone needs everyone. One such tie-up we could see is Bharti and Idea combining and maybe Vodafone could also be part of this combine, making Indus Towers an important aspect of their strategy going ahead," said Kunal Bajaj, director of consultancy Analysys Mason. “Another interesting combine could be Reliance Communications and Tata Teleservices as the circles that they have won are complementary to each other."

Bharti and Vodafone are expected to tie up with Nokia Siemens Networks and Ericsson for equipment because of ongoing relationships.

“The main issue will be pricing. The Chinese vendors acted as a counter-balance, but with the ongoing security issues, the other vendors will probably raise their prices," Bajaj said.

The auction for broadband wireless access spectrum will start in another two days, with 11 firms vying for two slots across the country.

With the reserve price set at Rs1,750 crore, analysts expect intense bidding, but prices won’t be as high as in the 3G auction.

The government will get another Rs16,828 crore from state-owned Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd, which were given 3G spectrum in early 2009 ahead of the rest on condition that they match the winning price.

The state-run telecom companies have been seeking concessions, but the department of telecommunications is unlikely to allow this.

Graphic by Paras Jain / Mint