It’s the survival of the biggest in India’s telecom industry

Reliance Jio has sparked an unprecedented wave of consolidation in India's telecom industry barely six months into its commercial roll-out. MintAsia examines the changing landscape

Leslie D'Monte
Updated7 Apr 2017
If all deals go through without any regulatory or other hurdles, three entities—Vodafone-Idea, Reliance Jio, Bharti Airtel—could end up controlling around 80% of telecom marketshare and revenue.
If all deals go through without any regulatory or other hurdles, three entities—Vodafone-Idea, Reliance Jio, Bharti Airtel—could end up controlling around 80% of telecom marketshare and revenue.

Everyone had seen the writing on the wall. Since billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd launched services in September, offering a lifetime of free voice calls and three months of free data (later extended until end-March, then end-June), mergers and acquisitions had become inevitable in India’s hyper-competitive telecom industry.

That explains why no one leapt out of their seats when Idea Cellular Ltd, a part of the Aditya Birla Group, and Vodafone Group Plc.’s Indian unit said on 21 March that they had decided to merge in a $23-billion deal to create the world’s second largest and India’s largest telecom company.

Although they played down the Jio factor as a reason for the merger, it’s clear that India’s No.2 and No.3 telcos had decided that, united, they had a chance of better competing with Ambani, India’s richest man, who has so far invested $20 billion in the network.

“It is the business logic that has fundamentally driven this combination...”, Vodafone chief executive officer Vittorio Colao said.

The aggression with which Jio went about signing up 100 million subscribers in less than three months would surely have provided a spur to the two former adversaries to join forces.

The combined entity will overtake Bharti Airtel Ltd in India, will have almost 400 million customers with a 35% customer market share and a 41% revenue market share. It will have a revenue of Rs81,600 crore and an operating profit of Rs24,400 crore.

According to Vodafone’s Colao, the combination will have the scale required “to ensure sustainable consumer choice... and to expand new technologies—such as mobile money services—that have the potential to transform daily life for every Indian.”

Bharti Airtel hasn’t been sitting still. Just three days after the announcement of the Idea-Vodafone merger, Bharti Airtel agreed to buy Tikona Digital Networks Pvt. Ltd’s 4G business, including its broadband wireless access spectrum and 350 cellular sites in five telecom circles, for around Rs1,600 crore.

A month earlier, Airtel had agreed to acquire the assets of Telenor South Asia Investments Pte Ltd’s India business. As part of the deal, Airtel will assume the Telenor unit’s liabilities related to licence fees and lease obligations for phone towers. The transaction, which won’t involve any cash payments to Telenor, will give Airtel access to 44 million customers (increasing its user base to 307 million), 43.4 megahertz (MHz) of spectrum in the 1,800MHz band and 20,000 base stations.

The first signs of consolidation were seen in September when Reliance Communications Ltd (RCom), led by Anil Ambani, and Aircel Ltd, owned by Malaysia-based Maxis Communications Bhd, announced that they would merge their mobile network operations.

On 15 March, RCom received approval from the Securities and Exchange Board of India (Sebi), BSE Ltd (BSE) and National Stock Exchange of India Ltd (NSE) to demerge its wireless division into Aircel Ltd and Dishnet Wireless Ltd.

Following the closure of the deal, RCom and the present shareholders of Aircel will hold 50% each in Aircel.

The creation of the new entity will first involve RCom demerging its existing cellular business, which has around 100 million subscribers.

The other businesses, including tower assets and fixed-line enterprise units, will continue to remain with RCom. The wireless unit will then be merged with Aircel. RCom and Aircel’s owner, Maxis Communications, will hold 50% each in the venture, with equal representation on the board.

And in November, RCom announced its merger with Sistema JSFC’s Indian operation—MTS—under which the Russian firm will hold a 10% stake in RCom. The merged entity will, however, carry a debt of nearly Rs28,000 crore. RCom and Aircel will each contribute half that amount into a debt pool.

Cost and pricing pressures, declining profitability, mounting debt and the need to be financially flexible to face competition (read primarily Jio) are forcing telcos to merge and harness operational and financial synergies (see chart: Peer pressure).

This effectively means that following the completion of the mergers (assuming that there will not be any regulatory hurdles), there would be three major telco groups that will control over 80% market share and revenue of the Indian telecom sector.

The Vodafone-Idea combine will come in first place with a 35% market share, followed by Airtel’s 29% (including Telenor) and RCom-Aircel-Sistema’s 16% (see chart: Vodafone-Idea merger to create a new No. 1).

In revenue terms, too, the Vodafone-Idea combine will lead with a 41% revenue marketshare, followed by Airtel’s 33% (plus Telenor’s 2.5%) and RCom-Aircel-Sistema’s 11%.

In rating company ICRA Ltd’s view, intense competition and profitability pressures in the Indian telecom industry have made scale a necessary prerequisite, thereby spurring consolidation, which reduces the number of competing entities, adds financial muscle to face aggressive price competition, and helps meet the high capex requirements in rolling out data services.

“While there are many regulatory hurdles before the (Vodafone-Idea) merger is cleared, it would nevertheless create a strong player in the industry. The merger, once completed, would likely have significant ramifications, though these may take two-to-three years to materialize,” said Harsh Jagnani, sector head and vice-president of corporate ratings at ICRA, a ratings agency.

“In the medium term, any reduction in competition in the industry remains unlikely as the large telcos would keep the intensity high. However, in the long term, this consolidation is expected to be positive for the industry as it would restore some pricing power and give better bargaining (ability) with vendors/suppliers.”

Effectively, the industry is likely to be left with five major telcos, assuming the mergers are completed—Vodafone-Idea; Bharti Airtel-Tikona; Jio; RCom-Aircel-Sistema and state-run Bharat Sanchar Nigam Ltd–Mahanagar Telephone Nigam Ltd.

With regard to the telecom towers industry, the consolidation drive would be a mixed bag, note ICRA analysts. The sale of tower assets by Vodafone and Idea would give an opportunity to existing tower companies to strengthen holdings and improve size.

On the other hand, a merger of operations of the telcos would make some tenancies redundant. Growth in the scale of the operators would improve their pricing power, giving them the opportunity to negotiate lower rentals with tower companies, ICRA analysts say.

Meanwhile, competition is taking its toll. The telecom sector’s revenue declined by about 6% quarter-on-quarter in the December quarter—the biggest decline seen by the sector historically, noted analysts from HSBC Securities and Capital Markets (India) Pvt. Ltd, in a 24 February report.

Sector revenues for the first nine months of the current fiscal are up about 2.4% year-on-year, suggesting that sector revenue on a full-year basis in the financial year 2017 may decline about 3%, they added. The lowest growth for the sector prior to this had been 4% in FY10.

Analysts attribute the poor revenue growth for the sector in 3Q FY17 to the free voice and data offer by Jio. HSBC analysts believe the sector’s revenue will decline in FY18, too, by about 6% as average revenue per unit (ARPUs) for the mid- to high-end of the subscriber base with incumbent telcos may get reset to significantly lower levels.

Jio’s launch has accelerated the consolidation of both spectrum and market share, which could eventually lead to four private sector telcos in India, notes a 16 February report by India Ratings and Research (Ind-Ra). The firm revised its outlook on the telecom sector to negative for FY18, from stable-to-negative, on expectations of “longer and deeper than expected deterioration in the credit profile of telcos following the extended free services by Reliance Jio”. Ind-Ra analysts believe that the telecom industry has lost approximately 20% revenue due to free services by Jio.

The Ind-Ra analysts believe that a redistribution of market share among existing telcos is underway. Jio’s subscribe base “could cross 100 million by March”, but the telco’s ability to retain market share would be driven by both pricing as well as user experience of its voice over LTE (VoLTE) technology, the analysts say. LTE is short for long-term evolution, a technology standard. For one, the consumer behaviour and market share will undergo a change after Jio starts charging for its services. The industry could witness an increase in the dual-SIM phenomena in the interim, following which the data and voice usage pattern for each telco could remain inconsistent and unpredictable (Has data reached inflection point?).

“Retaining customer base will necessitate the telcos to continue to augment their capacity and coverage for superior speed and virtual network platforms. Telcos with a superior spectrum holding will be better placed to compete on user experience,” the Ind-Ra report noted.

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