BackBharti Airtel’s Loop Mobile buy signals start of consolidation
Analysts believe sub-scale operators have no other option but to either consolidate or be consolidated
Premium
Bharti Airtel Ltd’s ₹ 700 crore acquisition of Loop Mobile does not look all that significant since the company’s total enterprise value is ₹ 1.8 trillion. Even so, it will help Bharti Airtel to strengthen its position in an important market. Besides, it also points to the start of a process of consolidation in the industry, which augurs well for large companies such as Bharti Airtel and Idea Cellular Ltd.
“A meaningful consolidation in Mumbai, which contributes 6.5% of India’s mobile market revenue, is a harbinger for things to come in the sector. We believe sub-scale operators have no other option but to either consolidate or be consolidated," analysts at UBS Securities India Pvt. Ltd wrote in a 18 February note to clients. “We believe operators such as Aircel, Telenor and Tata Tele may be looking to consolidate or be consolidated in the future."
Loop reported gross revenue of some ₹ 600 crore in the 12 months till September, according to data from the Telecom Regulatory Authority of India. Assuming it enjoys margins of 34% like Bharti Airtel, this will result in an earnings before interest, taxes, depreciation and amortization (Ebitda) of ₹ 204 crore.
The valuation of the deal, therefore, works out to about 3.4 times Ebitda, which looks reasonable. However, note that Bharti Airtel recently spent over ₹ 2,800 crore to buy 900 MHz radio spectrum in the Mumbai area, which will most likely be used to service Loop’s customers after the operator’s permit expires later this year.
Although there is little doubt that Bharti Airtel and other incumbent telecom operators overspent to acquire airwaves in the recent auction, one positive fallout is that the company now is in a fairly strong position as far as its spectrum assets go. In Mumbai, it has spectrum in various bands that can support 3G and 4G technology, both of which are likely to grow rapidly in urban centres.
Also, much of the correction related to the auction seems to be already in the price. If the consolidation story continues, the industry might be even able to raise tariffs and offset the high costs incurred in the auction. Of course, it’s still early to take that as a given. Besides, the strategy of Reliance Jio Infocomm Ltd remains an imponderable. It’s not surprising investors are still being cautious.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
