Mergers & Acquisitions (M&A) in Indian Telecom Industry

Submitted by: Akshat Mittal NSIT, Delhi

1. Introduction: Indian has achieved an overall teledensity of 67% and rural teledensity of 31%. Indian telecom industry is fast becoming an attractive destination for foreign investors and is experiencing consolidation of operations. It has witnessed several multi-billion dollar M&A deals ever since the telecom industry was opened to the private players in 1995. In the Indian telecom industry, most of the acquisitions were horizontal which helped the acquirers to expand the area of their operation and customer base quickly. These provided economies of scale with phenomenal benefit to the acquirers in terms of higher profitability, and better valuations. 2. Regulations governing M&A based on recommendations by TRAI: 2.1. Any merger or acquisition should not give rise to a monopoly situation in the market i.e. the merged entity should not have more than 40% of the market share (latest TRAI recommendation proposes to reduce this to 30%). 2.2. A single entity cannot have more than 10 % share in two different telecom companies operating in the same circle. 2.3. FDI in a company should not exceed 74%. 2.4. The number of operators in a circle post merger should not fall below 4. 2.5. The service provider must have operated for a period of three years before considering any sort of merger. 2.6. The merged entity should not hold more than 14.4 MHz spectrum for GSM services and 10 MHz for CDMA services. 3. Factors driving M&A in the Indian Telecom Industry 3.1. The inclusion of internet (including broadband) and cable services in the telecom sector. 3.2. Deregulation in the telecom sector. 3.3. Telecos wish to achieve economies of scale and improve margins. 3.4. Many foreign telecom heavyweights such as Vodafone and British telecom are reentering in the Indian market to be a part of the success story. 4. Typical takeover patterns: 4.1. The investor acquires a controlling stake in the acquired company and retains it as a separate entity. Hutchison has followed this model while acquiring companies such as Usha MartinKolkata, Fascel- Gujarat, Rajasthan and UP East, Sterling Cellular- Delhi, Escotel Punjab. 4.2. The investor merges the acquired company with the parent after acquiring controlling stake. Bharti has followed this model in its acquisitions. 4.3. Purchase of assets on a standalone basis without actually buying the actual company. Companies which have stopped operations generally sell their telecom assets in this manner 5. Valuation of a Telecom Company: Valuations of telecom companies vary depending upon what is being valued. 5.1. Valuation of a companys equity or its assets: Based on whether the entire operating entity is being bought or only some assets of the company.

5.2. Valuation of minority or majority stake: Generally minority stakes are valued less than majority. 5.3. Valuation of listed or unlisted company: As a rule of thumb, listed companies are valued 20-25% more than their unlisted counterparts. 5.4. Valuation of the Enterprise Value(EV): The following performance metrics are evaluated to check whether the EV of the company is in line with the industry trend: 5.4.1. EV/EBITDA Ratio: Similar to the price earnings ratio. Industry trend has its value 6-10. 5.4.2. EV/Revenue Ratio: Similar to the pay-back period 5.4.3. EV/Number of acquired subscriber: Value placed by the acquirer on the subscribers acquired. It is also dependent on other factors such as ARPU, type of circle, quality of customer etc. Industry average ranges $400 to $1000 per subscriber. While valuing a company one should look out for Phantom subscribers who are unwilling, low value prepaid subscribers maintained only to increase subscriber base and hence increase valuations.

6. Benefits of M&A in Telecom Industry 6.1. Acquisition of customer base and Market Access: Network roll out requires extensive experience of the Indian market and is time consuming. 6.2. Acquisition of licenses or geographical territory 6.3. Acquisition of spectrum: To maintain QoS and sustain network growth additional spectrum, merging an existing operation is simpler as compared to applying for new spectrum 6.4. Acquisition of telecom infrastructure and network: Building infrastructure for telecommunications is a difficult and time consuming process. M&A provide access to infrastructure much easily. 6.5. Acquisition of brand value 6.6. Higher operating profit (EBITDA) margin: Compared to Asian telecos (China, Philippines, Thailand) which have operating margins of 40-60%, Indian telecos have operating margins of 11-37%. There is scope for margin enhancement as government levies, licensing cost will come down while the increasing number of subscriber shall reduce the cost of operations per subscriber. 7. History of M&As in Indian Telecom: 7.1. Vodafone bought Hutch for $11billion in 2007. 7.2. NTT Docomo paid $2.7 billion for a 26% stake in Tata Teleservices in 2009. 7.3. Telenor bought 60% stake in Unitech Wireless for $1.23 billion in 2008. 7.4. Indus towers was set up by Bharti-Airtel, Vodafone-Essar and Idea Cellular in 2007 after merging their individual infrastructure assets in 16 circles and owns 110,000 towers. 8. Future scenario of M&A in India: 8.1. More than 10 telecos operating currently against the global average of 5-6. The smaller players will find it harder to compete in the sector. Hence a lot of consolidation can be expected in this industry. 8.2. New license holders will look to sell their stake at a premium. 8.3. New TRAI recommendations make it tough for the big industry players to merge or acquire each other.

Sources:
1. Mergers & Acquisitions (M&A) in Indian telecom industry- a study by Sanjoy Banka http://220.227.161.86/9846927-941.pdf 2. M&A Trends in the Indian Telecom Sector by Tanmay Gupta http://www.google.co.in/url?sa=t&source=web&cd=1&sqi=2&ved=0CCcQFjAA&url=http%3A%2F %2Fwww.iitcoe.in%2Findex.php%3Foption%3Dcom_docman%26task%3Ddoc_download%26gid% 3D8%26Itemid%3D20&ei=4K0DTpmbC4eyrAf1YmPDg&usg=AFQjCNHn9n_J_SDUiLGWNZGH4Qo_M9CvTw 3. Business Standard http://www.business-standard.com/india/news/dot-panel-backs-30-limitmerged-entitys-marketshare/439877/ 4. Indutrytracker.wordpress.com http://industrytracker.wordpress.com/2011/02/25/telecom-industry-in-india/ 5. Indiatelecomonline.com http://www.indiatelecomonline.com/tele-density-in-india-reaches-67-67/