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

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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
Last Published: Fri, Apr 07 2017. 01 19 AM IST
Leslie D'Monte

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, RCom
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.

Consolidation triggers
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).

Click here for enlarge

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).
Click here for enlarge

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.

Revenues take a hit

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.