Mergers & Acquisition in Indian Telecom – Spectrum Pricier – Case study Aircel Exit

Mergers Acquistions in Indian TelecomThe Indian Telecom Minister along with Cabinet Colleagues have almost finalized on the Mergers & Acquisitions [M&A] Norms for the Telecom Service Providers. The following are the broad guidelines,

  • The spectrum held by the merged entity in each circle will be capped at 50% of total available spectrum.
  • Spectrum holding beyond 4.4 MHz in the merged entity will be charged at the market price of the spectrum. Liberalized spectrum will be considered when calculating the total spectrum holding in each circle. However, it will be exempted while calculating the charge on spectrum beyond 4.4 MHz.
  • Legal opinion will be taken on transactions involving sale of equity.

The M&A rules favor the Govt Treasury to prevent fly by night operators such as Unitech from making windfall profits. This also makes the consolidation among challengers in the Indian telecom market not an attractive proposition irrespective of the extent of footprint overlap. We’ll see a case study on if Aircel wants to Exit in favor of Tata DoCoMo what will be the implications.

At the end of FY2013, Aircel had net debt of Rs 25,000 Cr bn and its FY2013 gross revenue was mere Rs 7600 Cr. In the first case, the merged entity will have to pay Rs 9,400 Cr as Spectrum M&A charges, taking the transaction EV to Rs 34,400 Cr + the Value of the Equity which implies EV / Sales of >(greater than) 4.5x. This is is much higher than Idea Cellular’s EV/sales multiple of 3.2X thus rendering the whole deal unattractive.

So What is Likely to Happen ? Stretched financials, lack of pricing power and poor network quality will render consolidation through M&A ineffective. Consolidation in the Indian telecom market, in our view, will be through a shift in market share towards the incumbents.