Consolidation is the name of the game for the telecom sector now. How else are smaller firms supposed to thrive in such a fiercely competitive environment? Bharti Airtel Ltd’s latest decision to acquire Telenor India’s operations is another step towards consolidation.
What does the acquisition bring to the table for Airtel?
In one word—spectrum. The 43MHz of 1800MHz spectrum that Airtel will acquire across seven circles as part of this deal is the biggest benefit to Airtel from this development. It will help further strengthen Airtel’s spectrum holding. Analysts from UBS point out that Telenor brings valuable, liberalized spectrum in the 1800MHz band in the circles of Uttar Pradesh (East), Uttar Pradesh (West) and Gujarat, which happen to be circles where Airtel’s liberalized spectrum holding is lower than average. “This is particularly important given the recent announcement of the potential Vodafone-Idea merger, which would have made Bharti’s spectrum position relatively weaker,” added UBS in a note on Thursday.
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On the valuation front, the consideration wasn’t disclosed in the press statement. According to BNP Paribas Securities India Pvt. Ltd, Airtel will assume Telenor’s spectrum liability (Rs1,650 crore) and tower contracts, but not its debt. BNP Paribas believes that Airtel has got an attractive deal, given that smaller operators are running out of options in the intensely competitive Indian telecom market.
Telenor’s subscriber base stands at about 44 million. Revenues and Ebitda for calendar year 2016 were around Rs4,800 crore and Rs350 crore, respectively. Ebitda is earnings before interest, tax, depreciation and amortization. Its voice realization at Rs23 paise/minute and average revenue per user of Rs90 is well below that of the larger operators, says BNP Paribas. Analysts maintain Airtel’s superior Ebitda margin profile would help improve Telenor’s operational performance and derive cost synergies.
Investors cheered the deal. Bharti Airtel shares increased as much as 11% during trading hours on Thursday, before ending the day 1.36% higher. Shares of Idea Cellular Ltd too surged 6.4%.
“The transaction is positive for Idea as well, given that Telenor is highly competitive in Idea’s key markets such as Maharashtra, Gujarat and UP (East and West),” said a report from Emkay Global Financial Services Ltd.
Of course, everyone agrees that industry consolidation will benefit the sector from a long-term perspective. But the outlook for telecom companies is expected to remain rather gloomy from a near-to-medium perspective. Competitive pressures are expected to linger, as companies continue to fight for market share to counter the threat from Reliance Jio Infocomm Ltd. Steps that other telecom companies take in reaction to Reliance Jio’s pricing strategy will be a key thing to watch out for in the coming days.
