Telecom Lead Asia: The 1800 MHz spectrum auctions, on expected lines, saw limited participation primarily only from the ‘pushed-into-a-corner’ operators, whose licenses were cancelled by the SC Feb 2012 judgment and who had little choice but to participate if they intended to continue operating.
1800 MHz price discovery goes into a regulatory back-and-forth again, at least in the four circles, where there were no bids.
1800 MHz auctions – a partial success or a philosophical failure?
The 1800 MHz auctions that started on Nov 12, 2012 closed on Wednesday after 14 rounds of bidding. The auctions did not see any bidding in four circles (Mumbai, Delhi, Karnataka and Rajasthan), was a partial success (# of blocks sold < base # of blocks available) in 14, and all the blocks available were sold only in four circles.
The final clearing price was higher than the reserve price per block only in Bihar.
The auctions saw interest only from the ‘pushed-into-a-corner’ operators (Idea, Telenor and Videocon) who faced a shutdown of operations if they did not bid. One can argue that the bidding decisions made by such operators were not truly ‘clean or independent’ given that they faced write-off of network investments if they did not bid. Even here, the fact that a Telenor settled only for six circles (after indicating that they were interested in bidding for nine) clearly demonstrates that the auction reserve price (different for different circles) set by the Government was too high.
Even as one can argue that the auctions were a partial success given that the Government managed to sell some blocks in some circles to some operators (notwithstanding the fact that these operators could not make a bottom-up price-value assessment of the asset being sold), we view the auctions as a failure and reflective of some serious price-value (of spectrum) distortion that the reserve prices represented.
Clarity on pending regulatory issues – none, incrementally; the wait continues
The significance of these auctions goes beyond what it meant for the operators impacted by the SC Feb 2012 judgment. These auctions were supposed to throw the ‘2012 market price’ for spectrum in various circles. This discovery has clearly not happened in four circles (Mumbai, Delhi, Karnataka and Rajasthan), which together accounted for 51 percent of the base price per MHz of spectrum set by the Government. In addition, whether the auction-discovered prices in other circles, which only saw partial success mostly driven by the ‘forced-to-participate’ state of a few operators, can be taken as ‘benchmark market prices’ faces philosophical (not legal, in our view) scrutiny. We note that all the material pending regulatory issues (renewal, refarming and one-time excess spectrum fees) need this ‘benchmark price’ input – clarity still eludes us, the wait continues.
No price discovery in a few circles and only partial success in most others – auctions cannot be termed as a success and Government’s pricing philosophy as well as reserve prices set will likely be questioned.
Telenor curtailing its ambitions even further; interesting case study this – Telenor started off in 2009 as an operator with pan-India ambitions, rolled out only in 13 circles, indicated that they would curtail operations to nine circles after the SC judgment and auction reserve price announcement, and finally settled only for six (leaving the Mumbai, Kolkata and West Bengal circles). Telenor’s curtailed ambitions, looked at in conjunction with the recent news flow on Aircel curbing operations in select (five, per media reports) circles, and other challengers being extremely cautious on expansion capex, clearly depict the business case challenge and balance sheet pressure being faced by the challengers.
Limited participation by Videocon – we do not know whether there is any merit to the speculation that RIL could look at buying Videocon Telecom out post auctions; nonetheless, Videocon’s limited participation in the auctions (they won 5 MHz spectrum in 6 circles – Gujarat, Haryana, MP, UP (E), UP (W) and Bihar) should lay to rest theories of RIL looking at an aggressive pan-India greenfield 2G network rollout to pursue an LTE data + GSM/CSFB voice strategy. We are not saying RIL will or will not pursue such a strategy; however, they are clearly not going the greenfield route for the same.
One can view Vodafone’s aggressive spectrum top-up strategy as aggressive market share pursuit intent and a negative for Bharti and Idea; however, we view the same as a capex/spectrum purchase trade-off on capacity enhancement and would not be unduly worried on this front.
All in, even as several issues still remain unsettled and several questions unanswered, we see the 1800 MHz spectrum auction as a positive for the industry, incumbents in particular. The trouble, as analysts, is that we no longer even have the luxury of taking the reserve prices as benchmarks to compute the impact of various regulatory events (renewal payouts, refarming/900 MHz auctions, one-time excess spectrum charge). We need a change in approach. Even as we are tempted to adopt a regulation-neutral stance on Bharti (essentially implying that Bharti can take the tariff hikes required to mitigate the regulatory burden, on an NPV basis), we stop short of doing the same.
Total proceeds for the Government sum up to Rs 94.2 billion. However, the actual cash inflow for FY2013E could be lower on account of two factors – (1) operators have a deferred payment option; they can choose to pay anywhere between 33 percent and 100 percent now and the rest in 10 equal installments starting two years from now, and (2) operators who had their licenses cancelled by the SC will likely be allowed to set off the earlier-paid entry fee against the payments for these auctions. We do not know the exact contours of how this set-off figure would be computed.
Idea’s participation was in line with expectations – the company won spectrum in (1) the seven circles where their licenses have been quashed – it took 4 blocks (or 5 MHz) of spectrum in 6 of these and 5 blocks in West Bengal, and (2) Bihar – where the company decided to go for spectrum enhancement by winning 1 block (1.25 MHz) of spectrum. Total payout for Idea works out to Rs20.3 bn.
Telenor – curtailed ambitions further to just six circles. We have discussed this in detail earlier. Total payout for Telenor works out to Rs 40.2 bn.
Videocon – 4 blocks of spectrum in 6 circles (discussed earlier). Total payout works out to Rs22.2 bn. Their strategy appears to be focused on the Hindi-speaking North and Central Indian belt.
Bharti – just one block in Assam. Total payout works out to Rs 87 million. We repeat that we have been pleasantly surprised with the restraint Bharti has exercised.
Vodafone – went for spectrum enhancement in 14 circles (Maharashtra, and all B and C circles, except Rajasthan). We are a tad surprised with the aggression but can understand the capex/spectrum payout tradeoff Vodafone faced. Total payout works out to Rs 11.4 billion.
Kotak Securities
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