India telecom M&A guidelines bring clarity to sell or buy

Paving way for bigger telecoms such as Bharti Airtel, Vodafone, etc. to grab smaller rivals and easy exit route for mobile players like Tatas, Aircel, MTS, etc. by aligning with others, India’s new merger and acquisition policy announced today brings enough clarity.

In an immediate response, GSM industry body COAI’s Director General Rajan S Mathews said: “We welcome clarity in M&A policy. We now expect 4-5 operators in each circle. However, step up cost on spectrum that was not acquired through auction and lock-in period are matter of concern.”

But there are concerns to the Indian telecom industry. “The 3i point of the guideline could create further litigation,” said Deloitte Haskins & Sells’ Partner Hemant Joshi.

A part of the telecom industry feels that consolidation is the need of the hour. But M&A guidelines approved earlier by the telecom ministry headed by Kapil Sibal may not provide full benefits of the consolidation in terms of costs especially of spectrum. This concern was shared by COAI chief as well.

Hemant Joshi says the new M&A guidelines free telecom companies from various equity holding norms for one year to complete the process of acquisition and make the new entity compliant with rules.

In fact, Sunil Mittal-promoted Bharti Airtel has kicked off the M&A regime by buying 3 million mobile users of Loop Mobile in Mumbai metro in a deal valued at around Rs 700 crore. Bharti Airtel is yet to officially announce the deal size and final details.

The domestic industry feels that there will be more such acquisitions in India. There will be joining hands of smaller rivals. For example, Telenor, Aircel, Tata Teleservices, MTS India, could be part of this kind of alliance.

Industry experts say there will be no mergers between two biggies. For instance, Airtel will not merge / buy Vodafone or Idea Cellular. There will be no incentive to biggies under the new M&A norms.

Vodafone is trying to buy Tata Teleservices and Tata Communications.

New M&A guidelines

The guideline says the license period of the resultant company will be valid for the longer period held by any of the merging company. However, there will be no change in the validity period of spectrum allocated to each of the entities.

The government has eased rules by allowing mergers between firms with up to 50 percent combined market share – both adjusted gross revenue and subscriber market share.
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At present, telecoms are allowed to merge if their combined subscriber market share does not exceed 40 percent in any of the nation’s 22 circles or zones.

Government will determine market share based on both subscriber number and adjusted gross revenue which is earned through telecom services.

The main concern is here. A market determined fee will have to be paid if the merged entity was to hold low-priced 4.4 MHz spectrum. This was earlier contested by telecom industry associations since they do not pay extra. This will block the smooth M&A.

The guidelines issued by government today largely focus around spectrum held by companies as there are two set of companies at present – one which hold spectrum allocated at old rate of 1,658 crore and other set which hold spectrum purchased through recent auctions at over 5 times this price.

The rules have allowed only those companies to participate in M&A activity who have either purchased spectrum through auction or paid one-time spectrum fee to bring old spectrum rates at par with latest market determined price, PTI reported.

The M&A guidelines say that acquirers of companies holding 4.4 Mhz spectrum, allocated at old rate, will have to pay to the government the difference between the initial amount (Rs 1,658 crore for pan-India as per 2001 auction) and the market rate determined through the latest auction.

The market rate determined through auction will remain valid for a period of one year. Thereafter, additional price calculated based on prime lending rate of State Bank of India will be added on to determine the market rate.

If companies holding spectrum at the old rate opt for buying another company they will have to submit one-time spectrum fee as bank guarantee to the Department of Telecom.

The guidelines further said that the merged entity will be allowed to hold a maximum of 25 percent spectrum allocated in a service area and 50 per cent in a particular band for telecom services under the rule.

In case of CDMA spectrum (800 Mhz band), held by firms like Tata Teleservices, Sistema Shyam and Reliance Communications, the government has fixed the upper limit of the total spectrum holding at 10 Mhz.

A merged entity will be allowed to hold a maximum of 2 blocks of 3G spectrum in a service area. This rule will check amalgamation of more than two 3G spectrum holding companies.

The new rules also allow telecom firms to enter into M&As within the lock-in period that bars new entities from selling equity for three year. The lock-in period will, however, apply to the company resulting from the M&A. COAI feels that there should be no lock-in period.
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