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Valuation drop: global telcos eye M&A route
November, 05th 2009

The month-long battering that stocks of telecom companies have taken on the bourses has resulted in a huge dent in their market capitalisations, making mergers & acquisitions in this space more affordable today than one year ago. When Japans NTT DoCoMo picked up a 26% stake in Tata Teleservices for $2.7 billion last November, for instance, it valued the company at a staggering $10.38 billion.

An India representative of a leading global telecom major said it has become more attractive to enter India through a direct buyout of existing assets, rather than acquire a fresh licence through an auction and build a network from scratch. Some biggies had missed the India story due to various reasons. Now, some of them may be tempted to come through the direct acquisition route, given the cheap valuations. It could also impact the 3G spectrum auctions, especially if some telecom majors switch strategy and go into acquisition mode.

Consider this: the countrys largest telecom operator, Bharti Airtel, saw its market cap erode by almost a third to Rs 51,409.25 crore between October 1 and November 3. Reliance Communications saw the steepest decline, 47.83%, to Rs 31,393.85 crore during the period. Idea Cellulars market cap fell 31.44% to Rs 7,192.22 crore.

We see average revenues per user declining 20-22% this year and 14-15% next year. More than subscriber addition, the fight would be subscriber retention. Revenue growth for all operators would now either be in high single digits or at best low double digits. With pressure on Arpus, the industry would witness significant cash burn, which would be a key trigger for consolidation, Crisil Research head of research Manoj Mohta told FE.

KPMGs Romal Shetty agrees: Mobile operators are going to have challenging times in the next one-and-a-half years. On the one hand, they are engulfed in a fierce tariff war accentuated by per-second billing eroding Arpus. On the other, talk time usage is not going up, with net subscriber addition largely coming from rural areas. Further, with new operators entering the market, things are only going to get worse.

What this essentially means is a serious correction in the valuation of telecom companies. Prior to DoCoMos entry, the telecom sector had seen the worlds seventh-largest telecom company, Norways Telenor, acquiring 67.25% in new licensee Unitech Wireless, valuing it at $1.82 billion.

UAEs Etisalat acquired 45% in Swan Telecom for around $900 million, valuing the company at $2 billion.

Calculating the valuation of a telecom firm itself will change.

Today, we measure valuation as the number of subscribers multiplied by the dollar value. But with dirt-cheap tariffs, subscriber numbers will become meaningless, as companies will offer free minutes to attract customers. Instead, revenue margins on subscribers and the consequent Ebidta margins will gain precedence, Shetty added.

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