Telecom mergers and acquisitions get prohibitive, even as big deals can go ahead
February, 21st 2014
With acquirers required to pay an additional cost for spectrum, in addition to the price paid to buy the target company, M&A activity in the telecom space will become expensive. The rule will come in play for companies that own 4.4 MHz of spectrum for GSM services; the additional cost will be in line with that of the February auction price. In other words, the acquirer will need to pay the difference between the entry fee and the auction-determined price for spectrum for 4.4 MHz in GSM band and 2.5 MHz in CDMA band, if the spectrum was originally acquired by paying the entry fee of R1,651 crore.
This means that while Bharti and Vodafone can merge based on their market shares and even retain a higher quantum of spectrum, they must pay around R8,300 crore to the government as the differential between the R1,651 crore they paid for 4.4 MHz spectrum and February auction prices. In addition, since these companies need to pay the government a one-time excess spectrum charge, they would need to furnish a bank guarantee for the amount due till the case, currently before the courts, is settled. The department of telecommunications on Thursday notified the new merger and acquisition guidelines with an aim to facilitate consolidation in the country's crowded telecom market with close to six operators in each circle. Most provisions relating to enhanced market share and the spectrum cap for a merged entity were welcomed by the industry.
However, the additional charge for spectrum drew some criticism. “Asking operators to pay market-linked prices for spectrum granted earlier is an irritant. This will increase the cost of acquisitions and may dissuade meaningful M&As,” Rajan Mathews, director general of Cellular Operators Association of India said.
“There needs to be some additional clarity on whether the weighted average method would be applicable on SUC. Overall, while some provisions are positive, the lock-in period would act as a disincentive. When spectrum has already been bought at market prices, there is no justification to place a lock-in clause,” he added. Industry executives said there's no rationale for the extra payment because the 2001 price was also market-discovered.
Analysts also contend that the auction-determined price arrived after the spectrum sale in February may not be a fair market price for the resource. “Latest auctions were held at a time when operators' licences were about to expire; so, they were compelled to participate in the sale. Asking merging entities to pay the differential based on this discovered price would put additional burden on the telcos and the sector may not be able to accrue the full benefits of consolidation,” said Hemant Joshi, partner, Deloitte Haskins & Sells.
The positive contents of the norms allow the merged entities to have 50% market share in all circles, both in terms of subscriber base and adjusted gross revenue (AGR). To calculate market share of telcos, subscriber base as of December 31 or June 30 of each year and AGR as on March 31 of the preceding year will be taken into account. The other positive feature is that the merged entity can hold up to 25% of the total spectrum assigned for access services and 50% spectrum assigned in a given band for each circle.
Companies holding 3G spectrum will also be allowed to retain two blocks of the high speed radio waves per circle in any resultant entity post merger, a move which was welcomed by the operators.
The resultant company after a merger will have to abide by the three-year lock-in period which bars telecom companies from transferring equities within three years of buying spectrum from an auction. The lock-in period will apply in respect of new shares that might be issued in respect of the resultant company (transferee company). The norms also allow the merger of internet service provider and mobile phone licences as mobile operators can also offer internet services under the unified licence.