The M&A market is getting hotter this summer, thanks to the sunrise Indian telecom sector. Despite the overall economic slowdown, telecom giants are not shying from pouring dollars in Indian telecom, especially in the last 12-18 months, as they see a significant investment opportunity in it. From Russias Sistema to Bahrains Batelco, to Emirates Etisalat to Norways Telenor and now the talks between South Africas MTN and Bharti, the queue outside the Indian telecom sector has just got longer.

For the count, companies of almost 10 countries have already invested in Indian telecom, at present. Primarily, amongst these are UK, Norway, US, Singapore, Malaysia, Russia, Japan, Gulf countries and now South Africa. The reason is simple. The telecom industry is widely known to give 3-4 times return over a five-year period, when compared with the stock market. With FIIs on a downtrend due to a flattish stock and real estate market, its the FDI in telecom which is seeing a bullish trend.

Last year it was Norways Telenor buying a 60% in Unitech Wireless for about $1.07 bn, followed by a whopping $2.7 bn investment by Japans NTT DoCoMo in Tata Teleservices for a 26% stake. Following suit, Bahrain Telecom invested $225 million investment in Chennais S Tel, a new player yet to start services. And now it is the $23 bn mega merger talks between Africas largest mobile operator MTN with Indias largest telecom group Bharti Airtel.

Over the next 2-3 years, I see about 11-13 new operators per circle. The Indian telecom M&A story will just become hotter as many operators will not be able to sustain due to operational issues, says Kunal Bajaj of BDA Connect, one of the largest telecom advisory firms in India. Clearly, while other sectors are shying away of cross border deals, in a global credit crunch, Indian telecom growth story continues to defy the macro economic slowdown.

Just to give a glimpse, the total number of M&A and group restructuring deals for the month of April 2009 stands at 21 with a total announced value of $427.55 million, according to advisory firm Grant Thornton. In comparison, most investments in the new telecom entrants in the India market have been over $400 million in the last 12 months, except the Batelcos $225 million investment in S Tel.

The great Indian telecom story continues unabated. The telecom sector has been adding about 8 million mobile subscribers every month. In fact, during the bottom most period of the economic slowdown in January this year, the sector added a whopping 15 million subscribers, making a global record in subscriber additions in a month. Perhaps this is the success story which continues to attract telecom majors from overseas to India in the slowdown and drive the otherwise lacklustre mergers and acquisitions activity.

For large telecom providers like Bharti Airtel and RCOM, which have been actively scouting for overseas acquisition, there was never a better time, as stocks globally are an all time low. Just a fact: Bharti Airtel will now be paying almost 70%-75% less for a 36% stake in MTN, compared to $7-8 bn it was planning to shell out for acquiring MTN, in summer last year.

For global telecom majors too who are willing to enter India, such attractive times might not return soon. Reeling with a credit crunch, new telecom licensees are willing to dole out equity in return for cash, which might be utilised for rollout of services.

Interestingly, though none of the new telecom license holders like S Tel, Unitech Wireless, Loop Telecom or Swan have launched services, they have managed to raise substantial cash by doling out equity.

While Batelco invested $225 million in Chennai based S Tel in January 2009, for a 49% stake, UAEs Etisalat bought 45% stake in Mumbai based Swan Telecom for $900 million in September, last year. Owned by a little known DB real estate group in Mumbai, Swan holds licenses to operate in 13 circles.

On the other hand, S Tel has already obtained licenses to operate in Bihar, Orissa, Jammu & Kashmir, Himachal Pradesh, North East and Assam.

Some of the new operators also hold category A ISP license like Swan, which makes entry into other capex (capital expenditure) light businesses for foreign players.

New player Shyam Sistema Teleservices Ltd, a JV between Russias Sistema and Indias Shyam Telelink may also get funding from Russian government for an offload of a 20% stake worth $700 million. SSTL has already launched services in Tamil Nadu, Kerala along with existing Rajasthan.

Another reason for the future potential of Indian telecom sector is that almost 600 million Indians still dont own a mobile phone. In comparison, the domestic markets of operators are either very small (like Etisalat in UAE) or very saturated (like Vodafone in UK). But for players like Bharti, operating 22 circles is like operating 22 countries with each varying in profile and teledensity.

The other reason behind global telecom majors investing in new entrants is that they see a three-year lock in period over shortly, by which they might expect to encash their holdings, b merging the entity in a bigger telecom entity like Vodafone or Airtel.

Even at the time of slowdown, the number of new subscriber has not gone down. This speaks a lot about the growth story of Indian telecom industry, says Harit Nagpal, marketing & new business director, Vodafone Essar Ltd, Indias third largest operator.

On the other hand, for Indian providers like Bharti which have achieved a critical mass, (in this case 100 million subscribers), the only next step is to enter the globally unpenetrated markets, especially now when valuations are down. "Expansion plans depend on business models of telecom players, says Aircel COO Gurdeep Singh.
Another reason behind global foray of large Indian operators is the DoT regulations.

With restrictions on domestic M&As, large Indian players are looking at opportunities outside. Markets are like South East Asia, Eastern Europe, Middle East and Africa are very attractive markets due to huge growth opportunities. The Indian players have successful business models and that can be replicated in these markets, says Ernst & Young associate director transaction advisory services, Nitin Gupta.

The M&A market in telecom will only get hotter as the spectrum gets allocated and new operators come into their full being. For consumers, expect a lot of new schemes and merger of brands in the coming years. For telecom stockholders, the future is shining, at least for the next 6-7 years, when India becomes a saturated telecom economy. That is a long way to go!