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Consolidation May Lead To Debt In Telecom Industry

Intense competition coupled with restricted increase in pricing means that any return on investment is a long time away

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The stage is set for full-fledged consolidation in the Indian telecom with the recent acquisition of Videocon's 1800 Mhz spectrum in two circles of Uttar Pradesh (West) and Gujarat.

This hasn't been the only consolidation move by the incumbents in recent times. Reliance Communications recently acquired Sistema Shyam, which operates under the brand name MTS, in an all-stock merger agreement. Some time back the market was abuzz with reports of Airtel in talks to acquire Aircel's spectrum.

Spectrum in other circles of Videocon like Bihar, Haryana, Madhya Pradesh and UP (East) might also be up for sale. "It is possible that Bharti Airtel and Vodafone may show interest in purchasing spectrum in the circles remaining with Videocon," says India Ratings and Research report.

Consolidation has been long anticipated and expected by the experts. There are close to six-to-seven telcos in every circle, which reduces the profitability for the telcos in this investment incentive business.

"Telcos are most certainly already keeping 4G in view when considering an Merger and acquisition or spectrum trading activity, so consolidations now should help accelerate the onset of 4G. Liberalization of 2G spectrum would be providing the much needed boost to consolidation," says Deepak Kumar, Founder Analyst at BusinessandMarket.

However, consolidation and race to horde spectrum means that incumbents might be walking in a debt trap. Idea Cellular has a gross debt of Rs 235.4 billion as of September 2015 and the current deal can potentially increase the company's total debt by as much as 10 per cent, says the recent India Ratings and Research report.

At the same time whether or not consolidation will lead to debt also depends on the approach taken by the companies. ""Whether it leads to a rise in debt or not depends much on the approach that a given telco takes. If we look at the recent RCom-SSTL deal for instance, it hardly adds to the existing debts for RCom due to the all-stock merger agreement. The deal sets a good precedence for the industry and I think telcos should follow it wherever possible, especially for large deals," elaborates Kumar.

Intense competition coupled with restricted increase in pricing means that any return on investment is a long time away. The entry of RJio also means that the incumbents would be forced to invest in network modernization and expansion. At the same time the entry of a new player, Reliance Jio will ensure that the tariffs cannot be increased. All this means that while expenditure is going to increase manifold and any gain on this investment is spread over a very long period.

"In case the other telecom players also tend to acquire spectrum at a substantial premium, the debt levels in such companies could increase further," says the India Ratings and Research report.

The Idea deal has also set a benchmark for spectrum pricing as the price paid of Rs 3310 crore by the company is 98 per cent higher than the price discovered in March 2015 auctions. Telcos like Tata DoCoMo, Aircel would be looking to enter spectrum sharing or trading deals with incumbents.

The other telcos looking to sell spectrum would be looking at a similar price for their spectrum, which means that the debt levels of incumbents can increase further.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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telecom videocon 4g spectrum

Gagandeep Kaur

An India-based business journalist, Gagandeep writes for several international and national publications. With work experience spanning more than 15 years, she specialises in writing on telecommunications and Information Technology industry

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