Mingle and Jingle

Telecom is staring down the abyss, and faces the prospect of rapidly turning from a sunrise sector to an inviable business proposition. Its the time to call for mingle.

Inevitability finally catches up with the new entrants in the Indian Telecom industry. It is a no brainer to see that a market with 15 players will not have space for the bottom rankers. With 14-15 players jostling for share of the consumer kitty, consolidation is now setting into the Indian telecom markets. In most circles, only about 6 players continue to sustain market momentum. The top 6 players account for 90% of the market shares by subscriptions and higher shares by value.

India has of course been through this before. In the late 1990s and early 2000s, today's leading operators, led by Bharti, consolidated many smaller operators which existed after the original 2G licence auctions in the mid 1990s.

The main difference between the first consolidation process and the one we are about to enter concerns the fundamental drivers of consolidation.

In the first process the likes of Bharti and Tata were building a geographic footprint. Operators were expanding their original few circles via a series of acquisitions of similarly small operators. Most of the operators today have a presence in many if not all 22 circles, so the current consolidation process will not be driven by a desire for wider geographic presence.

The first wave of consolidation was also driven by the need to acquire subscribers. Back in 2003, India had 13 million subscribers or a 1 percent penetration rate. Mobile telephony was still a luxury commodity. Today's consolidation process will be about providing a merged entity with a better chance of improving variables such as average revenue per user (ARPU) and more importantly average revenue per minute (ARPM).

The earlier process also involved a willing number of international investors keen to exit India. Major international operators such as AT&T, Telecom Italia, Telia, Telstra and Swisscom were all happy to sell up after years of growth which failed to live up to original expectations. This time around we have committed international investors who seem intent on staying, albeit going forward possibly as smaller shareholders in a larger entity.

Finally the earlier consolidation process involved many risk hungry investors, desperate to build market share and take risks on acquisitions. 

So what lessons can we draw from the earlier consolidation process and also from other markets in Europe and Asia where the consolidation process is well underway?

It is interesting to observe some of the recent consolidation moves in the mature mobile markets of Europe and Asia and their relevance to India and forthcoming consolidation. During the past few years we have seen mergers in mature markets such as Australia (Vodafone-Hutchison), Netherlands (TMobile-Orange) and UK (Orange-TMobile). Large international operators such as Deutsche Telekom, France Telecom, Hutch and Vodafone saw a better future as part of a merged entity rather than battling on stand-alone.

Critics claim telecom consolidation reduces competition and promote monopoly. 

But I think this new mingle process is likely to be a little more “defensive” driven, finding the right partner to team up with to diversify future financial and operational risks. The mergers are a part of a healthy competitive process and would foster innovation and bring benefits to consumers. They will improve the competence of the operator also increasing diffusion of different cultures coming from different merging entities. Finally, the success of a merger hinges on how well the post-merged entity positions itself to achieve cost and profit efficiencies. Careful valuation and disciplined negotiation are vital to successful acquisition, but in business as in life, it is sometimes more important to be lucky than smart.

Currently, there are a number of restrictions on M&As in the telecom sector. Consolidation is not allowed for three years after the grant of a licence, and there is a lock-in period of three years for the promoters’ stake. The combined market share of a merged entity cannot exceed 40 per cent in terms of both subscribers and revenues in any circle, and no consolidation will be allowed if it leaves less than four operators in a circle. These restrictions were viable when the market was having 6-8 operators and were placed to create a healthy competition in interest of consumers. But now the number has drastically increased to double defeating the purpose, as it is not making a viable business model to toil on.

Consolidation will result in synergies in the areas of infrastructure, human resources, spectrum and other areas. This can bring down costs, improve quality of services due to the availability of sufficient spectrum and increase investment. This would lead to a win-win situation for everyone involved, and ensure that the amazing growth story of Indian telecom remains on track.