Spectrum Trading norms to lead to exits — Airtel, Idea, Vodafone, Reliance Jio seen winning

spectrum

Spectrum trading is likely to lead to consolidation in the Indian telecom industry and four telecom operators — Bharti Airtel, Idea Cellular, Vodafone and Reliance Jio — are likely to emerge the winners — analysts said.

“The industry could see emergence of four pan-India players (Bharti Airtel Limited, Vodafone India Limited, Idea Cellular Ltd and Reliance Jio Infocomm Limited), assuming they will retain spectrum in all licensed service areas (LSAs) while other players may maintain strategic regional presence by trading their spectrum holding in some LSAs,” said India Ratings and Research (Ind-Ra).

“Spectrum trading and sharing is likely to push industry consolidation further, reduce regulatory uncertainty and ease network congestion,” Fitch Ratings said. It said Reliance Communications Ltd can now reduce debt levels by selling its pan-India 800 MHz spectrum (used for CDMA services).

Reliance Jio is seen as a possible buyer.

“Reliance Industries Ltd’s telecom subsidiary, Jio, which is rumoured to launch its 4G services in December 2015, could acquire 800MHz spectrum to provide better indoor coverage, as it owns spectrum in 800MHz only in 10 circles and higher-bandwidth spectrum of 2300MHz/1800MHz in the rest of the Indian circles. Rcom could be a source of this spectrum, as it has continuous spectrum bandwidth in 800MHz and already has a reciprocal infrastructure agreement with Jio to share Rcom’s 43,000 towers, 120,000km of inter-city fibre, and 70,000km of intra-city fibre network over the next 17-20 years,” Fitch said.

However, India Ratings was of the opinion that companies may not be keen to sell 800 MHz spectrum.

“Ind-Ra does not expect much trading however in the 800MHz band at this stage, as this band is of strategic importance to roll-out 4G services. Therefore, some operators could either develop 4G services on this band or rather wait for the 4G services in India to grow, so as to get a higher valuation for their 800MHz holding,” it said.

The norms would give an exit to smaller players.

“Spectrum trading coupled with sharing will spur consolidation as it provides an exit route to smaller loss-making telcos which have struggled to generate positive operating cash flows. Smaller telcos – including Tata Telecom, Videocon Telecom and Aircel Limited – make operating losses, are struggling to gain market share, and are saddled with high debt,” added Fitch.

Currently, there are more than six to seven operators holding spectrum in each of the LSA, of which two to three hold a miniscule market share.

“It opens up a viable ‘exit option’ for potential sellers, complete as well as selective. Several challengers in the Indian wireless industry have underutilized or unutilized spectrum in various bands (across circles) or have loss-making, unviable operations in several circles. Spectrum trading is a relatively neater option for them to sell some of this spectrum and bridge some of the ‘equilibrium gap’ between their P&Ls and balance sheets,” said Kotak Institutional Equities.

“This option should allay Street concerns on ‘(LTE) spectrum portfolio gaps’ of players like Idea and Vodafone. As a purely hypothetical example, buying Videocon’s 1800 MHz spectrum in the six circle where it owns such spectrum can take up (1) Idea’s ‘LTE spectrum footprint’ to nearly 84% of its revenues from the current 61%, and (2) Vodafone’s ‘LTE spectrum footprint’ to 62% from the current 33%. Videocon had bought this spectrum in Nov 2012 for a gross payout of around Rs 22 bn and the mark-to-market price of this spectrum portfolio (based on latest available prices, unadjusted for reduced validity) is around Rs 31 bn,” it added.

India Ratings estimates spectrum trading to lead to a strategic exit by operators in some states. “Aircel may consider exit in Gujarat, Haryana, Kerala, Madhya Pradesh, Reliance Communications may look to monetise its underutilised spectrum in Jammu and Kashmir, North East and similarly Tata Teleservices may evaluate exit options for Himachal Pradesh and Rajasthan.”

India Ratings pointed out that the norms are positive for both the industry and the consumers.

“Spectrum trading can help in efficient allocation of this natural resource compared with auctions. Auctions have a price uncertainty, and escalations in bidding prices similar to the past may prove the acquisition of additional spectrum to be more expensive,” it said, noting that Videocon Telecommunications Limited and Quadrant Televentures Limited have witnessed limited market share in a highly competitive market.

India’s pure-play CDMA player – Sistema Shyam TeleServices Limited may find itself on a back foot with the latest trading guidelines, India Ratings said.

“The company only has 3.75MHz of 800MHz spectrum in eight LSAs (except for Rajasthan where it has 5MHz) which was acquired in the March 2013 auctions. Spectrum trading guidelines specifically mention that the spectrum acquired by the company in March 2013 can only be traded after it has made payment of the differential premium of the latest auction price compared with the 2013 auction prices. The difference is an average 2.5x the initial auction price, requiring a high upfront payment for the company.”

Ind-Ra does not expect the transaction tax of 1% of the transaction amount as transfer fee as a material deterrent for spectrum trading.

The license fee and spectrum usage charges however on the transaction proceeds of the seller as part of the adjusted gross revenues could take away 12%-15% of the seller’s proceeds, it said.