New Delhi, Sept. 15: The domestic telecom sector is headed towards consolidation, spurred by new rules such as spectrum trading.
Telecom regulator Trai’s recommendation to allow spectrum trading is likely to be accepted and notified by the government next month.
The move is expected to specifically help companies such as Mukesh Ambani’s Reliance Jio, the UK’s Vodafone and Norway’s Telenor.
Mukesh Ambani’s Reliance Jio, which is yet to roll out services, can buy spectrum in circles where it does not have spectrum. Vodafone, too, is expected to benefit from trading in some circles.
Telenor, a major player in India, Pakistan, Bangladesh and Myanmar, can make strategic purchases to offer cheap connectivity across the subcontinent.
“Once accepted, Trai’s recommendations on spectrum trading will allow and support consolidation,” Mahesh Uppal, director of telecom consultancy Com First, said.
Trai has suggested that for a fee, a company can buy or rent spectrum from another player, subject to a cap of 50 per cent of spectrum in a band and 25 per cent of commercial spectrum assigned to a service area.
Telecom firms, thus, are gearing up for action. At a shareholders’ meet a fortnight ago, R-Com chairman Anil Ambani said, “We believe the telecom sector is going through a virtual consolidation and we expect in the next few years India will see 4-5 large operators who will be there on a nationwide basis.”
Uppal said, “Incumbent players as well as those who are late entrants with deep pockets are the obvious gainers and will be able to buy out the spectrum packets they need for a pan-India presence. Those who sell out will also gain from the exit.”
A note prepared by brokerage firm Motilal Oswal, titled Consolidation Calling, cited instances of operators scaling down their presence, possibly paving the way for strategic pacts towards consolidation.
“Telenor/Sistema reduced their footprint because of high spectrum price after the cancellation of their licences. Aircel/Tata Tele announced a scale-down or exit from 5-3 circles despite having spectrum, likely to stem the cash-burn,” the note said.
Analysts feel the process of consolidation will gain pace with smaller players such as Aircel and Loop being marginalised by larger players.
Spectrum trading also works out to be cheaper than buying out a firm.
“For instance, if you buy out a firm, you pay not only for the spectrum it holds, some of which you don’t need because it is in circles you do not require spectrum, but also for intrinsic values such as brand, and goodwill, besides duplicate telecom towers, switches and office space,” said K.P.Joshi, an independent merchant banker specialising in offshore mergers and acquisitions.
Trading also allows for short-term rentals to take care of a sudden jump in traffic such as during Durga Puja or Independence Day. Analysts believe short-term trading will help to maximise the profit of the firms which gain subscribers as well as those that have lost or have a static subscriber base.
“I expect the State Bank of India’s recommendations for spectrum trading exchange to be accepted eventually and this will mean many small telecom firms will simply live off trading in spectrum, allowing larger, more aggressive players to expand. It will be Darwin’s law for the sector,” said Joshi.
The SBI, which had taken part in Trai’s consultations, has suggested that spectrum trading should be done through bourses or a common trading platform so that it is transparent and allows for efficient utilisation, besides giving liquidity for the resource so that players don’t have to wait for periodic auctions.
A note prepared by Icra’s Sabyasachi Majumdar pointed out that trading would promote efficient and optimum utilisation of spectrum. “The trading of spectrum will allow a telco to align its spectrum holding across circles according to the subscriber base/revenue potential of the circle.”
Another advantage is the benefit of low exit cost. “Spectrum trading will provide an easy exit route for a telco, something which is not available as of now,” he added.
“Moreover, this will promote spectral efficiency by allowing a telecom company to consolidate fragmented spectrum in a particular band,” Majumdar said.