Union to Bring in Economies of Scale, but Could Lower Rev­enues for Ven­dors

Once merged, telco could rene­go­ti­ate con­tracts with net­work gear mak­ers, IT ser­vice providers

The Economic Times - - The Telecom Files -

Gul­veen Au­lakh & Kalyan Par­bat

New Delhi | Kolkata: A po­ten­tial Voda­fone and Idea Cel­lu­lar merger is likely to lower rentals for tower providers and lead to reval­u­a­tion of con­tracts with net­work gear mak­ers in the near term, as car­ri­ers would look at com­bin­ing syn­er­gies and re­mov­ing re­dun­dan­cies.

Con­sol­i­da­tion will also shrink the rev­enue pie for IT ven­dors to both com­pa­nies — ma­jor one be­ing IBM — who would have to brace for a sharp hit to rev­enues com­ing from long-term con­tracts.

“In case of 15% site ra­tio­nal­i­sa­tion by the Idea-Voda­fone com­bine, it will lead to 5.9% rev­enue con­trac­tion for Bharti In­fratel, while 20% rev­enue ra­tio­nal­i­sa­tion will lead to 7.9% rev­enue con­trac­tion for In­fratel,” an­a­lysts at Edel­weiss said in a note to clients. JM Fi­nan­cial es­ti­mated an over­lap of about 100,000 sites.

“A 10% re­dun­dancy of ex­ist­ing sites for Idea could wipe out the en­tire ten­ancy ad­di­tion for Bharti In­fratel for a year,” said Jef­fer­ries in a sep­a­rate note to clients.

Shares in Bharti In­fratel, the coun­try’s only listed telecom tower com­pany, fell more than 14% to ₹ 292.55 dur­ing the day’s trade, to reach its 52-week low, on the Bom­bay Stock Ex­change on Tues­day. The scrip closed 11% down at ₹ 293.65.

Voda­fone In­dia and Idea Cel­lu­lar have com­mon ven­dors across tow­ers, net­work equip­ment, man­aged ser­vices and IT, which in­cludes more than half a dozen com­pa­nies.

In­dus Tow­ers, Bharti In­fratel, Amer­i­can Tower Cor­po­ra­tion, GTL In­fra pro­vide tow­ers and Huawei, Eric­s­son and Nokia, which pro­vide telecom gear, some also do man­aged ser­vices. IT ven­dors in­clude pri­mar­ily IBM, among oth­ers like Tech Mahin­dra and Ac­cen­ture. The merger would “in­duce the need to make lots of tough choices around tech­nol­ogy ven­dors/IT part­ners, cus­tomer re­la­tion man­age­ment part­ners (like third-party con­tact cen­tres), and should nat­u­rally lead to re­align­ments of ex­ist­ing agree­ments and con­tracts with their re­spec­tive part­ners,” said for­mer Bharti Air­tel CEO San­jay Kapoor.

“Since the ob­jec­tive would be to build syn­ergy and avoid du­pli­ca­tion of net­work/sys­tems/peo­plere­sources/part­ners on a cir­cle-by­cir­cle ba­sis, the con­sol­i­da­tion at ecosys­tem part­ners’ level is in­evitable,” he added.

The No. 2 and No. 3 car­ri­ers in In­dia by sub­scribers may have to rene­go­ti­ate some ven­dor con­tracts to op­ti­mise net­work and bring in op­er­a­tional ef­fi­ciency on a cir­cle-to-cir­cle ba­sis. Idea and Voda­fone bought spec­trum in the 2016 auc­tions, and some net­work roll­out con­tracts have been given out. Voda­fone gave a 4G LTE de­ploy­ment and ex­pan­sion deal worth

450-500 mil­lion to Nokia cov­er­ing 10 cir­cles in Jan­uary, which fol­lowed a multi-year man­aged ser­vices con­tract worth 200 mil­lion. Last year, a three-year man­aged ser­vices and net­work op­er­a­tions con­tract worth $180-220 mil­lion was given to Huawei in some cir­cles.

The car­ri­ers would have to choose be­tween ven­dors run­ning par­al­lel ser­vice and sup­ply con­tracts, so as to keep one net­work. They may even re­dis­tribute ge­ogra­phies be­tween sup­pli­ers. “The ex­er­cise may take a year or so,” said a se­nior ex­ec­u­tive at one of the tower providers, ask­ing not to be named.

Gear mak­ers did not re­spond to queries seek­ing com­ment.

On the tower side, Idea and Voda­fone have largely sourced ten­an­cies on masts of In­dus Tow­ers — the largest tower com­pany in the world — in 16 cir­cles, and Bharti In­fratel, be­sides Amer­i­can Tower Com­pany (ATC) and GTL In­fra. Bro­ker­age Gold­man Sachs said Voda­fone and Idea would have a sig­nif­i­cant “tower over­lap” if the merger ma­te­ri­alises, lead­ing to ra­tio­nal­i­sa­tion of tower foot­print to ring in cost sav­ings. This could se­verely im­pact tower com­pa­nies, signs of which were seen on the bourses.

How­ever, an­a­lysts added that the dam­age may not be as se­vere on ex­ist­ing sites, as it may be for new net­work roll­outs and de­ploy­ments aimed at im­prov­ing net­work.

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