Hurdles likely on revenue market share, spectrum fronts

THE SPUR in M&A activity in the country’s telecom sector, which started with smaller companies jumping the boat in light of pricing pressure that increased with the entry of Jio, has now arrived in the boardrooms of two of the largest three service providers of the country — Vodafone India and Idea Cellular.

Notwithstanding the consolidation of strengths from both the companies, experts suggest this potential merger might run into some hurdles immediately as well as the longer term.

For these two to combine, the obvious strengths would come in form of the separate geographies in which they have focused. On one hand, Vodafone India has commanded substantial market share in metro circles, on the other Idea has a stronghold in circles such as Kerala, Uttar Pradesh (West), and Madhya Pradesh. This essentially indicates complementing of each other’s subscriber bases by both these companies.

“Incumbent companies, like Vodafone and Idea, face serious competitive pressures. They are therefore trying to reconfigure themselves to deal with the new environment. When you combine with somebody, there is some readjustment of the control that you had separately. I would look at the merger as a reconfiguration, and combining of resources to face the new challenges,” Mahesh Uppal, director, Comfirst India, said.

While contours of the potential deal remain unclear, the existing state of both firms in terms of revenue market share (RMS) and spectrum holding highlight that the operators might face a financial speedbreaker arising out of the deal.

“There would be any number of commercial issues, which would have to be dealt with before the merger happens. However, the regulatory hurdles — on account of the rules that are in place — are fewer, and largely surmountable,” Uppal said. However, these hurdles might come at a cost.

The companies would have to adhere to the spectrum holding cap, which the merged company would be breaching in certain circles. In order to maintain their holding below the prescribed limit, the analyst said, the companies would have to surrender spectrum worth nearly Rs 6,000 crore. The spectrum cap, the limit of radiowaves a telecom operator can hold for providing wireless services, is 50 per cent in a spectrum band identified fit for transmitting mobile signals and 25 per cent of the total such spectrum assigned in a telecom circle.

Also, the M&A norms for telecom companies in the country stipulate that the combined entity must not have more than 50 per cent RMS.

Even on a cumulative basis, the Vodafone + Idea entity would have 43 per cent RMS, in some of the circles — Gujarat, Haryana, Kerala, Maharashtra, and UP (West) — the RMS exceeds 50 per cent.

“In some circles the combined entity will breach the 50 per cent RMS cap for the M&A to go through. But, the RMS share of individual operators will get rebalanced once Jio starts to charge for its services. Hence, the situation on this account will become clear once that happens,” a senior telecom sector analyst said. Currently since Jio is not charging its customers, it is outside the realm of revenue market share.

The analyst said that the problem may arise for the combined entity in form of forgoing some revenue to go through with the deal, which would be a loss additional to the one it would be conceding to Jio. “If the combined entity forgoes some of its revenue, the impact will be less than 5 per cent of their total revenue. But this will further go down with an increase in the overall base after Jio starts charging its users,” he added.

The companies would have to adhere to the spectrum holding cap, which the merged company would be breaching in certain circles