Telecom Consolidation the story so far…

Around five years ago, India’s telecom growth story started hitting roadblocks. Blow by blow, the phenomenal growth of the previous few years started to peter out. Operators started running short of spectrum, quality of service declined as networks started to get more congested, innovation wasn’t keeping up with the need for new communications services, network build became more and more expensive as it spread into rural and remote areas, and to cap it all scandals started to surface which rocked confidence in the industry altogether. Many operators moved into survival mode as debt piled up in the sector, and as confidence waned and ratios moved against the industry, access to funds dried up and was further exacerbated by the global financial crisis.

Fast forward to the spectrum auctions of early 2014, and we have begun to see some respite. The market has started looking up, buoyed by new spectrum, the freedom to launch 4G services over liberalized air waves, regulatory clarity over important issues, and new found expectations from the election of a promarket government. But a fundamental roadblock is still in place: too many players. For the sector to regain momentum, we require the stimulus of a more liberal M&A policy which enables industry structure to adjust more swiftly to what the market needs, which is four-to-five players competing in the market, not the eight-odd we have today.

World-over, it has been observed that mature telecom markets support anywhere between three to five players to provide an optimal balance of price competition and profitability, to enable enough funds to flow into the industry, yet keep driving cheaper and better services to customers. India’s current M&A norms are not allowing that equilibrium to be reached here. Repayment of market-linked prices for spectrum in case of M&A is the biggest dampener for any consolidation, and spectrum trading and sharing norms have to be made more liberal to be meaningful.

Indian telecom is not new to mergers and acquisitions. Comprising 23 circles each with its own historic evolution of licensed operations, India has witnessed almost 30 important M&A deals in the past 15 years, much of which has driven the emergence of a number of national (or near national) players. The market is used to consolidation (see table), and at the moment, is ripe for it.