Telecom consolidation

What is the issue?

• The shareholders of Idea Cellular have approved the company’s proposed merger of its mobile business with Vodafone India.
• Tata groups recently announced that it would sell its consumer mobile business to telecom operator Bharti Airtel Ltd.
• With the range of consolidations happening in the Indian Telecom sector, it is witnessing a change of phase.

What are the recent developments?

• The telecom sector had around 9-10 mobile operators in each circle just a few years ago.
• However, with the range of consolidations happening now, this is now set to go down to 3-4 mobile operators.
• Recent mergers and acquisitions include that between Vodafone & Hutchison Essar, Telenor & Unitech Wireless, Reliance & Aircel, Airtel & Tata, etc.
• The latest proposal to merge Vodafone and Idea Cellular is expected to take this progress to next level.

Why is this so significant?

• The merger can conclude only after the National Company Law Tribunal (NCLT) grants approval.
• If the merger materialises, the number of private players in the Indian telecom space would decline to three.
• The four players expected to remain are Airtel, Reliance Jio, Vodafone-Idea combine and the state-owned BSNL.
• A limited operators market would generate the optimum balance of competition and investment.
• Airtel, Reliance Jio and the Voda-Idea combine will compete for the lucrative data services market, setting the stage for a three-way battle.

Why is this an unhealthy sign?                        

• Consolidations are expected to fare well in terms of revenue, return on equity and encouraging infrastructure-based competition.
• However, the factors that had driven earlier consolidations and those behind the ongoing ones are different.
• The twin troubles of high spectrum costs and intense pricing pressures led by Reliance Jio have hit hard the Indian telecom sector.
• Resultantly, most of the deals are in the nature of distress sales by loss-making companies.
• E.g. Jio’s entry triggered exits by the weaker players and merger of smaller incumbents (Idea and Vodafone).
• The current consolidations had led to huge value destruction and had been painful for those exiting.
• Another serious implication is the impact on jobs.
• According to a market estimate, as many as 30,000 jobs could be at stake from the ongoing consolidation.
• Also, unsuccessful mergers could lead to disruptions in the telecom operations.

What lies ahead?

• Consolidation, if it was done as a natural progression than being forced due to market disruption by one operator, is good.
• Given all these, it is expected that after the initial pain, the consolidation would augur well for the telecom industry.
• The surviving three to four operators could emerge stronger, to capitalise on the huge potential that data services would bring.

Source: BusinessLine