In early March 2016, Bharti Airtel signed a definitive agreement with Videocon Telecommunications Limited (VTL) to acquire the right to use the latter’s 2×5 MHz block of spectrum in the 1800 MHz band in six circles – Bihar, Haryana, Madhya Pradesh, Uttar Pradesh (East), Uttar Pradesh (West) and Gujarat. The deal is valued at Rs 44.28 billion, which, as per the HDFC Bank Investment Advisory Group, is about 1.8 times the last determined auction price adjusted for the life of the spectrum. VTL won the spectrum in the 2012 auction and it is valid up to December 18, 2032.
Within a month of closing the deal with Videocon, Airtel signed another similar definitive agreement with Aircel and its subsidiaries, Dishnet Wireless Limited and Aircel Cellular Limited, to acquire the right to use 20 MHz in the 2300 band in eight circles. These are Tamil Nadu (including Chennai), Bihar, Jammu & Kashmir, West Bengal, Assam, Northeast, Andhra Pradesh and Odisha. The deal is worth Rs 35 billion. The spectrum, which can be used to service a 4G LTE network, is valid till September 20, 2030. However, the transfer of the right to use (4G spectrum) in Andhra Pradesh and Odisha is subject to the revision of spectrum caps with the upcoming auction to be conducted by the Department of telecommunications .
Given that 4G spectrum is critical for the next phase of expansion as mobile data increasingly replaces voice as the main growth driver for mobile operators, these two acquisitions are being seen in a positive light for Airtel as it extends its 4G footprint across all circles, making it a pan-Indian 4G operator.
The deal is significant for Airtel as it will help the operator gain a stronger foothold in the market, which is witnessing heightened competition in the data space. While Airtel had 3G coverage in all the six circles where it has enhanced its spectrum holding through this transaction, it did not have 4G capability in five of these circles. Post the acquisition, Airtel has increased its 4G-capable spectrum portfolio to 19 of the 22 telecom circles in the country.
Apart from the significant quantum of 4G spectrum that Airtel will acquire, the operator will get around 7 million existing customers (through mobile number portability) on Videocon’s network, as the latter is likely to close its business in these circles.
However, the cost of the deal will add to Airtel’s capex plans. The operator had already spent about $1.7 billion during 2015-16 (as of December 2015), with a total capex guidance of $2.4 billion-$2.5 billion for India and South Asia for the entire year. Its net debt, which stood at
Rs 788 billion as of December 2015, may also increase as a result of the deal. However, some experts are of the view that Airtel may fund this acquisition from the planned sale of its operations in some African countries.
Airtel was the first to start 4G services in the 2300 MHz band, in 2012. It stepped up its roll-outs in the past few months, expanding to more than 430 cities and towns across 14 circles, anticipating competition from Reliance Jio Infocomm Limited (RJIL), which is expected to soft-launch its 4G services shortly and start wider commercial operations by December 2016.
In comparison, Aircel has barely met its roll-out obligations. Its 4G networks are functional in Tamil Nadu, Andhra Pradesh, Bihar, Odisha, Assam and Jammu & Kashmir for enterprise customers only.
The deal is, therefore, beneficial for both companies. Following the deal with Aircel, Bharti’s 2300 MHz spectrum holding will increase to 170 MHz from 80 MHz, while its spectrum-holding market share will rise from 18.2 per cent to 38.6 per cent.
This deal with Aircel, in addition to that with Videocon, will enable Bharti Airtel to give stiff competition to RJIL, which has access to 4G spectrum in all 22 telecom circles. Vodafone India and Idea Cellular have 4G spectrum in 5 and 12 circles respectively.
For Aircel, the deal will help it pare debt and thereby fulfil a precondition for its merger with RCOM. Aircel is required to reduce about Rs 40 billion of its Rs 180 billion debt before it can merge with RCOM.
Effect on the industry
An important fact that emerges from this transaction is that operators are willing to pay significant premiums to acquire 4G spectrum. This shows the growing importance that operators are giving to 4G services to drive the next phase of growth. In addition, the deal with Videocon is expected to impact the upcoming spectrum auction. According to some industry experts, it is likely to bring down competition in the 1800 MHz band, as Airtel is expected to be out of the race for spectrum in this band in these six circles. As a result, bidding will be less fierce than that witnessed in the previous auction.
Meanwhile, the spectrum auction this year will be driven more by strategic decisions than by the need for survival in the market as operators now have additional ways of acquiring spectrum. Spectrum sharing and trading, which was approved by the government in September 2015, have spurred consolidation in the highly competitive Indian telecom industry. Apart from the Airtel-Videocon deal, RJIL and RCOM have signed a spectrum sharing deal. State-run Bharat Sanchar Nigam Limited is also reportedly in talks with Airtel and Idea Cellular for spectrum sharing.
With stressed balance sheets and stiff competition in the industry, more operators are expected to share and/or trade spectrum in order to monetise their existing assets.