Monday, May 8, 2017

Monthly update on the Indian telecommunications market - Part 3

Full article: Part 1Part 2 , Part 3Part 4

Preamble

Part 2 covered the rapid process of vendor consolidation into four main groups that is taking place in the Indian telecoms market and looked in detail at the activities of the two market leaders, Bharti Airtel's merger with Telenor India and the even larger conjunction of Vodafone India with Idea Cellular, together with related minor acquisitions. Those two companies alone once all proposals have fully closed will, based on December 2016 data and financial sources, account for almost 65% of India's mobile subscribers and in the range 73 to 78% of total communications market revenue. Despite the seemingly very strong position on paper of the new Vodafone-Idea company, which would nominally take over as leader of the Indian telecoms market, there are legitimate doubts about the viability of the union, as covered in Part 2.

The other two groups likely to make up the Top 4 are Reliance Communications (RCOM), run by Anil Ambani, (Mukesh Ambani's younger and very competitive brother) and also Mukesh's own massive $20 billion-funded RJIO, which although still a minnow in revenue terms is eventually likely to dominate the Indian broadband market. There are also issues with both of them.

Despite its dramatic first few months apparent success after its launch in September, which has resulted in it already signing on more than 100 million customers, RJIO still remains something of an unknown quantity commercially, since early customers have been drawn to use its services by attractive initial offers of free voice and free or very cheap data services. How many customers it will retain once it starts to charge market-level prices is still rather uncertain. While due to the constantly extended RJIO launch date, both Bharti Airtel and Vodafone have had time to adjust their pricing, products and marketing approach and are likely to stand firm in competition.

The second uncertainty is what will eventually be the settled relationship between RJIO and RCOM, which have been  drawing steadily closer together via a number of deals involving the sharing of spectrum and networks, but whose ultimate intentions are unclear. At one extreme the deals that have been done may have just been normal commercial deals beneficial to both parties and merely been able to be implemented faster than usual and more economically because of trust within the family. At the other extreme, it is a deliberate long term plan to dominate the market, which will eventually result in a full merger whereby Anil perhaps would become the manager of the combined company within the framework of the RIL conglomerate, managed by Mukesh (who has plenty of other opportunities to take in a fast growing country whose economy is likely to double in the next ten years). What view the TRAI regulator would take on such a proposal remains to be seen.

Group 3 – RCOM, Sistema, Aircel and Tata, plus network sharing with RJIO

Since at least mid-2015 RCOM, at one time a contender on its own account for a Top 3 position in terms of mobile subscriptions, has been in restructuring mode and has also for most of that time been steadily losing organic market share, resulting in a drop in its ranking amongst all 12 mobile operators of two places from No 4 to No 6.

In November 2015 it was announced that in a deal with a headline value of $690 million RCOM would, in exchange for a 10% stake in the merged association, acquire smaller rival Sistema Shyam Teleservices (SSTL), as a result of which it would get an additional 9 million customers and INR 15 billion ($229 million) in annual revenue. Also, RCOM claimed, it would be the largest holder of 800/850 MHz spectrum for 4G. Despite the agreement this deal does not yet seem to have fully closed. In fact, Russia's giant 70,000-employee Sistema Group and RCom only submitted documents for final approval of the transaction by India's DoT in November 2016. In early February 2017 the board chairman of Sistema, Vladimir Evtushenkov, told TASS that he expected the deal to close in March. Because of the long delay some circumstances may have changed. As of December 2016, TRAI only reported 5.9 million customers for Sistema compared to 9 million at the time the deal was first agreed (it is possible that some Sistema customers, by agreement, may already have been transferred to the RCOM network).

In December 2015 RCOM, then India's fourth largest operator in terms of mobile subscribers with around 110.4 million subscribers as of September 2015, announced that it was holding non-binding talks with Aircel’s majority owner Maxis Communications of Malaysia and shareholder Sindya Securities and Investments to merge its mobile business with Aircel, which served just under 84 million. At the time the two companies claimed synergies for the merger would amount to INR 20,000 crore. In September 2016 final details of the agreement were confirmed whereby RCom and Maxis Communications would hold 50% each in a newly created venture with equal representation on the board. Following the merger, the company would have an asset base of more than INR 65,000 crore and net worth of INR 35,000 crore. RCOM's overall debt, including the deferred spectrum payment liability, would be reduced by INR 20,000 crore and Aircel's debt would reduce by INR 4,000 crore upon completion of the transaction. According to their announcement the merged entity would have the second-largest spectrum holding amongst all operators, totalling 448 MHz across 850 MHz, 900 MHz, 1800 MHz and 2100 MHz bands.

As with the SSTL acquisition, this is a complicated agreement and India is a very bureaucratic country where many different approvals have to be obtained for such a deal. In fact the agreement has only just been approved (on April 22nd) by Aircel shareholders and on April 24th 2017 by the shareholders of RCOM.

The company has already received approval from the Securities and Exchange Board of India, BSE, National Stock Exchange of India and Competition Commission of India for the proposed scheme of arrangement but several other approvals are still required.

RCOM itself has, for a variety of reasons, including loss of licences, heavy debt and possibly a management distracted by all its many restructuring arrangements, not being doing that well. In January 2016 RCOM reported for the October to December quarter of 2015, a year on year decline of 2.9% in revenue to INR 5,277 crore and a 15% decline in net profit to INR 171 crore, which it said was mainly due to the expiry of 2G licences in five circles including Bihar, West Bengal and Assam.

As of December 2016, TRAI reported that RCOM now ranked only the sixth largest supplier served 86.5 million mobile subscriptions, a drop of almost 24 million from the 110.4 million at the end of September 2015.

Apart from the other deals, RCOM has concluded several extremely important network and spectrum-sharing agreements with RJIO. RJIO entered into a INR12,000 crore pact with RCOM in June 2013 to utilise the latter's telecom towers for providing broadband digital services. In 2014, RJIO signed a deal with RCOM to share the latter’s optic fibre infrastructure in some 300 cities and towns. In early January 2016, RCOM announced that it would, subject to regulatory approvals, sell its spectrum in the 800 MHz band across 9 circles, to RJIO and both companies would also share their spectrum in 800 MHz band across 17 circles with the eventual aim of sharing that spectrum across all 22 circles.

In late September 2016 speaking to investors Anil Ambani confirmed that RCOM and RJIO had 'all but' merged, saying specifically: 1As far as our 100 million customers are concerned, as far as our 1 million retailers are concerned, as far as our employees are concerned, and as far as our vendors and partners are concerned, there has already been a virtual merger of the two organisations (RCom and Jio)'.

Further comment

Apart from the two state-owned operators BSNL and  MTNL which together own almost 9% of the mobile market and have a dominant share of India's fixed-line market, there is only one other unconsolidated operator left of any significance, Tata Teleservices, which as of December 2016 served just under 53 million mobile subscriptions for a 4.70% market share. In early February 2017, India's Economic Times reported that persons familiar with the matter had told them that Anil Ambani had initiated talks with newly appointed Tata Sons chairman N. Chandrasekharan to explore a possible union. There are, however, two major problems that Tata Teleservices still has to deal with. The first is a massive debt of INR 30,000 crore and the second is an unresolved dispute between Tata and NTT DOCOMO related to their partnership in Tata Tele with a headline value of $1.17 billion. However, at least one source reported on March 14th that following what was described as a 'truce' between Tata and NTT due diligence talks had been started between RCOM and Tata on the possibility of a deal regarding Tata Teleservices.

Full article: Part 1Part 2 , Part 3Part 4

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