Sunil Mittal Is Right: India Will See Consolidation In Telecom Sector, But Not Enough

Bharti Enterprises group CEO Sunil Mittal, in an interview, has said that having 12 players in the telecom market has led to fragmented spectrum holdings and financial troubles for the entire industry. He explained how Aircel having sold its 4G spectrum to Airtel is now merging with Reliance Communications (RCom), which is also merging with Sistema’s MTS. The smaller players, Uninor and Tata Teleservices, are also exploring their options while Videocon has exited the sector. The entry of Mukesh Ambani’s Reliance Jio, according to Mittal, will create even more pressure for consolidation. He said:

He is mostly correct. As things stand, the telecom sector has too many weak players and staggering loads of debt (over Rs 3,50,000 crore) that can be corrected only if there are fewer players and higher tariffs. But Reliance Jio’s impending entry will actually end up pressuring tariffs further as it will be pricing its 4G data rates aggressively to gain market share, and wrest new subscribers from the incumbents.

The wireless telecom sector has 12 players at present- Bharti, Vodafone, RCom, Idea, BSNL, MTNL, Aircel, Tata Teleservices, Telenor, Sistema, Videocon and Quadrant. If we take public sector BSNL and MTNL as one entity, remove Videocon from the list, and exclude bit-player Quadrant with 0.3 percent market share- we will have nine remaining players.

From this lot, RCom has already acquired Sistema in an all-share deal and once this is digested, it will attempt to merge with Aircel- which is nearly as big as itself (RCom had 101 million subscribers as of December 2015, while Aircel had 86 million). If both RCom mergers go through (only the Sistema one seems certain though), we will have seven still standing but most of them barely.

Enter Reliance Jio, and it will be back to eight players which is simply three too many. At current low tariffs and high spectrum prices (another spectrum auction later this year will only increase debts), India cannot afford more than five national players. Assuming a mai-baap sarkar will never let BSNL (or MTNL) die or be sold, even if they look like perennial losers.

Since Aircel clearly wants out at some point, we need to see three weak players seek mergers or an exit. Which players would those be? Logically, the struggling Tata Teleservices in which Docomo has already opted out, should be the next one on the block- even though the Tatas have the bandwidth to fund it further. The question is whether they want another bleeding ulcer, with high debts, when they are already struggling with the debts of flagship Tata Steel.

We can safely conclude that BSNL and MTNL can merge, though there may be complications with MTNL being listed and BSNL- the much bigger entity- being 100 percent government-owned. It would have to be a reverse merger, with the mouse swallowing the elephant. The side benefit would be that BSNL, with 83 million wireless subscribers, will get listed through the backdoor. One wonders why the NDA government is dawdling over a simple idea like a merger.

One can also speculate about whether Norwegian Telenor will want to stay and fight for market share, but the numbers show that it is determined to stay. In December 2015, it had the highest percentage growth in subscriber additions and had garnered a market share of 5.02 percent. This indicates that Telenor may not be a quitter.

Another interesting thing to speculate about is whether the Anil Ambani-owned RCom and brother Mukesh Ambani-owned Reliance Jio will ultimately merge, given that they already have a strategic partnership for sharing spectrum and networks.

There are good reasons as to why this would make sense at some point. Three of them are:

1. At 1,010 million national consumers, of whom 57 percent are urban consumers, India’s cellphone market is saturated in the biggest markets. This means Reliance Jio can grow to the minimum economic size of 100-150 million, only if it grabs market share from the weaker players (of whom there are not too many left) or goes for low value subscribers in rural areas, where teledensity is still under 50 percent. At some point it would make sense for it to acquire customers through an acquisition, but there are only a few juicy targets left.

2. Among the big players, RCom is overloaded with debt, which added up to nearly Rs 40,000 crore. Its finances are weak and, on a standalone basis, it made a loss of Rs 154 crore in 2014-2015. It reported a loss in the latest December quarter too. RCom’s ability to buy costly spectrum is being doubted, though it is possible for it to pare debt by selling its towers- something it has been unable to do at a good valuation, for several years now. At some point, Anil Ambani has to make a double or quits decision.

3. At the very least, it would make sense for RCom and RJio to enter into a strategic alliance for sharing resources and customers that would be a near-merger. It is also possible for them to work in tandem on pricing and back-end cooperation.

Net-net: what we are seeing is that consolidation, though desirable, will not really accelerate to reduce the number of players to five or six. As at the end of the fiscal year 2015-2016, the players who simply won’t vanish seem to be: Bharti Airtel (243 million subscribers), Vodafone (193 million), Idea (172 million), RCom (101 million), Telenor (51 million), BSNL/MTNL (around 87 million) and, the still to be launched, Reliance Jio.That’s seven players and, also, only if Tatas and Aircel make an exit at some point. India will still have one or two players too many.

For the telecom sector to strengthen and truly consolidate, we need not only Aircel but Tatas and RCom to also exit the picture. When an elephant jumps into the pool, the resulting splash will not only throw out the water, but some of the smaller players along with it.

This piece is based on R Jagannathan’s piece here