Fitch: India's Spectrum Auction to Boost Telco Consolidation
18/02/2014 06:39
(The following statement was released by the rating agency) SINGAPORE, February 18 (Fitch) The recent Indian telecom spectrum auction will hasten industry consolidation, strengthen tariffs and reduce regulatory risks, says Fitch Ratings. Industry operators will come down to six/seven from 12 as the bottom-six telcos look to exit - lacking sufficient spectrum and financial muscle to remain viable. Consolidation will improve operating profitability and cash flow, and return pricing power to the larger operators in the medium term. Meanwhile, debt-funded spectrum costs and M&A will weigh on leverage in the short term. The spectrum auction clearly spelt out the telcos' pecking order by financially crowding out smaller operators from the industry. Post-consolidation, six/seven operators will emerge, including the existing top four - Bharti Airtel, Idea Cellular, Vodafone India and Reliance Communications, along with a new entrant - Reliance Industries Limited (RIL). We expect the emergence of a couple more merged entities. The top three operators and RIL placed aggressive bids and won 76% of the spectrum offered (431.2MHz), paying prices which were 84% and 29% higher than the reserve prices for 900MHz and 1,800MHz, respectively. The existing large participants chose to bid for spectrum coming up for renewal in the next two years, so as to boost their spectrum holding and strengthen their overall position. Leverage will deteriorate for the winners in the short term, due to the largely debt-funded spectrum costs. However, cash flows for the larger telcos will still be manageable, as these companies have the option to pay spectrum cost in phases - one-third upfront, and the balance over a period of 10 years (following a two-year moratorium). Weaker operators did not participate due to lack of funding options amid their strained financial position. Tata Group, Loop Telecom, Sistema India and Videocon are likely to be acquired by larger operators, or actively seek to be acquired, to improve their financial position. They suffer EBITDA losses, have significant debt and are operationally stretched. They also lack sufficient cash to support data-related infrastructure investments. RIL, with cash and equivalents of USD15bn-16bn, could be likely to buy a GSM-based smaller telco to fill its spectrum gap to provide both voice and data services. It already owns 20MHz in 2,300MHz (4G band), and won 78.8MHz in 1,800MHz spectrum for USD1.8bn in the auction concluded 13 February 2014. Seven telcos placed aggregate winning bids of USD9.9bn, to win a total of 305.6MHz (offered: 385.2MHz) in the 1,800MHz band and 46MHz (offered: 46MHz) in 900MHz. This was third-time lucky for the Indian government, as the past two auctions were not successful due to high reserve prices. Contacts: Nitin Soni Associate Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Steve Durose Senior Director Head of TMT, Asia-Pacific +61 2 8256 0307 Aninda Mitra Senior Director, Fitch Wire +65 6796 7232 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Bharti Airtel Limited http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720296 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE