M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger

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The objective of my project is to study the Telecom industry in India and understand how the recent trends are driving Mergers, Acquisitions and Partnerships in this industry. I will study recent partnerships, merger and acquisitions that have taken place in this industry. I will focus on the following the following deals in the industry to gain deeper understanding of the M&A nuances in this industry:

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M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger

  1. 1. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 A PROJECT REPORT ON M&A TRENDS &FINANCIAL PERFORMANCE OF INDIAN TELECOM COMPANIES DURING PRE AND POST MERGER SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR MASTER OF MANAGEMENT STUDIES TO UNIVERSITY OF MUMBAI BY MAYUR ASHOK NAHAR ROLL NO. 2011212 2011-2013 UNDER THE GUIDANCE OF PROF. CHARU UPADHYAYA LALA LAJPATRAI INSTITUTE OF MANAGEMENT MAHALAXMI, MUMBAI – 400 03 1 Internal research report:- Mayur Nahar
  2. 2. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 EXECUTIVE SUMMARY Mergers and Acquisitions (M&A) activity has always been recognized as one of the most important means of inorganic growth for corporate world. The swift globalization and increasing strength and importance of Indian Economy in the World have created huge interest of world in Indian corporate sector and the capital market. Last two financials years have seen tremendous increase in the M&A‘s deals involving Indian companies, both in number and in value terms. Year 2008-09 recorded 600 deals with total value of US$ 32 Billion whereas in the year 2009-10 it closed at 595 with a total disclosed value of US$ 31 billion. Indian telecom industry is the second fastest growing telecom market in the world after China. The overall Tele-density India has reached 60% at the end of January 2013.The growth has been fueled by progressive policies of TRAI and deregulation. The telecom industry is changing at a rapid pace with constantly changing policies, new players, alliances and partnerships being announced on a daily basis. In this study, I have looked at various M&A transactions that have taken place in the recent past. After doing a broad review, I have focused on three specific events, namely, Idea Cellular takeover of Spice Telecom, Bharti takeover of Zain and Vodafone hutch deal I have identified the following trends and drivers in the industry Global ambitions of Indian Telecom giants will see acquisitions and joint ventures in growing African and South East Asian markets. Telecom players are also looking to tap into global funds to finance their aggressive growth plans. New license holders will continue to look to grow and expand in market New policies will seek to curb this license arbitrage. 2 Internal research report:- Mayur Nahar
  3. 3. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Smaller players with operations in only a few circles will find in difficult to compete with the nationwide players. The industry may see consolidation with these smaller operators being acquired by the larger ones. ―Unbundling of the corporation‖ will continue as companies will seek for economies of scale and lower cost by infrastructure sharing 3 Internal research report:- Mayur Nahar
  4. 4. 2013 M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger INDEX SR. NO CONTENT PAGE NO. 1 INTRODUCTION 1-4 2 REVIEW OF LITERATURE 5-12 3 TELECOM SECTOR OVERVIEW 13- 29 4 RECENT PARTNERSHIPS, MERGERS AND ACQUISITIONS 30-41 IN INDIA 5 MERGERS AND ACQUISITIONS 42-54 6 FINANCIAL PERFORMANCE 55-61 7 VALUATIONS DRIVERS OF TELECOM INDUSTRY 62-69 8 REGULATORY ENVIRONMENT IMPACT 70-75 9 FINDINGS OF THE STUDY 76 10 CONCLUSION 77 4 Internal research report:- Mayur Nahar
  5. 5. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Introduction and Research methodology 1.1 Introduction A company may grow internally, or externally. The objective of the firm in either case is to maximizethe wealth of the existing shareholders. Most corporate growth occurs by internal expansion, whichtakes place when a firm‘s existing divisions grow through normal capital budgeting activities. Themergers, takeovers referred to collectively as CorporateRestructuring, have become a major force in the financial and economic environment all over theworld. The industrial restructuring has raised important issues both for business decisions as well as forpublic policy formulation. On the more positive side, M & As may be critical to the healthy expansionof business firms as they evolve through successive stages of growth and development. The successful Entry into new product markets and into new geographical markets by a firm may require M & As atsome stage in the firm‘s development. The successful competition in international markets may dependon capabilities obtained in a timely and efficient fashion through M & As. The objective of my project is to study the Telecom industry in India and understand how the recent trends are driving Mergers, Acquisitions and Partnerships in this industry. I will study recent partnerships, merger and acquisitions that have taken place in this industry. I will focus on the following the following deals in the industry to gain deeper understanding of the M&A nuances in this industry: 1) Idea Cellular takeover of Spice Telecom: It is a deal that will throw light on the consolidation trends in theIndian Telecom industry. Bharti Airtel takeover of Zain Africa Vodafone takeover of hutch Studying the drivers in these deal will help me understand the global expansion trends in the IndianTelecom industry. 5 Internal research report:- Mayur Nahar
  6. 6. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 The above three deals will provide me with deeper understanding of both consolidation and global expansion trends in this industry. 1.2 Objectives  To study the recent trends those are driving mergers, acquisitions and partnership in telecom industry.  To study the impacts of regulatory environment on telecom sector  To measure the financial performance of pre and post-merger companies in the sector.  To find out the critical factors that induces merger of telecom companies.  To summarize the findings and offer a conclusion. 1.3 Scope of study It is important to improve the competitiveness and quality of the telecom sector in order to enhance its efficiency. Mergers take place in the Indian context in line with the trend of consolidation that has characterized the financial services industry and, in particular, the telecom industry. Companies over the world over have been merging at a furious pace, driven by the urge to gain synergies in their operation, derive economies of scale and offer one-stop facilities to a growingly more demanding clientele. Hence the desire to grow quickly through mergers rather than through the slow and tortuous path of normal expansion in business. Merger seems to lead to financial and strategic growth. The financial and strategic management aspect of merger is to be analyzed from several angles. The present study is about the evaluation of financial performance of mergers before and after mergers in the telecom industry. 1.4 Significance of the study Measuring the value that mergers and acquisitions create is an inexact science. M&A and their financial performance are merged to know exact impact on compnies Using my research policy maker 360 degree view of industry and current situation. 6 Internal research report:- Mayur Nahar
  7. 7. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 My research provide way to think on valuation & financial performance of Industry and market situation One benefit of this approach is that it provides a measure of expected value unaffected by other variables, such as subsequent acquisition 1.5 Research Methodology:i) Hypotheses of the Study The present study tests the following null hypotheses. Ho1.Their is no effect on the liquidity, solvency and profitability position of the companies post merger. Ho2. The merged telecom companies did not expand their business activities after merger. ii) Methods of Collection of data For the purpose of study secondary data will be collected from the Prowess Corporate Database Software. Also, the data will be collected from Annual Reports, Published Research Reports by various industries and research organization, books, periodicals and websites iii) Sample size The sample size comprises of Indian telecom companies. iv) Research instrument In order to conduct the study financial statement analysis will be conducted on the data collected. Also, ratio analysis will be performed to compare the performance of telecom companies in India. v) Research Limitation The research is limited to only the telecom policy and its effect on the telecom industry overall aspects of telecom industry 7 Internal research report:- Mayur Nahar
  8. 8. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 2. Review of Literature Article 1- Financial Performance of Indian Manufacturing Companies during Pre and Post Merger Author: S. Vanitha&M. Selvam , (2011)JFMR – Issue 2 Abstract:Corporate Restructuring has become a major component in the financial andeconomic environment all over the world. Industrial restructuring has raised importantissues for business decisions as well as for public policy formulation. Since 1991, Indianindustries have been increasingly exposed to both domestic and international competitionand competitiveness. Hence, in recent times, companies have started restructuring theiroperations around their core business activities through M & As. Link:-www.journaloffinancialmarketsresearch.com/ISSUES/JFMR_2_06.pdf Article 2 :- National Telecom Policy – 2012 Abstract:- Telecommunication has emerged as a key driver of economic and social development in an increasingly knowledge intensive global scenario, in which India needs to play a leadership role. National Telecom Policy-2012 is designed to ensure that India plays this role effectively and transforms the socio-economic scenario through accelerated equitable and inclusive economic growth by laying special emphasis on providing affordable and quality telecommunication services in rural and remote areas Link: - http://www.dot.gov.in/ntp/NTP-06.06.2012-final.pdf 8 Internal research report:- Mayur Nahar
  9. 9. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Article 3 - 2013 Outlook: Indian Telecommunication Services Author :- (2013) India rating & research Abstract:India Ratings‘ outlook on the Indian Telecommunication services sector remains negative for 2013 considering increasing regulatory costs for incumbent and new operators. Uncertainty in regulations, which was the key credit risk in 2012,has now been replaced by increasing costs which will impact most operators, including the incumbents over the short-to- medium term. With the exit of three small telecoms and fewer licenses with Videocon and Uninor, there is limited room for further consolidation. While there may be some corporate action involving small operators, India Ratings does not expect any M&A activity involving large operators in the short-term. While some regulatory developments will have a uniform impact on all the operators, others will have a different degree on impact on different operators. A high reserve price will be negativefor all operators, whereas a staggered payment mechanism and liberalized use of spectrum willbe positive for all operators. In case of spectrum refarming and one-time fees, India Ratingsdoes not expect a positive impact on operators. Link: http://indiaratings.co.in/upload/research/specialReports/2013/1/18/fitch18Indian.pdf Article 4 - Innovating the Telco Business Model - Capgimini Author - Jerome Buvat(2011) Abstract:The operating environment for telcos is turning increasingly complex. Telecom operators who had grown on the back of traditional voice and data services are realizing that as consumption patterns are rapidly changing, value not only moves to other stages in the telco value chain but also into completely different markets. Subsequently, their old business models are coming under increasing pressure and appear to be crumbling. 9 Internal research report:- Mayur Nahar
  10. 10. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Some telcos have understood this rapidly evolving scenario and have taken steps to ensure that they are in tune with the changing times. How else can one explain the fact that a fiber operator convince sits customer to dig up the last mile connectivity, or that a telco enters into reselling energy and gas agreements, or that consumers in certain markets have opted for advertisements to be a core part of their mobile experience? These developments represent only a fraction of the innovation in business models that telcos canpartake in. They, in turn, are being driven by a range of broader trends that are currently impacting business models the world over. Telcos should consider taking steps to incrementally change their business models, while striving to adopt radical approaches in select areas, and challenge traditionally accepted norms of where a telco fits into the larger ecosystem. Link:- www.teralytics.ch/resources/telco_business_models_capgemini.pdf Article 5:- India Telecoms Sector Author: - Credit Suisse (23 Feb 2012) - Sunil Tirumalai Abstract:India‘s telecom penetration (as a % of GDP) is similar to the regions The traditional metrics of measuring levels of telecom maturity (such as subscriber penetration) could have limitations when applied to India which is significantly younger and poorer than other markets. Instead, looking at the size of its telecom industry in relation to the overall economy, we believe that the sector is nearing mature penetration already. 30% of the Indian population is under 15 years old and probably not a ready market for telecom services Low income levels also mean that a portion of the population may not be able to afford telecom servicesMobile net adds in India have come down While it is reasonable to assume that the fall in net adds is a result of tariff hikes The reported mobile penetration numbers for India continue to remain lower than for other Asian markets This is more true for VLR (Visitor Location Register)-based penetration at 54% (VLR data is not easily available for other countries). This gives the impression that the near-term growth potential for India is high Link:https://www.creditsuisse.com/conferences/aic/2012/doc/web/20120227_indiatelco.pdf 10 Internal research report:- Mayur Nahar
  11. 11. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Article 6 -Impact of TRAI’s spectrum recommendation on Consumers and Industry Authors:-Mohammad Chowdhury(2012) - PWC Abstract:―Analysis of effects on costs, tariffs and financial returns‖ published on 12th July 2012. In this paper TRAI states that they have attempted to address the concerns raised by various stakeholders and re-computed the incremental impact of their Recommendations (including Reserve Price) on per minute costs and profitability across the sector. In the present analysis, TRAI has partially considered cost implications with respect to spectrum rights and outgoing calls. TRAI also provides analysis on potential impacts to the industry in terms of EBITDA, PBIT and ROCE. TRAI continues to assume high minute‘s growth and this does not align with past industry trends in all countries around the world which show a long-term decline in MOU per subscriber over time. Per TRAI estimates, Minutes of Use (MOU) per subscriber per month will grow from 327 in FY‘12 to 410 by FY‘16. This is in contrast to the last four years where MOU per subscriber per month has declined from 455 minutes in FY‘08 to 327 minutes in FY‘12. Additional impact due to policy changes is considered on and above normal business returns industry has witnessed over the years. Impact of reduction in spectrum usage charges, spectrum reframing opex, spectrum reframing capex and spectrum cost is considered over business as usual assumptions to derive impact on industry due to proposed policy changes Link:-http://www.pwc.in/en_IN/in/assets/pdfs/publications-2012/trairecommendationvol-II.pdf Article 7 :- Telecommunications Authors:Abstract:Margins and profitability to remain under pressure due to intense pricing competition and network expansion. RIL‘s possible entry into voice to limit tariff hike Valuations near historic lows are justified given the decline in profitability & low business returns, with no visible signs of turnaround in near term. Spectrum renewals and other regulatory payouts to further weaken the balance sheet Cut earnings estimate for Bharti & Idea and downgrade the stocks to REDUCE with revised TP of Rs228 & 72, resp. RoE and RoCE for Bharti and Idea have declined to 11 Internal research report:- Mayur Nahar
  12. 12. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 single digit. Muted operational performance going forward rules out near term improvement in profitability & healthy business returns. Article 8:- Valuation drivers in the telecommunications industry Authors:- Vincent de La Bachelerie (Ernst & young ) 2012 Abstract:M&A activity in the telecommunications sector has resumed, led by transactions in emerging markets. Valuation multiples are higher for players in high-growthmarkets than in mature markets. There is a consensus on the nature and average weight of the assets recognized and valued as part of purchase price allocation (PPA). Subscriber relationships are generally the primary intangible asset in PPA, with a weight of around 33% of the enterprise value (EV). Goodwill remains significant, with a weight of 60% of the EV, thus reflecting the growth potential of certain targets, as well as the importance of synergies expected from any successful integration. Article 9:- Measuring Post Merger and Acquisition Performance: An Investigation of Select Financial Sector Organizations in India Author :- (2010) Dr. Neena Sinha & Dr. K.P.Kaushik -International Journal of Economics and Finance Abstract :The present paper examines the impact of mergers and acquisitions on the financial efficiency of the selected financial institutions in India. The analysis consists of two stages. Firstly, by using the ratio analysis approach, we calculate the change in the position of the companies during the period 2000-2008. Secondly, we examine changes in the efficiency of the companies during the pre and post merger periods by using nonparametric Wilcoxon signed rank test. While we found a significant change in the earnings of the shareholders, there is no significant change in liquidity position of the firms. The result of the study indicate that M&A cases in India show a significantcorrelation between financial performance and the M&A deal, in the long run, and the acquiring firms were able to generate value. 12 Internal research report:- Mayur Nahar
  13. 13. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Strategic alliances and Mergers and Acquisitions (M&A) are the dominant corporate strategies followed by organizations looking for enhanced value creation. The growing tendency towards mergers and acquisitions (M&As) world-wide, has been driven by intensifying competition. Link :- http://www.ccsenet.org/journal/index.php/ijef/article/view/4917 Article 10 :- The future of M&A in telecom - McKinsey & Company, Inc Authors : -(2011)Jean-Christophe Lebraud & Peter Karlströmer Abstract :- Mergers and acquisitions have been a mainstay of the telecom industry for many years. In the past decade, the telecom industry has spent an astounding USD 1.5 trillion on M&A activities, investments that have transformed the industry landscape into the competitive playing field we see today. However, the motivations behind the transactions have evolved over time, and we believe the industry is on the cusp of a new wave of M&A activity driven by some of the disruptions now taking place.over 80 percent of aggregate deal value has focused on core telecom services and spectrum license market segments, with the remainder targeted toward adjacent markets such as infrastructure, connectivity providers, multimedia and financial services The extent to which operators can gain scale benefits, and whether they can achieve these on a cross-border basis. The amount of in-country consolidation that regulators will allowOperator decisions to expand aggressively in non-core areasCan we improve our position domestically through M&A? leaders should work to align their corporate strategy and M&A plans. We believe this will be more important than ever now, since many operators today are making significant shifts in their strategic direction and it will be important that their M&A goals are aligned to support the new overall strategic direction in a good way. Telecom players need to transform their M&A capabilities and ways of working to proactively pursue a wide breadth of opportunities that align with their strategic requirements. This could mean ensuring that the M&A team is set up correctly and has the right capabilities and capacity. Leaders should clarify their M&A approach, organization and the way they source deals globally, and work closely with investor relations to ensure they have the right story to tell the capital markets 13 Internal research report:- Mayur Nahar
  14. 14. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Link : - www.mckinsey.com/~/media/mckinsey/.../Telecoms/PDFs/M_A.ashx Article 11 :- Growth of Mergers & Acquisitions (M&A) In India in the Telecom Industry Authors : - ( 2012) Anjan Babu K &Dr. Aisha.M.Sheriff ) International Journal of Management & Information Technology Volume 1, No 3 Abstract :- With more than 500 million subscribers, India is the second largest mobile phone market in the world after China. In the last decade, an average of 15 Telecom operators has started operations in India. The market has been flamboyant for Indian as well as Foreign investors. Many of them are entering through the Merger and Acquisition route. The Governing Regulatory Authorities have a responsibility that no irregularity occurs and that every investor is given equal opportunity. Spectrum which is a constrained essential input for mobile services is also highly fragmented leading to possible industry inefficiencies. This paper critically examines the Merger and Acquisition scenario in the Telecom industry in India and the current policy framework that provides policy prescriptions for the future. Link :- cirworld.com/index.php/ijmit/article/download/13-MIT-209/pdf 14 Internal research report:- Mayur Nahar
  15. 15. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 3 . Telecom Sector Overview Today, India is one of the fastest growing telecom markets in the world. The unprecedented increase in teledensity and sharp decline in tariffs in the Indian telecom sector have contributed significantly to the country‘s economic growth. Besides contributing to about 3% to India‘s GDP, Telecommunications, along with Information Technology, has greatly accelerated the growth of the economic and social sectors. Telecommunications is no longer limited to voice. The evolution from analog to digital technology has facilitated the conversion of voice, data and video to the digital form. Increasingly, these are now being rendered through single networks bringing about a convergence in networks, services and also devices. Hence, it is now imperative to move towards convergence between telecom, broadcast and IT services, networks, platforms, technologies and overcome the existing segregation of licensing, registration and regulatory mechanisms in these areas to enhance affordability, increase access, delivery of multiple services and reduce cost. It will be a key enabler of equitable and inclusive growth. The policy aims to address and enable the coordinated action to respond to the dynamic needs resulting from confluence of telecom, broadcasting and IT sectors. The PSUs have played a pre-eminent role in provision of telecom services in the country, particularly in rural, remote, backward and hilly areas. Contribution of BSNL and MTNL to broadband penetration in the country is significant. The importance of PSUs in meeting the strategic and security needs of the nation can also not be understated. This policy recognizes that these PSUs will continue to play such important role 15 Internal research report:- Mayur Nahar
  16. 16. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 3.1. Regulatory environment 3.1.1) Department of Telecommunication (DOT) Telecommunications is one of the few sectors in India, which has witnessed the most fundamental structural and institutional reforms since 1991. Considering the great potential for the growth of telephone demand with the accelerated growth of economic activities, the Government of India announced the National Telecom Policy in 1994 and the New Telecom Policy in 1999. The National Telecom Policy provides for private sector participation to supplement the efforts of DoT in basic telephone services. The opening up of the basic services provided a big opportunity for private & foreign investors. More policy initiativesincluded Addendum to NTP -1999, Broadband Policy 2004, Amendment to Broadband Policy 2004 etc. The opening of the sector has not only lead to rapid growth but also helped a great deal towardsmaximization of consumer benefits. The tariffs have been falling continuously across the board as result of healthy and unrestricted competition. The Telecom Commission and the Department of Telecommunications are responsible for policyformulation, licensing, wireless spectrum management, 16 Internal research report:- Mayur Nahar
  17. 17. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger administrative monitoring of PSUs, research 2013 anddevelopment and standardization/validation of equipment etc. 3.1.2)TRAI Telecom Regulatory Authority of India (TRAI),is an independent regulatory Authority under the TelecomRegulatory Authority of India Act, 1997 (as amended in January 2000). Under the TRAI Act, TRAI carries out various functions. It is empowered to make recommendations, either suo-moto or on a request from th Licensor on a wide range of matters. These include  the need and time for introduction of a new service provider;  terms and conditions of a telecommunications license;  revocation of licences;  measures to facilitate competition and promote efficiency in the operation of telecommunication  services;  technological improvements in services;  specifications as to the type of equipment to be used by the service providers;  measures for the development of telecommunication technology and ―any other matter[s]  relatable to [the] telecommunication industry in general;‖  efficient management of spectrum. It is mandatory for the Licensor to seek recommendations from TRAI on the need and timing for introduction of a Service Provider and terms and conditions of License. TRAI's recommendations are notbinding on the Central Government. 17 Internal research report:- Mayur Nahar
  18. 18. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Some other functions of TRAI include:  ensuring compliance with terms and conditions of telecom licenses;  fixing terms and conditions for inter-connectivity between service providers;  ensuring technical compatibility and effective inter-connection among different service providers;  regulating arrangements among service providers for sharing revenues;  laying-down standards for quality of services;  prescribing and regulating periods within which local and long distance telecommunication circuit  are to be provided by service providers;  maintaining a register of inter-connect agreements;  ensuring effective compliance with universal service obligations.  fixation of tariffs TRAI is empowered to issue directions to the service providers for discharge of these functions. The main objective of TRAI is to provide the affordable telecom services by creating competition in the telecom sector. But at the same time also ensuring that the competition is fair and not determinant to the interest of any section of society or service providers. 3.1.3) Foreign Exchange Management Act (FEMA) Guidelines Foreign Exchange Management Act, 1999 (―FEMA‖): FEMA and the various rules, regulations, circulars, etc. issued under FEMA consolidate the law relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. The provisions of FEMA specify the current and capital account transactions which may be carried on with general or specific permission of the RBI and/or the FIPB. The two most relevant regulations under FEMA from an M&A perspective are: 18 Internal research report:- Mayur Nahar
  19. 19. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 I. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (―FDI Regulations‖): The FDI Regulations and the press notes issued there under govern investments by persons resident outside India in shares, debentures (convertible and nonconvertible), security receipts and warrants of companies incorporated in India; in effect regulating inbound investments/acquisitions. In most sectors, 100% foreign direct investment is permitted (with or without conditions) without the prior approval of FIPB. In certain sectors it is permitted only to the extent prescribed, subject to conditions set out in the sect oral policy, without the prior approval of FIPB. Hostile takeovers on a cross border basis are effectively precluded. II. Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (―Foreign Security Regulations‖): Outbound investments by residents in India are regulated by the Foreign Security Regulations. Indian companies are permitted to invest up to 400% of their net worth in joint ventures or wholly owned subsidiaries abroad under the automatic route. 3.1.4)Securities & Exchange Board of India (SEBI) Securities & Exchange Board of India (SEBI) regulations are applicable to listed group of Companies. For Telecom M & A the regulations are as followsRegulation 10- Acquisition of shares- Describes the substantial of shares for which public announcement is prerequisite. In this case acquisition by an acquirer to exercise 15% of voting rights require a public announcement 19 Internal research report:- Mayur Nahar
  20. 20. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Regulation 11- Deals with the consolidation of holdings, primarily where an acquirer holds shares less than 55% & wishes to acquire more. Secondly, where an acquirer acquired more than 55% but less than 75% requires a prior public announcement. 3.1.5) CCI Competition Commission of India (CCI), established in 2003, held statutory responsibility for ensuringfree and fair competition in all sectors of the economy. The Competition Act, 2002 had provided for a liberal regime for mergers, whereby combinations exceeding the threshold limits fell within the jurisdiction of CCI. Most competition laws in the world require mandatory prior notification of every merger to the competitionauthority but under Indian law it was voluntary. However, CCI could also take suo motu cognisance of a merger perceived as potentially anti competitive and it could enquire until one year after the merger had taken place. Once CCI had been notified, it must decide within 90 days of publication of details of the merger or else it is deemed approved. The CCI could allow or disallow a merger or can allow it with certainmodification. The Competition Act has not come into force in its entirety. Once enforced in its entirety, it will repeal the MRTP Act and dissolve the MRTP Commission. The Competition Act prohibits anticompetitive agreement and abuse of a dominant position. It also regulates combinations of enterprises and persons. The acquisition of enterprises by persons or the merger or amalgamation of enterprises is considered to be a combination and requires filings with the Competition Commission of India, but only if the thresholds 20 Internal research report:- Mayur Nahar
  21. 21. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 of their assets orturnover exceeds the value stipulated in the Competition Act. The Competition Act seeks to ensure fair competition in India through a body known as the Competition Commission of India (CCI) 3.2Key players in market 21 Internal research report:- Mayur Nahar
  22. 22. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 22 Internal research report:- Mayur Nahar 2013
  23. 23. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Major players are summarized below. BSNL: BSNL recorded a revenue of Rs 35,296 crore in the last fiscal, down from Rs 40,135 crore in FY 2006- 07, a decline of 12.1%. The company is looking at new business streams to increase revenue and reduce losses. BSNL is toying with the idea of entering into managed network services and enterprise business, which will add value to mobile as well as landline. Apart from this the company is also looking at adding IPTV and VoIP services in its portfolio. BSNL would also be investing Rs 15,000 crore for the next three years in a bid to return to its profitable position. Like other service providers, BSNL is also planning to focus on the rural segment in the coming years. BSNL leads the broadband segment, as far as subscribers are concerned. Currently, the company has 2 mn out of the 3.9 mn subscribers in the country. Bharti: Bhari Airtel as it crossed the magical figure of 50 mn subscribers in the country. The customer addition has taken its revenue to Rs 26,436 crore in FY 200708, clocking 47.8% increase. The company has also formed an alliance with four global IT majors: Alcatel Lucent owned Mobilitec, Germany-based CoreMedia, USbased Adamind and UK's Apertio for its service delivery platform. Continuing with itsstrategy of focusing on its core business and outsourcing the rest, Bharti signed a $35 mn three-year outsourcing deal with BPO service provider, Firstsource Solutions. Bharti will be launching operations in SriLanka later this year and is investing $200 mn for the same. The company also launched its DTH services. Bharti is focusing on the rural and enterprise segments as its growth areas. Reliance: Reliance Communications recorded an increase of 71% in its net profit. And an increase of 28.8%in its revenue, which is Rs 18,638 crore in fy 2007-08. It received start-up GSM spectrum last year. It has huge expansion plans in rural India. It also expanded globally with acquisition of UK-based Vanco and Uganda-based Anupam Global Soft. In a landmark deal, Reliance partnered with Microsoft to deliver IPTV in India on the latter's mediaroom platform. Reliance Communications will have the exclusive deployment rights for the platform in India. 23 Internal research report:- Mayur Nahar
  24. 24. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Vodafone: Vodafone Essar achieved 46.5% rise in telecom revenue in India with its income from operations touching Rs 15,477 crore in FY 2007-08, up from Rs 10,565 crore in the previous financial year. Vodafone entered India through its acquisition of Hutchison Essar stake. Tata Communications: The Tata-run VSNL created a significant landmark when it announced financial results for the last fiscal-an astounding growth of 85%, to touch Rs 8,857 crore. VSNL's transformation has helped it lead in segments such as wholesale voice, wholesale and enterprise data, and retail broadband; and ensured global infrastructure and global customers. Telecom Equipment Players The top equipment players in the Indian telecom space are Nokia, Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Cisco, Sony Ericsson, Huawei and ZTE. 3.3 Recent trends The world in the last decade has seen a boom in the number of mobile subscribers. Fixed line subscribers on the other hand have remained more or less flat or down with some increase in the developing markets. Figure below shows that the trends of mobile subscribersin the period 2003-2013 24 Internal research report:- Mayur Nahar
  25. 25. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Mobile-cellular penetration, 2013*, and mobile-cellular subscription growth rates, 2005-2013* In 2013, over 2.7 billion people are using the Internet, which corresponds to 39% of the world‘s population. As global mobile-cellular penetration approaches 100% and market saturation is reached, growth rates have fallen to their lowest levels in both developed and developing countries. Mobile-cellular penetration rates stand at 96% globally; 128% in developed countries; and 89% in developing countries. Mobile-cellular penetration, 2013*, and mobile-cellular subscription growth rates, 2005-2013* 25 Internal research report:- Mayur Nahar
  26. 26. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Households with Internet access, 2013* Internet users by development level, 2003-2013*, and by region, 2013* The number of internet subscribers in India is on a steady rise. Many of the wireless service providers are also providing internet services to their subscribers. Indian Market 26 Internal research report:- Mayur Nahar
  27. 27. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Source: - Airtel Annual presesntation 2013 Current state of the Telecom industry Subscriber addition for the industry declined to 19mn in Q1FY13 v/s 21.5mn in Q4FY12 (share in net adds for Bharti increased from 20% to 40% in Q1FY13). Telecom industry is expected to report 4% qoq growth in Q1FY13, driven by 4% qoq growth from Bharti. On the back of lower subscriber addition and stable MoU/sub going forward, we estimate industry traffic growth at 10%/8% yoy in FY13E/14E v/s 13% in FY12. Slowing voice growth and muted data growth is a cause of concern in highly competitive voice market. 3.4 Growth Drivers in telecom sectors Key factors, which will fuel the growth of the sector include increased access to services owing to launch of newer telecom technologies like LTE , 3G and BWA, better devices, changing consumer behavior and the emergence of cloud technologies. A majority of the investments will go into the capital expenditure for setting up newer networks like 3G and developing the backhaul,among other things.  Subscriber Base The mobile subscriber base in India is estimated rise by 9 per cent to 696 million connections this year, according to technology researcher Gartner. The mobile service penetration in the country is currently at 51 per cent and is expected to grow to 72 per cent by 2016.  Mobile Value Added Services (MVAS) India's current MVAS industry has an estimated size of US$ 2.7 billion. The industry derives its revenues majorly from the top five to six products such as game based applications, music downloads, etc, which continue to form close to 80 per cent of VAS revenues. The Indian MVAS industry estimated to grow to US$ 10.8 billion by 2015, with the next wave of growth in subscriptions expected to come from semi-urban and rural areas. 27 Internal research report:- Mayur Nahar
  28. 28. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013  Mobile Number Portabil ty (MNP) i Mobile Number Portability requests increased from 41.88 million subscribers at the end of March 2012 to 45.89 million at the end of April 2012. In the month of April 2012 alone, 4.01 million requests have been made for MNP.  Handsets The mobile handset market's revenues in India will grow from US$ 5.7 billion in 2010 to US$7.8 billion in 2016, according to the study. India is the second largest mobile handset market in the world and is set to become an even larger market with unit shipment of 208.4 million in 2016 at a CAGR of 11.8 per cent from 2010 to 2016. The Indian handset market witnessed a 14.1 per cent growth in 2011 to touch a total volume of 182 million handsets. The market continues to be dominated by samsung with a share of 33 per cent, followed by Samsung with 27 per cent, and Micromax with 14 per cent. Domestic and Chinese handset makers such as Micromax, G'Five, Karbonn, Spice, Maxx and Lava, have garnered a strong presence in the Indian market due to their feature-rich, localized products and low price points 28 Internal research report:- Mayur Nahar
  29. 29. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Future opportunities 3G & WiMax Auction of spectrum for 3G services with full swing . 3G offers opportunities for new players to enter the booming Indian telecom market. Better spectral efficiency and high speed data services are some of the advantages that 3G has to offer. However, high license fee, handset costs, and low acceptance rate among consumers may dampen the hype. WiMax offers high speed data connectivity in a radius of upto 50km. It is attractive not only for providing broadband access in urban areas but is also touted as a technology that can bridge the digital divide by providing broadband access in rural areas without the high costs associated with laying cables. Major differences between 3G and WiMax: WiMax offers better spectral efficiency through OFDM and multiple antenna support. It offers higher peak rate It offers variable channel bandwidth on uplink and downlink. It also allows for symmetric uplink and downlink to support T1 services. 3G only supports asymmetric uplink and downlink. 3G has better mobility support. WiMax mobility is an add on feature and is unproven. Data Services Will be Next Growth Driver India Ratings expects that higher adoption of data services will be the next growth driver for telcos. As the voice market is maturing, telcos will shift their focus on data services, along with value-added services. As per industry estimates, there were 137 29 Internal research report:- Mayur Nahar
  30. 30. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 million internet users and only 23 million internet subscribers in the country at endJune 2012, as per TRAI data. The number of internet users are likely to double over the next two three years, most of which will be on the mobile platform. Telcos have invested heavily for acquiring 3G licenses and rolling out a network for it. But adoption of 3G services has been lower than expected primarily due to the low penetration of compatible handsets and high cost of data services. However, India Ratings expects faster adoption of these services in the near term as operators have slashed 3G usage chargesGrowth and future of VAS Currently, MVAS in India accounts for 10 per cent of the operator's revenue, which is expected to reach 18 per cent by 2010. According to a study by Stanford University and consulting firm BDA, the Indian MVAS is poised to touch US$ 2.74 billion by 2010.Here are many opportunities on m2m, m-banking, m-education, and m-health There is lack of innovation on the application side Application providers need to make investment in understanding challenges of business users and then design solutions VAS providers should look at holistic solutions Fortune at the bottom of the pyramid The Indian rural market is going to be the next big thing for wireless telecom providers. With the tele-density in rural areas being still about 10 per cent against the national average of about 21 per cent, there seems to be huge untapped potential for mobile phone penetration in rural India. The government also plans an investment of US$ 5 billion, during 20013 to 20015, for the development of around 100,000 community service centres in rural India to provide broadband connectivity. Additionally, by 2013, the government targets:  80 million rural connections  Mobile coverage of 90 per cent geographical area  Internet Protocol Television (IPTV) in 600 towns 30 Internal research report:- Mayur Nahar
  31. 31. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013  Two-fold increase in telecom equipment R&D from the current level of 15 per cent. 4. Recent partnerships, mergers and acquisitions in India 4.1 Bharti Airtel Qulacomm Bharti acquires 49% stakes in qualcomm in 2012 4.2 NTT DoCoMo takes stake in Tata Teleservices (2009) NTT DoCoMo paid 2.7 Billion USD for a 26% stake in Tata Teleservices. The deal values Tata Teleservices at $10 bn. 4.3 New GSM license holders (As SC cancelled 122 licenses) In January 2008 the Department of Telecommunications allocated 2G GSM spectrum for 120 circles to nine applicants—Unitech, Datacom (Videocon), Loop (BPL), Shyam, Idea, STel, Spice, Swan and Tata Teleservices. This allocation based on a first-come first-serve basis and the subsequent second-hand deals where some global major acquired stake in the new allotee companies valuing them much higher than the license fee sparked major controversy. Currently there is a proposal under discussion to ban dilution of promoter‘sequity in a company for 3-5 years. The telecom regulator examining a proposal whether to introduce a lock-in period before the promoters of telecom firms can sell their equity. DoT‘s intention for proposing this policy was to prevent fly-by-night promoters from making huge profits by selling their equity, especially when the Government had given them spectrum at a subsidised price. In my opinion, the market should be allowed to function rather than exerting external controls. The question that needs to be asked is that why should the government be selling spectrum at subsidized prices? Is this not a drain on the exchequer‘s money? The government should introduce competitive bidding measures so that the spectrum is sold at the right price. Swan Telecom – Etisalat (Emirates based Etiasalat paid $900 mn for 45% stake in Swan Telecom.) 31 Internal research report:- Mayur Nahar
  32. 32. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Unitech Wireless - Norway‘s Telenor (Norway-based telecom operator Telenor has bought a 60 per cent stake in Unitech Wireless for US$ 1.23 billion. STel – Bahrain Telcom (Bahrain Telecommunications Co (Batelco), has signed an agreement to acquire 49% stake in Chennai based S Tel for $225 Millionxii. S Tel received Unified Access Services Licences and start-up spectrum in Bihar,Orissa, Jammu & Kashmir, Himachal Pradesh, North East and Assam and a ‗Category A‘ All-India ISP licence. 4.4 Telecom Infrastructure (Tower) consolidation Mobile subscriber base is expected to touch 500 million by 2010 for which at least 3.8 lakh more towers arerequired. In a bid to tap this opportunity, telecom players have demerged their infrastructure into separatetower business to unlock the value by selling minority stake. Reliance Telecom Infrastructure (RTIL) and Swan Telecom are in advanced talks for a multi-year infrastructure sharing deal. RTIL, which has about47,000 towers is the third largest telecoms infrastructure company after Indus towers (85,000 towers) and Bharti Infratel. In 2008, the Indian government allowed Indian telecom companies to share their active infrastructure, which includes all key electronic components including antennas, feeder cables, nodes, radio access network, transmission systems and backhaul, with the exception of radio frequencies. Prior to March, 2008, telcos here could only share passive infrastructure such as towers, repeaters, shelters and generators. Swan had earlier signed a infrastructure sharing deal with BSNL to use the state-owned telco‘s networks on a national basis. Bharti Infratel , with ownership of 60,000 towers, had sold about 10 per cent stake to a consortium ofinvestors for about $ 1 billion. Indus Towers : Three leading GSM operators, Bharti Airtel, Vodafone-Essar and Idea Cellular, have joined hands to set up an independent tower company called Indus Towers. It owns 70,000 towers after merging their individual infrastructure assets in 16 telecom circles in India. 32 Internal research report:- Mayur Nahar
  33. 33. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Reliance Communications had sold 5 per cent stake in its tower company for $337 million. It owns 13,000 towers. Tata Teleservices merged its mobile tower company – Wireless Tata Tele Info Services Ltd (WTTIL) – with Quippo, a tower firm owned by the SREI Group and Singapore Government. Post merger, Quippo will have 49 per cent stake in WTTIL while Tata Teleservices will hold the balance. Under the terms of the deal, Quippo Telecom will pay Rs 2,400 crore ($ 493 million) to Tata Teleservices and also transfer its existing telecom infrastructure comprising 5,000 towers to WTTIL. Once the merger is completed, the company will have 18,000 towers with an enterprise valuation of $2.6 billion (about Rs 13,000 crore). The merged entity will be managed by Quippo despite being a minority shareholder. Quippo had also bought out 1,000 towers owned by the Spice Group. The telecom tower industry, after reporting a robust growth till 2010, is presently witnessing a slowdown with the telcos curtailing their network rolout plans. The cancellation of telecom licences in February 2012 has been another setback for the tower industry, as this is likely to lead to loss of tenancies and build-up of receivables. The tower industry is awaiting clarity on reduction in the limit on foreign direct investment (FDI) in the sector and the inclusion of tower companies within the purview of licensing. Currently, some telcos are even exploring the possibility of divesting their equity stake in tower companies in order to meet funding requirements 4.5Vodafone acquisition of Hutch In Feburary 2007, British telecom giant Vodafone has bagged the 67% Hutch Telecom International (HTIL) stake in Hutch-Essar at an enterprise value of $19.3 billion (approx Rs 86,000 crore). The acquisition provided Vodafone with access to the lucrative Indian mobile market. The deal has been in the news lately due to the income tax (I-T) department notice to Vodafone-Essar asking why capital gains tax on the $11.1 billion deal should not be levied on the company. The same is being 33 Internal research report:- Mayur Nahar
  34. 34. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 contested in courts. In December 2008 the Bombay High Court dismissed the petition by Vodafone International Holdings against the tax bill relating to the purchase. Vodafone has moved the Supreme Court challenging the Bombay High Court order upholding a show-cause notice issued by the Income-Tax Department asking the telecom firm to pay $2 billion post its acquisition of Hutchison‘s stake in Hutchison Essar. The order raises cross-border M&A taxation issues that firms need to be aware of. Vodafone contended that its Netherlands arm had acquired shares in a Cayman Islands company (which in turn held shares in Vodafone Essar) from Hong Kongbased Hutchison Telecom: and that all the companies being overseas ones, Indian revenue department had no jurisdiction in the matter. Vodafone ‗s argument that its international company had merely acquired a Cayman Islands company which in turn held shares in the Indian company was not accepted by the court which said it found this argument too simplistic. It held that Vodafone‘s basic objective appeared to be acquisition of a business interest in India. 4.6 Tata’s Global Foray The Tata Group acquired the Government-owned monopoly service provider for international long distance calling, i.e. Videsh Sanchar Nigam Limited ("VSNL"), in 2002. The Tata-owned VSNL has made two key acquisitions over the years, i.e. Tyco Global Network in 2005 and Teleglobe in 2006. The Tata Group subsequently rebranded VSNL and other subsidiaries of VSNL (including Teleglobe and Tyco and Tata Indicom Enterprise Business Unit) under one global brand name – Tata Communicationsxiv in early 2008. Tata Communications is now the number one global international wholesale voice operator and India's largest provider of international long distance, enterprise data and internet services in India. Tata Communications‘ international growth strategy was based on pursuing growth avenues by geographical expansion. The primary drivers for this phase of the growth 34 Internal research report:- Mayur Nahar
  35. 35. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 were network and bandwidth capacity building, global market access and most importantly complete global connectivity without any network gaps on any routes. Tata Communications started their path towards globalization by acquiring licenses in Sri Lanka in 2003. Continuing on this path, they created a wholly owned subsidiary in the US, VSNL America Inc. This helped them in offering Internet protocol-virtual private network (IP-VPN) solutions, and in adding value to their own operations in the area of Internet services by facilitating end-to-end management of the Internetbandwidth from India all the way to the US. Subsequently, they opened operations in the UK with subsidiaries named VSNL Telecommunications UK and VSNL UK; then they built presence in Europe through offices in France and Germany. They also completed a major project connecting India and Singapore by high bandwidth optical cable with complete ownership. Tyco Acquisition Tata Communications‘ largest acquisition till date came in 2004 when they acquired Tyco Global Network (TGN) for $130 million. This gave the company control over a 60,000 km cable network spread over three continents with a huge bandwidth of 1015 terabytes and substantial control over bandwidth prices. They also beat Reliance in this acquisition, an important victory over the rival. Teleglobe acquisition Continuing on their acquisition spree, Tata Communications acquired Teleglobe International Holdings, aleading provider of wholesale voice, data, IP and mobile signaling services, in 2005. This acquisition gavethem Teleglobe‘s global network access, agreements with leading global voice carriers and an enhancedutilization of TGN network allowing global scale for voice. The acquisition made VSNL International one of the largest international mobile, data and voice network. With this acquisition Tata Communications became the largest provider of submarine cable bandwidth. Presence in newer developing markets 35 Internal research report:- Mayur Nahar
  36. 36. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 In 2006, Tata Communications acquired a 26% stake in South African telecom operators SNO and Infraco, who together will control significant chunks of the telecom infrastructure in South Africa. In 2008, Tata Communications entered into an agreement with two South African companies — Eskom and Transnet — to acquire their 30 per cent stake in Neotel, the second telecom network operator in the Southern African nation. After the completion of the acquisition Tata Communication along with Tata Africa would have an effective 56 per cent stake in Neotel. Recently in 2008, Tata Communications expanded its Global VPN service to China through an NNI (Network to Network Interface) agreement with China Enterprise Netcom Corporation, a value-addedtelecommunication services and integrated IT solutions provider and subsidiary of CITIC (China International Trust and Investment Corporation), allowing them to serve their many global and India MNC customers who require a single scalable and reliable global VPN with deep reach into both India and China, and broad reach around the world. 4.7 Idea Cellular takeover of Spice Telecom On 25th June 2008 the country's fifth-largest mobile operator in terms of subscribers, Idea Cellularannounced the acquisition of B K Modi-owned Spice group's 40.8 per cent stake in Spice Communicationsfor Rs 2,716 crore. Idea acquired the stake at Rs 77.30 a share. The Birla group company, Idea Cellular said it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares for every 100 Spice shares held. It will also pay an additional Rs 544-crore as non compete fee. Idea Cellular Overview Idea Cellular, the leading GSM mobile services operator has licenses to operate in all 22 service areas of India with commercial operations in 11 service areas. With a customer base of over 110 million, Idea Cellular is a part of the US $ 28 billion 36 Internal research report:- Mayur Nahar
  37. 37. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Aditya Birla Group. The group has a market cap in excess of US $ 31.5 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities. Spice Telecom Overview Spice Telecom is the brand name of Spice Communications Limited, a mobile phone service provider in India. Spice Telecom was operating in the states of Punjab (India) and Karnataka i.e., in 2 circles of 23 Telecom Circles of India. Spice Communications Limited was promoted by Dilip Modi of Modi Wellvest Private Limited, which owned 40.80% of the company. Telekom Malaysia Berhad owns 39.20% through TMI India Limited, Mauritius. TMI India Limited is a wholly owned subsidiary of TM's international investmentholding company TM International Sdn Bhd (TMI). Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limitedcompany. Spice subsequently became a deemed public company under Section 43(1A) of the Companies Act, 1956 of India with effect from 1 April 1999 and its name was changed to Modicom Network Limited. Spice assumed its present name via a fresh Certificate of Incorporation dated 3 December 1999. With the addition of the word ‗Private‘ in Spice‘s name under Section 43(2A) of the Companies Amendment Act, 2000 of India, Spice‘s name was changed to Spice Communications Private Limited with effect from 28October 2003. On 28 December 2006, Spice was converted into a public limited company and assumed its present name 37 Internal research report:- Mayur Nahar
  38. 38. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger . MARKET Porter‘s industry analysis CUSTOMERS POTENTIAL NEW COMPETITORS COMPETITORS 38 Internal research report:- Mayur Nahar 2013
  39. 39. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger SUPPLIERS 2013 SUBSTITUTES Economic model of telecom sector Return on capital: 1. Reducing from 20 % + (pre-telecom opening up ) to current 9 %. Drops mainly due to competition and also due to -ve profitability of several players such as MTNL, BSNL and smaller players Dupont analysis:-. Asset TO fairly stable at 0.7 to 0.8 as this industry requires constant investment due to high obsolence 2. Continuous slide in margins from 15 % + to < 10% 3. ROA has gone down from 10 % + to below 10 % ( and< 5 % ) 4. Debt equity is same 0.4 : 1 . Not too high debt scenario. most financing may be through equity (12bn debt of airtel ) launched IPO 5. ROE due to margin pressure (dropping price) is also sliding down Capital intensive? High capital intensity due to obsolesce as we have to build brand in sector high start up cost Margin intensive? The business low Net margins which are continuously going down due to competition and new technology introduction is costlier like BWA , LTE Business model of telecom companies in India 39 Internal research report:- Mayur Nahar
  40. 40. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Bharti, idea Vodafone are the big brands in Indian telecom services india . Bharti looks nothing like other telecoms. The sector's core competency is branding and identifying customer pain points. In the U.S., telecoms are classified as a high technology industry: "Network is their business. They all outsourced network installation, maintenance, and service through companies like Ericsson and Nokia Siemens Networks, and chose software companies like IBM to build and manage its IT systems. FOREIGN DIRECT INVESTMENT India‟ s foreign investment regime is governed by the Foreign Direct Investment (―FDI‖) policy. As per the FDI policy, there are certain sectors wherein 100% FDI is allowed (such as software development), whereas there are certain sectors wherein no FDI is allowed at all (such as gambling). Further, there are certain sectors where FDI is allowed with certain sectoral caps (such as telecom). Furthermore some investments can be made under the automatic route (i.e. without any government approval) whilst others require prior approval of the government. The Department of Industrial Policy & Promotion (―DIPP‖) is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives. 40 Internal research report:- Mayur Nahar
  41. 41. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 The telecom sector in India has always been a sensitive and regulated sector and the government has been wary of allowing foreign participation. However the outlook of the government and the industry is fast changing. For the longest time, the intention of the government was that the majority of the shares of a telecom licensee company should be held by Indian shareholders; as a result foreign companies and investors were only allowed to hold up to 74 % of the equity of a telecom licensee. Source:- planning commission Foreign Investment can be direct or indirect. Direct foreign investment means investing directly into the investee (licensee) company; and Indirect foreign investment means foreign investment in the company/companies holding shares of the investee (licensee) company and their holding company/companies or legal entity (such as mutual funds, trusts, etc). Down Stream Investments The government has also introduced guidelines for downstream investment by Investing Indian Companies „owned or controlled by non-resident entities‟ which states that if FDI is provided to a company (―Investing Company‖) „owned‟ or „controlled‟ by non-resident entities, any downstream investment made by such 41 Internal research report:- Mayur Nahar
  42. 42. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Investing Company would require FIPB approval, irrespective of the amount of investment. The intention of the government is very clear that they want to control the activities of foreign owned or controlled investment holding companies in India and their downstream investments 5. MERGERS AND ACQUISITIONS A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of onecompany company by another in which no new company is formed. Currently, Merger & Acquisitions (M&As) have become very popular over the years especially during the last two decades owing to rapid changes that have taken place in the business environment. Meticulous pre-merger planning including conducting proper due diligence, committed and competent leadership, speed with which the integration plan is integrated all this pave for the success of M&As. The Telecom industry is one such field which offers ample opportunity for an M&A. India, as one of the fastest growing economies in the world has been on the forefront when it comes to M&A in the Telecom industry. There is an upward trend in the mergers and acquisitions in the Telecom Sector that are happening throughout the world. The aim behind such mergers is to attain competitive benefits in the telecommunications industry. Foreign investors and telecom majors look at India as one of the fastest growing telecom markets in the world. Sweeping reforms introduced & well supported by the Government over the last decade have dramatically changed the face of the telecommunication industry. The mobile sector has achieved a tele-density of 64% by FEB 2013 which has been aided by a bouquet of factors like aggressive foreign investment, regulatory support, competitive tariffs and falling network cost and handset prices.Both transnational and domestic telecommunications services providers are keen to try merger and acquisition options because this will help them in many ways. They can explore new markets, cut down on their expenses, achieve greater market share and accomplish market control 42 Internal research report:- Mayur Nahar
  43. 43. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Over the last few years, a phenomenal growth has been witnessed taking place in Telecom industry. Private sector investment & FDI have also boosted the growth of M&A in India. Following are the benefits provided in the Telecom industry  Good Infrastructure  Error free network  Higher operating profit margin  Acquisition of geographical territory  Easier licensing options  Access to products & services M&A OVERVIEW ASIA PECIFIC Source :-MergerMarket M&A Round-up for H1 2012 43 Internal research report:- Mayur Nahar
  44. 44. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger Source :- Merger market 2012 Main strategic reasons for acquisitions — Answer from telecom operators 44 Internal research report:- Mayur Nahar 2013
  45. 45. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 M&A In Indian Telecom Sector With the liberalization of the Indian economy, the telecom sector has become very attractive for mergers and acquisitions. Some of the big deals that have taken place in the Indian telecom include the following:  Bharti acquires 49% stakes in qualcomm in 2012  SingTel increasing its stake in Bharti telecom from 26.96 % to 32.8 % in 2011  Bharti aquires zain telecom  Reliance industries acquires infotel broadband 2010  Providence‟ s investment into Aditya Birla Telecom in 2009  Vodafone taking over Hutchison-Essar in 2007  Malaysia Telekom's 49% stake in Spice Telecom  Temasek Holdings' 9.9% stake in Tata Teleservices through its wholly-owned subsidiary Aranda Investments Mauritius 45 Internal research report:- Mayur Nahar
  46. 46. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 5.2M&A TRENDS In Indian Telecom Companies &IMPACTS 5.2.1Bharti airtel – zain telecom Bharti Airtel Limited (―Bharti Airtel‖) bags the „big ticket‟ to begin its much awaited African Safari. The highly ambitious, Indian entrepreneur, Mr. Sunil Bharti Mittal had always looked at Africa as the venue for the next round of technology and telecom revolution and had never concealed his intent to be a part of African business history. Bharti Airtel was determined to find its way into Africa, but the crucial question was who would be the indigenous partner? The two rounds of extremely arduous negotiations with MTN Group Limited (―MTN‖) could not bring any success for Bharti Airtel. However, the failure to woo MTN did not dampen the spirits of Bharti Airtel or dilute its ambitions. The writing on the wall was clear; choosing another African partner was only a matter of time Source :- Annual Report(in million Rs) On February 15, 2010, Bharti Airtel announced that it had entered into exclusive discussions with Mobile Telecommunications Company KSC (―Zain‖) for the acquisition of Zain Africa International BV (―Zain Africa‖) and thereby the entire African operations of Zain, excluding the operations in Sudan and Morocco. With bitter experience to haunt, Bharti Airtel strategically played it safe this time and made 46 Internal research report:- Mayur Nahar
  47. 47. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 an offer to Zain which it just could not refuse. For a commercially ailing Zain, Bharti Airtel‟ s offer of USD 10.7 billion was a jackpot. 47 Internal research report:- Mayur Nahar
  48. 48. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 The structure adopted by Bharti Airtel for acquisition of Zain Africa is conducive from a tax perspective specifically with respect to repatriation of profits from Zain Africa to Bharti Airtel.Under the domestic tax laws of Netherlands, no taxes are levied on dividends distributed between two Netherlands resident companies, subject to compliance with the applicable participation exemption conditions. Thus, it should provide for a tax free transfer of profits from Zain Africa to Bharti Airtel Netherlands BV Source :- Annual Report(in million Rs) Market reacted on merger & post merger market situation Source : bloomberg 48 Internal research report:- Mayur Nahar
  49. 49. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 5.2.2 Idea cellular- spice deal overview Idea Cellular, the leading GSM mobile services operator has licenses to operate in all 22 service areas of India with commercial operations in 11 service areas. With a customer base of over 110 million Idea is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India. Idea Cellular is a part of the US $ 61 billion Aditya Birla Group. The group has a market cap in excess of US $65 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities. On 25th June 2008 the country's fifth-largest mobile operator in terms of subscribers, Idea Cellular announced the acquisition of B K Modi-owned Spice group's 40.8 per cent stake in Spice Communications for Rs 2,716 crore. Idea acquired the stake at Rs 77.30 a share. The Birla group company, Idea Cellular said it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares for every 100 Spice shares held. It will also pay an additional Rs 544-crore as non compete fee Spice Telecom Overview Spice Telecom is the brand name of Spice Communications Limited, a mobile phone service provider in India. Spice Telecom was operating in the states of Punjab (India) and Karnataka i.e., in 2 circles of 23 Telecom Circles of India. Spice Communications Limited was promoted by Dilip Modi of Modi Wellvest Private Limited, which owned 40.80% of the company. Telekom Malaysia Berhad owns 39.20% through TMI India Limited, Mauritius. TMI India Limited is a wholly owned subsidiary of TM's international investment holding company TM International Sdn Bhd (TMI).Spice Telecom is the brand name of Spice Communications Limited, a mobile phone service provider in India. Spice Telecom was operating in the states of Punjab (India) and Karnataka i.e., in 2 circles of 23Telecom Circles of India. Spice Communications Limited was promoted by Dilip Modi of Modi Well vest Private Limited, which owned 40.80% of the company. Telekom Malaysia Berhad owns 39.20% through TMI 49 Internal research report:- Mayur Nahar
  50. 50. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 India Limited, Mauritius. TMI India Limited is a wholly owned subsidiary of TM's international investment holding company TM International Sdn Bhd (TMI). Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limited company. Source :- Annual Report(in million Rs) 50 Internal research report:- Mayur Nahar
  51. 51. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 The Spice Communications have been looking for a quick exit since the telecom tribunal rejected the company‘s plea for a panIndia licence. Increased competition led to deterioration of Spice‘s finances. Its Net Profit fell from 69.70Mn in FY2005 to a loss of (525Mn) by Dec 2007. The Aditya Vikram Birla group-controlled Idea Cellular acquired BK Modi‘s 40.8% stake in Spice Communications for around Rs 2200cr. The deal finalized between Rs 77 and Rs 78 per share. After buying out the Modis, Idea Cellular provided open offer for 20% stake in Spice that held by the public. The two companies will be subsequently merged. Telekom Malaysia, which had a 39.3% stake in Spice Communications, got a proportional stake in the combined entity. Source :- Annual Report(in million Rs) The deal gave Idea strategic advantage, since Spice holds spectrum in the highly efficient 900 Mhz, which can accommodate a large number of subscribers. If Idea were to launch operations independently in Karnataka and Punjab (the two circles where Spice operates now), it only get radio frequencies in the 1800 MHz band, as the 900 MHz has been exhausted. The deal result in Idea Cellular moving ahead of Tata Teleservices to become the country‘s fifth-largest mobile service provider. Market reacted on merger & post merger market situation 51 Internal research report:- Mayur Nahar
  52. 52. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger Source :- Bloomberg 5.2.3Vodafone - hutch deal Huchison-telecommunication-(Pre-Merger) Source :- Annual Report(in million Rs) 52 Internal research report:- Mayur Nahar 2013
  53. 53. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 In the year when Vodafone in net losses acquired stakes in Hutchison turnaround Vodafone .vodafone India is his most profitable entity in last 4 quarters 53 Internal research report:- Mayur Nahar
  54. 54. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 6 .Financial performance The financial performance of the 5 acquiring firms before and after the announcement of M & A have been analyzed with the help of various financial ratios. Analysis of Financial Performance of Telecom Companies in India Test of Hypothesis –1 In order to test the validity of the null hypothesis, ―The merged telecom companies did not achieve better liquidity, better solvency and improve profitability after the merger‖, the following parameters have been selected to test the results of pre and post merger periods 6.1Return on NetWorth (RONW) 54 Internal research report:- Mayur Nahar
  55. 55. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Major observations in Table:This ratio highlights managements ablity to generate a meaningful return on capital invested in the business As profit shrinking every year . only company seen unaffected is VODAFONE due to good growth aspects. Tata communication seen worst affected due to start up companies RONW of All other operators are decreasing year on year 6.2 Earning Per Share (EPS) 55 Internal research report:- Mayur Nahar
  56. 56. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Telecom Services sector has the lowest percentage earnings Impact of NTP 2011 on earning NTP clauses such as one-time excess spectrum charges, charges on spectrum renewal (net present value of the impact), changes in roaming regulations, a five-paise reduction in termination charges and a 8 percent license fee for tower companies. Major observations :Idea & Vodafone only two companies successful in sustaining income .MNP(mobile number portability ) helped idea to increase its subscriber base. Reliance communication & Tata communication worst with respect to earning Tata communication losses widen in last quarter . telecom companies are trying to back on track by increasing tariff . idea cellular, Bharti airtel already increased their tariff II. Liquidity parameters 6.3 Current Ratio 56 Internal research report:- Mayur Nahar
  57. 57. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Liquidity ratios measure the short term solvency i.e. the firm‘s ability to pay off current dues. In the present study current ratio is used to check the liquidity of the firm It is also called ‗working capital ratio‘. It expresses the relationship between current assets and current liabilities. A higher current ratio shows that the manufacturing company is able to pay its debts maturing within a year. From the management point of view, a higher current ratio is an indication of poor planning since an extensive amount of funds would lie idle. In a sound telecom business, a current ratio of 1.5:1 is considered an ideal one. A very high ratio will result in idleness of funds and therefore, is not a good sign. On the contrary, a low ratio would mean inadequacy of working capital. Major observations in Table : Tata communication Only one company which has ratio more then industry . as more assets idle impacted on tata‘s earning . Airtel ratio down due to its aqusition (zain) and due to high 3G spectram price that increased liabilities in operator balance sheet III. Solvency parameters 57 Internal research report:- Mayur Nahar
  58. 58. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 6.4 Debt-Equity ratio Major observations in Table Most telecom companies have significant amount of debts to their Balance sheets. Debt to Equity ratio for leading Telco is increasing. Bharti debt which will now be almost Rs.1.5 for a Rupee of Equity. Obviously this skewed ratio is also because of purchase of Zain’s Africa assets, but not only because of this. In case of Idea its debt to equity ratio will go from 0.67 to 0.96 in just years’ time. Reliance Communications Balance sheet is already highly stressed and has not improved after paying the 3G spectrum amount. Same applies to all 3G spectrum winners. 58 Internal research report:- Mayur Nahar
  59. 59. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 IV. Overall efficiency parameters 6.5 Profit before tax (PBT) The main objective of business is to earn profit. Therefore, efficiency in business is measured by profitability. Thus, a measure of profitability is the overall measure of efficiency. To check the overall efficiency of the merging cases, profit before tax, profit after tax and profit before tax to total income are calculated. Major observations in Table:PBT of Bharti Airtel grew significantly from 2008 to 2010 at CAGR of approx. 21%and declined there afterwards by almost 10% each year due to high debt and poor revenue reliazation from its acquisition of zain . Vodafone‘s profits grew substantially from 09 to 12 due to growth in its customer base Likewise all other operators declined in profit before tax due interest rates 59 Internal research report:- Mayur Nahar
  60. 60. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 In year 2008 Indian Telecom Industry Manufactured 250 Billion minutes. Currently it is manufacturing 600 Billion.In year 2008 it sold each minute for 60 Paise today it sells it for about 35 paise. The running cost of Manufacturing this minutes without taking sunk cost into account is stuck at around 25 paise per minute.Above stated is the case of Airtel, which has the lowest cost, because of its completely outsourced Business model. For rest it is even higher. Net profit of telecom companies increased y-o-y only in case of tata Communication losses are increasing y-o-y . profits had been affected due to regulatory changes leading to higher license fee rates, such as India's department of telecommunications' Wireless Planning and Coordination (WPC) wing's WiMax charges, along with a onetime actuarial loss on Canada's pension fund. 60 Internal research report:- Mayur Nahar
  61. 61. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 7. Valuations drivers of telecom industry The purpose of my analysis is to identify the key valuation drivers for telecom operators, and to consider the impact of their activities (size, exposure to emerging markets Valuations are about projections of future cash flows discounted to their present value. Earlier, the subscriber base was the key determinant of valuation since EBITDA figures of most players were largely in the negative The main valuation criteria used by investors in the telecommunications industry EV/Sales EV/EBITDA Price Earnings Ratio (P/E) Price-to-Book (P/B) Beta coefficient (ß) Telecom specific ratios & key performer indicators ARPU* EV/Number of subscribers EV/Line installed SAC* 61 Internal research report:- Mayur Nahar
  62. 62. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 SRC* Large telcos that operate in emerging markets have higher valuation multiples than their peers in mature markets. Investors place a premium on growth prospects, so long as they are well monitored and diversified. EV/EBITDA The greater the exposure to emerging markets, the higher the EV/EBITDA multiple, provided the operator is large enough EV/EBITDA multiples of larger emerging operators by geographical exposure Key performer Indiactor ARPU The Indian telecom industry is highly competitive with at least seven telcos in each circle and up to 12 telcos in some circles competing for market share. This makes India one of the most crowded mobile markets globally—the number of telcos in most countries ranges from two to five—and has led to aggressive pricing by telcos during the last two years. The impact of such pricing strategies is reflected in the trend of decline in the industry‘s key operating metrices: Average Revenue per User (ARPU); and Average Rate per Minute (RPM) 62 Internal research report:- Mayur Nahar
  63. 63. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Source: - Bloomerg Interesting part is all the leverages coming to Telco‘s are at a time when there revenues are steadily declining Quarter on Quarter (QoQ). Indian Telecom Operators says they are in Business of ―Manufacturing Minutes‖ and it will increase as more and more operators launch their services that have been granted license to provide Unified Access Service (UAS) to consumers. ‘Minute’ Statistics: Quick recap – In year 2008 Indian Telecom Industry Manufactured 250 Billion minutes. Currently it is manufacturing 600 Billion.In year 2008 it sold each minute for 60 Paise today it sells it for about 35 paise.The running cost of Manufacturing this minutes without taking sunk cost into account is stuck at around 25 paise per minute.Above stated is the case of Airtel, which has the lowest cost, because of its completely outsourced Business model. For rest it is even higher. In coming months there will be much ‗free cash‘ flowing out of the balance sheet to battle in the market for all the operators and here Bharti is also no exception. What is changing Business Dynamics? All 4 parameters which define the Industry have turned adverse now: 1. Customers 2. Competitiveness 3. Regulations 4. Raw Materials Population (Potential Customers) was one the biggest pain reliever for Telecom Company, but now customers have changed behaving like they use to a decade ago. One cant even blame them, as telecom 63 Internal research report:- Mayur Nahar
  64. 64. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Asset valuation methodologies for the telecommunications industry All the acquired assets and assumed liabilities should be recorded at fair value, and their sum compared with the price paid by the acquirer. According to IFRS 3/3R (Business Combinations) and FAS 141/141R (Business Combinations), the fair value is defined as ―the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm‘s length transaction.‖ In addition, standards specify that fair value should reflect market expectationsabout the probability that the future economic benefits associated with the asset will flow to the acquirer. Therefore, any analysis should reflect assumptions which would be common to any market participant if it were to buy or sell each asset on an individual basis. Thus, the fair value should be determined with reference to market participants in general, but exclude synergistic values that are unique to a particular buyer. The following methodologies are commonly used to value intangible assets: • Income approach which allows future economic benefits of the asset to be captured (via the multi-period excess earnings method, relief from royalty method, build-out or greenfield method) • Market approach based on comparing the asset with similar assets, and prices paid for them (comparable transactions method) • Cost approach relying on the principle that no prudent investor would pay for an asset more than the cost to recreate it or to reproduce an asset of similar utility (replacement or reproduction cost method) More than one approach may need to be considered in order to arrive at supportable valuation range. In the following sections, we explain the choice of the preferred method for each asset valued, and discuss some of the practical challenges. 64 Internal research report:- Mayur Nahar
  65. 65. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 7.1Bharti Airtel – Zain deal Bharti Airtel is paying Zain an enterprise value of USD 10.7 billion10 which is 10 times the enterprise value (―EV‖) to Earnings Before Interest, Taxes, Depreciation and Amortization (―EBIDTA‖) multiple for Zain. Out of the total acquisition price, USD 8.3 billion will be paid in cash within three months from the date of closing and USD 700 million will be paid after one year from the date of closing.Further, Bharti Airtelassume debt to the tune of USD 1.7 billion on the books of Zain Africa. Airtel itself is available at 7.2 times EV to EBITDA. Even if significant EBITDA growth of 20-22% for the next two years is factored in, the deal would still be upwards of 6 times to 6.5 times on EV/EBITDA multiples. This would make it amongst the most expensive emerging market telecom players on figures after two years. The deal is highly volatile and carries huge commercial risk for Bharti Airtel. To acquire a financially sinking company, Bharti Airtel has incurred exceedingly expensive loan worth USD 8.3 billion at an interest rate of 195 basis points over LIBOR. The loan would be a drag on Bharti Airtel's earnings with no immediate returns expected from the loss-making target. Bharti Airtel Limited is rated second in current valuation category among related companies. After adjusting for long-term liabilities, total market size of Wireless Communications industry is currently estimated at about5.74 Trillion. Bharti totals roughly 1.81 Trillion in current valuation claiming about 32% of Wireless Communications industry. Valuation YEAR Revenue(Rs mn) EBITDA(Rs mn) EBITDA Margins PAT(Rs mn) EPS (Rs) RoE RoCE P/E EV/EBITDA Idea Bharti Airtel FY13E FY14E FY13E2 FY14E3 226732 249397 803486 872345 59442 66828 243959 275178 26.20% 26.80% 30.40% 31.50% 10159 15073 34848 51312 3.07 4.56 9.2 13.5 7.50% 10.20% 6.30% 8.60% 9.90% 11.80% 7.80% 9.50% 24.1 16.2 27 18.3 5.9 4.9 6.3 5.3 7.2Idea cellular 65 Internal research report:- Mayur Nahar
  66. 66. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 The acquisition of Spice Communications by Idea Cellular at Rs77.3 per share implying a valuation of 18x EV/EBIDTA looks expensive at the time of buyout. However considering the entire deal structure involving preferential allotment to TMI and the share swap, the deal turns out to be valuation neutral at the same time enabling Idea raise funds for future expansion. Idea bought Spice group‘s 40.8% stake in Spice Communications As market consider deal as over valuation of spice by idea However, it should be noted that in such deals, there is typically an acquisition premium involved and often, valuation ratios like P/E or EV/EBITDA take a backseat in light of the longer-term quantitative, qualitative and strategic benefits involved. We believe Idea in the longterm will benefit in several ways from the deal and it should be looked at from that perspective. Idea has delivered better than expected EBITDA in highly competitive environment, led by cost controls. However, regulatory payouts in near term would be significantly higher than FCF generation. estimated FCF of Rs56bn over next 2 years but regulatory pay out towards one-time spectrum charge, spectrum renewals, bidding for 7 cancelled circles and spectrum re-farming would be significantly high. Further, re-farming would have significant negative impact on opex as well. 66 Internal research report:- Mayur Nahar
  67. 67. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Based on recorded statements Idea Cellular Limited has Operating Margin of 10.55%. This is 174.3% lower than that of Technology sector, and 270.44% lower than that of Wireless Communicationsindustry, The Operating Margin for all stocks is 397.18% lower than the firm. 7.3Vodafone hutch deal:In October 2005, Vodafone picked up a 10 per cent stake in Bharti Airtel for $1.5 billion (then Rs 6,750 crore) 52 per cent buyout of Hutchison Essar for $10.9-billion (Rs 44,690 crore) last year, that valued the company at $21 billion (Rs 86,100 crore) Price to Sales ratio shows how much market values every dollar of the company's sales. 67 Internal research report:- Mayur Nahar
  68. 68. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 Vodafone Group Public Limited Company is rated fourth in market capitalization category among related companies. Market capitalization of Wireless Communications industry is at this time estimated at about 5.59 Trillion. Vodafone claims roughly 80.21 Billion in market capitalization contributing just under 2% to Wireless Communications industry. 8. Regulatory Environment Impact Cancellation of Licenses Lead to Consolidation In February 2012, the SC cancelled 122 2G licenses which it awarded 2008 onwards. This ruling mainly affected new entrants; however some of the licenses of older operators were also cancelled. After the cancellation, some of the operators – Loop Telecom Private Limited, Etisalat DB Telecom Pvt. Ltd. and S Tel Ltd. – decided to exit the market and are winding up operations. Two other majorly affected operators – Unitech Wireless Limited and Videocon Telecommunications Ltd. – are continuing their operations but 68 Internal research report:- Mayur Nahar
  69. 69. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 at a smaller scale after winning back some of the cancelled licenses in November 2012 in a re-auction that received muted response. Sistema Shyam Teleservices Ltd still is waiting for verdict on curative petition filed in the SC before deciding its course of action. The Indian telecom sector is one of the most competitive sectors in the world and consolidation due to license cancellation should offer some respite to the operators who are struggling due to declining call rates. However, India Ratings does not expect any significant reduction in competition from here in the short term, as most of the operators are either large pan-India operators or small regional players. Room for Tariff Hikes Call rates in India are among the cheapest in the world with ARPM of INR0.48. Over the last few years, call rates have declined sharply, before stabilising recently, as operators were trying to add subscribers at the cost of profitability. India Ratings expects that this trend will now reverse. This is because operators are capitalising on reduced competitive intensity due to license cancellation by raising tariffs; also, there is a high likelihood of passing of incremental regulatory expenses in part or fully to customers. Furthermore, there is limited scope for new subscriber-led revenue growth from here on. However, a rise in tariffs may negatively impact minutes of usage. Regulatory Developments High Reserve Price and Muted Response in Auctions The Indian government held auctions for cancelled 2G spectrum in November 2012, which received a muted response from bidders mainly due to the high reserve price for auction. The reserve price was set at INR28bn per MHz for 1800MHz telecom spectrum (used by GSM operators) and INR36.4bn per MHz (1.3xfor 1800MHz spectrum base price) for 800MHz spectrum (used by CDMA operators), both for pan-India spectrums. 69 Internal research report:- Mayur Nahar
  70. 70. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 There was no pan-India bidder for the 1800MHz spectrum and there was no bidder at all for the 800MHz spectrum. As a result, the government was able to raise just INR94bn from this sale, compared with the target of over INR400bn. There was no bidding in four circles, including key circles Delhi and Mumbai. In response to the muted response, the government has cut spectrum reserve prices in these four circles by 30%, bringing it down to INR24bn per MHz for a pan-India spectrum. The industry considers that the revised base prices are still high and operators will have limited interest in the auction. However, the government has cut reserve price of the 800MHz spectrum by a steep 50% to INR18.2bn per MHz for a pan-India spectrum, thus making it cheaper than the 1800MHz spectrum. A fresh auction is likely to take place in March 2013, to sell unsold spectrum and also to auction the 900MHz spectrum in Delhi, Mumbai and Kolkata, which is currently used by incumbent operators. Staggered Payment Mechanism Positive Positively, the government has given an option of staggered payments mechanism, wherein GSM and CDMA operators can pay 33% and 25% of the spectrum charges up-front, respectively, and the rest in 10 annual instalments (with interest) following a two-year moratorium period. Therefore, telcos will not face an immediate cash outflow for the purchase of spectrum, thus reducing impact on their credit profile. Operators have also been allowed to mortgage spectrum to raise bank loans. Liberalised Use of Spectrum The government has also decided to liberalise the use of auctioned spectrum thus providing the licensee an option to deploy new technologies. This will be positive for the industry as operators will now be able to offer both voice and high speed data services on the same spectrum using efficient technology Spectrum Re-Farming 70 Internal research report:- Mayur Nahar
  71. 71. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 To create a level playing field among various operators, the government has decided to re-farm the more efficient 900MHz spectrum, used by older operators, with 1800MHz. Operators will have to participate in a bidding process in case they choose to retain 2.5MHz of the 900MHz spectrum. The remaining spectrum will be replaced with the 1800MHz spectrum at an auction determined price. Operators will also need to invest heavily in upgrading network infrastructure to match service quality with the 1800MHz spectrum. One-Time Fees on Excess Spectrum The government has also decided to impose a one-time fee on operators that hold a spectrum above contractual spectrum of 4.4MHz in case of GSM and 2.5MHz in case of CDMA. There will be two components of this fee. GSM and CDMA operators will have to pay a prospective charge on holding spectrum above 4.4MHz and 2.5MHz, respectively, which will be linked to auction determined prices. The other component will be a retrospective charge on spectrum above 6.2MHz, held with GSM operators for the July 2008 to December 2012 period, which will be calculated by indexing of the 2001 spectrum allocation price to the prime lending rate of State Bank of India. The one-time fee on excess spectrum could result in a significant cash outflow for the affected operators. However, for this payment also, operators have an option of making a partial upfront payment and the remaining in the form of interest bearing loans. The operators who do not want to pay the one-time fees may surrender the excess spectrum. Abolition of Roaming Charges The government plans to abolish roaming charges in 2013, which contributes about 8% to revenue for telcos. Any such move will negatively impact revenue and profitability of operators and they may respond with tariff hikes. India Ratings expects delays in implementation of this plan as the government needs to fine tune the recommendation before it is implemented. Impact of Regulatory Developments 71 Internal research report:- Mayur Nahar
  72. 72. M&A Trends and Financial Performance of Telecom Companies during Pre& Post Merger 2013 While some regulatory developments will have a uniform impact on all the operators, others will have a different degree on impact on different operators. A high reserve price will be negative for all operators, whereas a staggered payment mechanism and liberalised use of spectrum will be positive for all operators. In case of spectrum refarming and one-time fees, India Ratings does not expect a positive impact on operators Government Initiatives The Government intends to make India a teleport hub, enabling it to become an uplinking/down-linking centre, just like Hong Kong and Singapore. The Ministry of Information and Broadcasting (I&B), in consultation with the industry, will explore modalities, challenges and finalise the road map for the same. The initiative is expected to facilitate foreign investments, better technology and sustainable 72 Internal research report:- Mayur Nahar

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