In what could be considered a landmark year for the telecom sector in India, 2017 saw telcos consolidate like never before. By the end of the year, there were only three major players left in the market.
On Tuesday, Anil Ambani-led Reliance Communications said that the telecom sector has become a money guzzler where only those with deep pockets can survive.
Even the "mighty" house of Tatas had to "gift away" their telecom business (to Airtel), Ambani asserted, sounding bitter about the regulatory framework. He said the long time taken to clear RCom's merger with Systema Shyam Telecom represents an "unease of doing business".
For every telecom company in India that cannot be considered a giant in the sector, the last couple of years have been the same. Companies have had to either pump in a lot of money into their business to stay competitive enough to survive, or merge themselves with other companies. And as if that were not enough, when companies did try to merge with each other, they were held up by regulatory hurdles.
So when Reliance Jio finally arrived late last year, other telcos were left high and dry quite literally. According to a report by Kleiner Perkins Internet Trends 2017, India’s wireless consumer data prices fell 48 percent as incumbent mobile operators responded to Jio’s pricing.
The Jio effect
As of September this year, the top three telcos in the country had together lost over 50 lakh subscribers, according to a report by Business Standard. Idea and Vodafone had lost 28 lakh and 24 lakh subscribers, respectively, while Airtel's base contracted by two lakh subscribers, the report said.
However, Prashant Singhal, Global telecommunications Leader at EY, told the newspaper that for a market like India, it was the revenue that must be monitored to check a telcos' health rather than the subscriber base.
"The health of industry is driven by revenue and we have to see if revenue is shifting in favour of Reliance Jio. In India, people have got multiple SIMs and losing subscribers does not give a clear indication of an operator’s health," Singhal said.
Both Airtel and Vodafone were forced to slash tariff after they started losing customers to Jio. However, the two companies continue to charge for voice calls and text messages, at least on some of their plans, whereas these services are offered free of cost by Jio on all its plans.
The country's largest telecom operator Bharti Airtel's consolidated net profit for the second quarter fell 6.6 percent, dented by pricing pressure, while Vodafone saw its operating profit fall 39 percent year-on year in the first half of this fiscal year.
Speaking to The Economic Times, Bharti Airtel's Sunil Mittal had said that Jio's entry with prolonged free offers had led to unexpectedly rapid consolidation.
"Market has consolidated to a level which was an aspiration, but never thought would be a possibility. Now we're looking at 3-4 players. Number 2 Vodafone and Number 3 Idea being put together, is unprecedented... you never see two strong companies merging...this is just because the market structure has got completely damaged," he told the newspaper.
Mittal estimated that around USD 40-50 billion (approximately Rs 2.5-3.2 lakh crore) has been written off by various telecom companies, which he believes is "largely due to Jio".
However, Reliance Industries Chairman Mukesh Ambani quickly rebutted Mittal, saying businesses must stop looking at regulators and governments to guarantee their profits, according to a report by Gadgets Now.
Speaking to CNBC-TV18, former chairman of Micromax Sanjay Kapoor said in October that consolidation in the telecom space is good, while competition remains severe.
According to Kapoor, two things are happening in the sector. Firstly, there is clear consolidation in a space where an unsustainable perfect competition structure is dying down. A more sustainable structure is now coming into shape and three long-term players seem to be standing out.
Secondly, he said, Jio starting to publish its earnings numbers will drive change in behaviour of other telcos, considering their revenue steams had been completely disrupted by the new carrier.
According to a report by The Hindu BusinessLine, analysts at Goldman Sachs feel that as a result of consolidation, consumers can hope to benefit from their service providers who are on a stronger footing to expand their networks and improve quality of service.
Indian telecom companies are now looking for mergers and acquisitions to stay ahead of the competition. In February, Telecom Secretary JS Deepak said that the Indian telecom market would eventually consolidate to have only five major players. He also said "consolidation is going to be very good for India as we are likely to get four private and one government player (BSNL-MTNL), which is ideal."
According to the Telecom Regulatory Authority of India (TRAI), there were more than 1.18 billion wireless telephone subscribers in the country in April this year, being serviced by as many as 12 operators.
For the telecom sector in India, 2017 was a year marked by unprecedented consolidation. Here are some of the key mergers and acquisitions of the sector from this year:
Airtel and Tata Teleservices
In October, Airtel announced a merger of its mobile operations with struggling Tata Teleservices. According to the deal, Airtel would acquire Tata's consumer mobile business in 19 circles.
The merger was done on a debt-free, cash-free basis. The deal also gave Airtel access to Tata's 1,800, 2,100 and 850 MHz spectrum bands, all widely used for 4G. In December, both boards had cleared terms for the customer business merger.
Vodafone and Idea Cellular
India's second largest (Vodafone) and third largest (Idea) telecom operators are now in the process of merging to form what would become the country's largest operator. The merged entity will also be the world's second largest telecom service provider.
According to the terms of the deal, Idea's parent entity Aditya Birla Group will gradually raise its stake in the combined entity while the Vodafone Group will reduce its stake until both their shares are equal. The two companies have received regulatory approval and have started picking key executives. They are hopeful that the merger will be concluded in 2018.
Airtel acquires Telenor India and Tikona
In February, Airtel bought Telenor's ailing Indian subsidiary, Telenor India. According to the deal, Airtel took over Telenor India's liabilities pertaining to licence fees and lease obligations for mobile towers.
The deal, which gave Airtel 44 million additional users, did not involve any cash payment to Telenor. Airtel also got Telenor India's 43.4 MHz spectrum in the 1,800 MHz band as a part of the deal.
In September this year, Airtel announced it had fully acquired Tikona Digital Network's share capital. Earlier, the company had announced a plan to purchase Tikona's 4G airwaves for Rs 1,600 crore. The acquisition gave the Sunil Mittal-led telecom company access to Tikona's 4G spectrum in five circles.
Reliance Communications and Aircel
In April 2017, Reliance Communications and Aircel approved a merger that would create one of the largest networks in the country in terms of subscribers. RCom and Aircel's parent firm Maxis were supposed to own 50 percent stake each in the merged entity.
The proposed merger was crucial for RCom as it would have retired Rs 25,000 crore of debt from its total debt of around Rs 45,000 crore. However, RCom shelved merger talks with Aircel, citing regulatory uncertainties.
On December 26, RCom unveiled a new resolution plan to reduce its debt by up to Rs 39,000 crore through prepayment and sale of assets and form a new RCom with debt levels of less than Rs 6,000 crore.
The resolution plan involves exiting strategic debt restructuring (SDR) and monetising some of the company's assets, including transfer of spectrum liabilities by March 2018.Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd