India’s Phone Market May Finally Consolidate

India’s cutthroat mobile-phone market may finally get the consolidation needed to help make carriers profitable as new takeover regulations near.

Overseas carriers including Norway’s Telenor ASA and Russia’s Sistema JSFC are losing money in the world’s fastest-growing mobile-phone industry, after spending a combined $7 billion on Indian airwaves and networks. Wireless companies have been waiting on new acquisition rules, which the government may clarify as soon as this month. That could clear the way for consolidation, possibly halving the number of carriers and boosting profitability, said PricewaterhouseCoopers.

“What’s certain is that we will see a couple of deals once the guidelines are released, with the potential for bigger deals following later this year,” Nitin Soni, associate director and analyst at Fitch Ratings in Singapore, said in a telephone interview. “There’s a long list of possibilities.”

Potential targets in a market where calls sell for less than a cent a minute include Tata Teleservices Maharashtra Ltd., which provides services in Mumbai, and Aircel Ltd., the Indian unit of Malaysia’s second-biggest mobile-phone operator, Soni said. Sales of smartphones will triple next year in India, where there are already more subscribers than the populations of North and South America, said Euromonitor. Still, operating margins are the lowest in Asia, according to data compiled by Bloomberg.

‘Desperately’ Needed

India is home to 13 mobile-phone operators, the largest of which are Bharti Airtel Ltd. and Vodafone Group Plc. Sanjay Kapoor, who was chief executive officer of Bharti until March, said last year that a rise in call prices -- a development that’s “desperately” needed -- wouldn’t occur until there are fewer operators.

In addition to eliminating rivals, deals would also help companies grab more spectrum -- the airwaves used to transmit voice and data for mobile devices. India’s Supreme Court canceled 122 mobile licenses last year, citing corruption during their original allocation, and the government then sought to auction the spectrum at higher prices.

The airwave cancellations and uncertain acquisition rules have prevented operators from buying each other, said Harit Shah, a Mumbai-based analyst at Nirmal Bang Equities Ltd.

New Regulations

The new regulations, which the government has said could be announced this month, may define exactly how much spectrum operators can own in each of the country’s 22 telecommunications regions, R. Chandrashekhar, India’s former secretary to the Department of Telecommunications, said in March. The rules could inflate the price of airwaves to compensate for the difference between their original purchase price and the cost in recent auctions, he said.

“Aircel and Tata Teleservices seem to be on the block,” Nirmal Bang’s Shah said in a phone interview. “From strictly a regional perspective, that makes sense for Telenor and Sistema.”

Sistema, controlled by Russian billionaire Vladimir Evtushenkov, has plowed about $3.7 billion into its Indian phone venture since 2008, while Telenor, the Nordic region’s biggest phone company, has spent about $3.3 billion.

According to PricewaterhouseCoopers, consolidation could help the carriers’ money-losing Indian businesses, which both had spectrum reclaimed by the government last year. Telenor controls 3.7 percent of India’s mobile-phone market, while Sistema has 1.4 percent, according to March data from the Telecom Regulatory Authority of India.

Deal Discussions

“The conditions still aren’t right for long-term profitable growth for all the players,” Mohammad Chowdhury, who heads the telecommunications practice at PricewaterhouseCoopers in Mumbai, said in a phone interview. “There’s still a benefit from further consolidation.”

A Sistema spokesman referred to May 27 comments from its then-CEO in India, Vsevolod Rozanov, who said he had nothing specific to say related to acquisitions, especially before any new takeover rules. Glenn Mandelid, a spokesman for Telenor, didn’t reply to a text message seeking comment on any plans to buy assets in India.

In November, people with direct knowledge of the matter said Telenor, majority owned by the Norwegian government, was in talks with Tata Teleservices to combine their businesses in India. Any deal would depend on the takeover rules being considered by India’s telecom regulator, the people said.

Telenor’s Indian business, which lost 6.28 billion kroner ($1.1 billion) last year, would more than triple its subscriber market share by adding Tata Teleservices.

Stock Decline

Tata Teleservices had a 7.7 percent market share in India as of March.

Today, Tata Teleservices fell 0.7 percent to 7.30 rupees. The company’s shares have tumbled 47 percent in the past year, cutting its market value to 13.8 billion rupees ($243 million). Meanwhile, Telenor’s stock has increased 35 percent, giving it a stronger currency for acquisitions.

Tata Teleservices said in an e-mailed statement that it doesn’t comment on speculation.

While Sistema has already written off about a third of its $2.8 billion investment in Indian mobile services, the company plans to spend as much as $1 billion more to expand in India, ex-CEO Rozanov told reporters April 9. He became chief financial officer of Moscow-based Sistema JSFC this month. Sergey Savchenko, CFO of Sistema in India, said last year the company was prepared to spend “billions” on “organic and inorganic growth.”

Its Indian business reported a net loss of 6.44 billion rupees in the quarter ended in March.

‘The Bottom’

In the latest 12-month period, Indian mobile-phone companies with market values higher than $100 million had an average operating margin of 5.8 percent, the lowest in Asia, according to data compiled by Bloomberg.

“We are at the bottom of the bad news from a market and margin perspective,” said Walter Rossini, a fund manager in Milan for Aletti Gestielle Sgr SpA. “There could be an opportunity to buy the smaller players.”

Aircel, owned by Kuala Lumpur-based Maxis Communications Bhd., had a market share of 6.9 percent as of March. It may be a target for Telenor or Sistema, said Soni at Fitch. India’s Economic Times said in September that Sistema may pay $3 billion for Aircel and a stake in Maxis. Closely held Aircel has not publicly released its most recent results.

Maxis CEO Sandip Das didn’t reply to an e-mail seeking comment on any sale of Aircel. No one answered the phone at Aircel’s office.

African Exploration

People familiar with the matter said last week that MTN Group Ltd., Africa’s largest wireless carrier, was exploring a potential acquisition in India. The discussions could lead to a revival of an attempt to link up with Reliance Communications Ltd., the phone company of billionaire Anil Ambani that tried unsuccessfully to merge with MTN in 2008, the people said.

Reliance Communications, India’s third-largest wireless operator by customers, has seen its shares fall 73 percent since the talks ended in July 2008. The company now has a market value of about $4.2 billion.

Representatives for Reliance Communications and MTN declined to comment on the Bloomberg News report last week.

Total mobile-phone revenue in India climbed 30 percent to $16.9 billion between 2007 and 2012, as subscribers reached 961 million, market researcher Euromonitor estimates.

While the Indian government’s new guidelines on takeovers may help spur acquisitions, deals that make a lot of sense have yet to be struck, according to Nomura Holdings Inc.

“If it were that simple, it would have happened a while ago,” Sachin Gupta, a Singapore-based analyst with Nomura, said in a phone interview.

According to Soni at Fitch, deals are inevitable this time around, and companies are likely already preparing takeovers in anticipation of the rules, which will make it easier to value assets.

“A couple of deals could be possible immediately” after the regulations are announced, Soni said. “A lot of companies must be doing the due diligence.”

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