Telecom mergers and acquisitions get prohibitive, even as big deals can go ahead

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M&A activity in the telecom space will become expensive. M&A activity in the telecom space will become expensive.
SummaryTelcos need to pay ‘market price’ of spectrum for the companies they buy.

With acquirers required to pay an additional cost for spectrum, in addition to the price paid to buy the target company, M&A activity in the telecom space will become expensive. The rule will come in play for companies that own 4.4 MHz of spectrum for GSM services; the additional cost will be in line with that of the February auction price.

In other words, the acquirer will need to pay the difference between the entry fee and the auction-determined price for spectrum for 4.4 MHz in GSM band and 2.5 MHz in CDMA band, if the spectrum was originally acquired by paying the entry fee of R1,651 crore.

This means that while Bharti and Vodafone can merge based on their market shares and even retain a higher quantum of spectrum, they must pay around R8,300 crore to the government as the differential between the R1,651 crore they paid for 4.4 MHz spectrum and February auction prices. In addition, since these companies need to pay the government a one-time excess spectrum charge, they would need to furnish a bank guarantee for the amount due till the case, currently before the courts, is settled.

The department of telecommunications on Thursday notified the new merger and acquisition guidelines with an aim to facilitate consolidation in the country's crowded telecom market with close to six operators in each circle. Most provisions relating to enhanced market share and the spectrum cap for a merged entity were welcomed by the industry.

However, the additional charge for spectrum drew some criticism. “Asking operators to pay market-linked prices for spectrum granted earlier is an irritant. This will increase the cost of acquisitions and may dissuade meaningful M&As,” Rajan Mathews, director general of Cellular Operators Association

of India said.

“There needs to be some additional clarity on whether the weighted average method would be applicable on SUC. Overall, while some provisions are positive, the lock-in period would act as a disincentive. When spectrum has already been bought at market prices, there is no justification to place a lock-in clause,” he added.

Industry executives said there's no rationale for the

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