What are the positive features of the new M&A norms for telecom companies?
The new M&A policy is forward-looking and is in sync with market realities in a number of areas. According to it, now a merged entity can have up to 50% market share in a circle and retain up to 25% of the total spectrum assigned. The earlier proposal was to cap the market share at 35% and spectrum holding at 14 MHz. Further, merged companies holding 3G spectrum will be allowed to retain two blocks of the high speed radio waves per circle against one currently. The impact of these changes would be that mergers between big and mid-sized telecom firms can happen now, which has the potential of bringing about the much-desired consolidation in the market.
Does this mean that consolidation will start soon?
Unlikely. A key negative feature far outweighs the positives in the M&A guidelines. The industry has already expressed its unhappiness about it. The payment of additional cost to the government as per the February auction price in addition to the takeover target for 4.4 MHz spectrum will either deter M&A activities or make them costlier. This norm mandates that an acquiring company will need to pay to the government the difference between the entry fee and the auction-determined price for 4.4 MHz spectrum 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 big players like Bharti and Vodafone can merge based on their market share and even retain a higher quantum of spectrum, they would have to pay around R8,300 crore to the government as the differential between the R1,651 crore they paid for 4.4 MHz spectrum in 2001 and the February auction prices. In addition, since these companies have a one-time excess spectrum charge to pay to the government, they would have to pay a bank guarantee for the amount due to the government till the outcome of the case which is currently before the courts. Under these norms, the viable options would be to acquire