A pall of regulatory uncertainty hangs heavy over mergers and acquisitions in India?s booming telecom industry. Thanks to lack of policy clarity, virtually no Indian or foreign telco is in a position to buy any telecommunications company in India. The government is yet to frame a policy based on the various recommendations by the Telecom Regulatory Authority of India (Trai) on M&As and wireless spectrum. There is no clarity on the fundamentals of valuing a telecom company, how much spectrum a merged entity can hold, and whether any transaction charge needs to be paid to the government.
The worst-affected by the impasse would be Reliance Communications (RComm), which is looking to offload 26% equity to a strategic investor. There has been speculation that UAE-based telco Etisalat may pick up a stake in the company; however, a set of regulatory hurdles ensure that no such deal can take place before February-March, 2011 in the most optimistic scenario.
According to Romal Shetty, telecom analyst with KPMG, recent Trai recommendations have made buying large firms tougher. ?There is also a problem buying smaller firms: Their sole attraction is the spectrum they hold, and in the absence of any clarity on how much spectrum a merged entity can hold and what it needs to pay the government, it would be difficult to make any decision regarding buying companies,? he added.
Agrees telecom analyst Mahesh Uppal: ?I would say that M&As can happen in this uncertain environment also, but they would be very unhealthy. They would be speculative in character and not good for the sector.?
So what are these specific hurdles? Let?s take the Reliance Communications-Etisalat ?deal? as an example. Etisalat holds 45% in a Etisalat DB, (earlier known as Swan Telecom) which has failed to roll out services in any circle so far. The policy on cross-holding bars an operator from taking more than 10% equity in another operator in the same circle.
RComm and Etisalat DB have licences in several common circles; so it?s just not possible for the latter to acquire a 26% stake in the former. A merger is allowed, but even this is ruled out in the case of Etisalat DB and Rcomm until next February-March. This is because new players who won telecom licences in January, 2008 ? Etisalat DB is one of them ? are barred from mergers until three years.
This is a specific case. On the macro-front, Trai has set a 14.4 Mhz spectrum cap for merged telecom firms. This means if a Company A with 10 Mhz merges with Company B with 6 Mhz, the merged entity must surrender the additional 1.6 Mhz of spectrum. Further, for spectrum held in excess of 6.2 Mhz, they would have to pay the market price, which is linked to the price discovered in the recent 3G spectrum auctions. This is because the regulator has said that the government is contractually bound to provide spectrum only till 6.2 Mhz. There is a further cost: In all such cases, the merged entity will have to pay a transfer charge to the government, which is 5% of the difference between the transaction price and the total spectrum price.
And that?s not all. Till date, valuations in the telecom space was largely determined by the subscriber base of the company since there was no separate charge for spectrum. By assigning cost to spectrum, a whole new dimension has been added to the valuation aspect.
An empowered group of ministers headed by finance minister Pranab Mukherjee is expected to vet Trai?s recommendations in this regard. The companies would have to wait to seal any deal till its verdict is not out.