M&A

Analysis of M&A in Indian

Telecom Sector

Submitted By
Group 7 Section-B

Harsh Govind Paunikar

Gourav Sarkar
Preetam Kumar Agrawal
Priya Jaiswal
Sankhadeep Saha
Saurav Chandra
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Contents

1. Industry Overview ........................................................................................................................... 2

1.1 Analysis of Telecom Industry ...................................................................................................... 3
2. Motives for Mergers and Acquisition in Telecom Sector................................................................ 3
3. Legal & Regulatory Framework related to M&A in India. ............................................................... 6
4. Deal Structuring .............................................................................................................................. 7
5. M&A Case Study.............................................................................................................................. 7
5.1 Reliance Infotel Broadband......................................................................................................... 7
5.2 Telenor- Unitech Deal ................................................................................................................. 9
5.3 Vodafone-Idea........................................................................................................................... 10
6. Future Impact of M&A on Indian Telecom Sector ........................................................................ 12
7. References .................................................................................................................................... 13
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1. Industry Overview

 India is 2nd largest telecommunication market with approximately 1.18 billion subscribers.1
 India consist of strong telecom infrastructure.
 In terms of ratings, India is ahead of peer countries in West and Asia.
 Major subscribers are Airtel, Vodafone, Idea, BSNL, MTNL and Jio.
 Bharti Airtel is the market leader in the wireless subscription, with approximately 23% share,
followed by Vodafone (17.80% share).

Source- IBEF Telecom Document Link-https://www.ibef.org/download/Telecommunication-July-

2017.pdf Date of Access- 16/08/2017

 The Indian Government has been quite pro-active in its energies to transform India into a
global telecommunication hub. Prudent regulatory support has helped the industry and
customers.
 National Telecom Policy of 2012 has allowed for unified licensing, complete MNP (Mobile
Number Portability) & free roaming throughout country.

1
http://timesofindia.indiatimes.com/business/india-business/telecom-subscriber-base-in-india-grows-to-1-18-
billion-in-feb-trai/articleshow/58443836.cms Date of access- 24/08/2017
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1.1 Analysis of Telecom Industry

To understand the competitive dynamics of the industry, we need to analyse the bargaining power
of suppliers & customers, along with threat of substitutes and new entrants. Below is the Porters’s 5
forces of the telecom industry in India.

Source- IBEF Telecom Document Link- https://www.ibef.org/download/Telecommunication-July-

2017.pdf Date of Access- 16/08/2017

2. Motives for Mergers and Acquisition in Telecom Sector

Indian Telecom sector has witnessed a massive number of mergers and acquisitions in past 10 years.
Reasons for them are as follows-

I. Foreign Players willing to enter India2- India being a big market for telecom has attracted
attention of many foreign players. Due to expectation of growth and profitability in Indian
Telecom Sector, many foreign players entered India. As it is not easy to start afresh because
of spectrum limitation and other entry barrier, the foreign players have used mergers and
acquisitions to expand its footprints in India. Examples- Vodafone acquiring Hutch stake in
India, Japan’s NTT Docomo taking stake in Tata Teleservices.

2
Source- M&A Trends in Indian Telecom Sector by Tanmay Gupta IIM Ahmedabad Link-
http://www.yieldopedia.com/paneladmin/reports/14123057dd51d264e178883afc830107.pdf Date of Access-
16/08/2017
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II. Inorganic Subscriber Growth - Telecom sector in India is quite competitive. It is difficult for
smaller players to compete with biggies. The big players are also keen on acquiring the
customers of smaller players as the market is getting saturated. In past 5 years, growth of
customer is quite slow compared to what is was 5 years ago.Example- Reliance
Communication and Aircel Merger. Below chart illustrate this.

Source- Telecom Regulatory Authority of India

Link- http://www.trai.gov.in/sites/default/files/Telecom%20Sub_Eng_pr.03_09-01-2017_0.pdfDate
of Access- 17/08/2017

III. Decrease Costs- Average Revunue per User (called as ARPU) is one of the lowest in the
world. In this scenario to maintain profitability it is important to cut down cost. Mergers and
Acquisition helps in achieving economies of scale by reducing infrastructure costs,
operational, marketing and HR Costs.

Source- http://www.livemint.com/Industry/n02lQV04A2ui4x37XKVzmL/Its-the-survival-of-
the-biggest-in-Indias-telecom-industry.html Date of Access- 22/08/2017

IV. Limited Spectrum-India is divided into 22 circles. Each circle has limited amount of spectrum
to be allocated to different players in each of 2G, 3G and 4G Technology. So to grow, it is
important to acquire spectrums of other players. Mergers & Acquisitions are an easy tool to
achieve this. Below chart shows spectrum holding of 3G technology in variou circles.
5|Page

Source- https://telecomtalk.info/india-spectrum-data-sheet/134245/ Date of Access-

20/08/2017

V. Rapid change in Technology-Telecom sector has witnessed a rapid change in technology like
2G, 3G and 4G. So, to achieve economies of learning, firms are going for M&A. Indian
Telecom firms are acquiring smaller companies to learn future technology like IOT.
VI. Acquisition of Brand Value-Brand Name play an important role in Indian Telecom Industry.
Smaller firms can benefit a lot by merging with bigger names. Example- RCom- Sistema
Merger, Rcom-Aircel & Airtel-Telenor.
VII. Advent of Reliance Jio3-After Reliance Jio Infocomm Ltd started services in September,
giving a lifetime free voice calls and 3 months of free data (which was later extended till June
next year), M&As had become unavoidable in India’s hyper-competitive telecom industry.
Idea Cellular and Vodafone Group Plc.’s Indian unit said on 21 March they had decided to
merge in a $23-billion deal to create the world’s 2ndlargest and India’s largest telecom
company.Although they played down the Jio factor as a motive for the merger, it’s clear that
India’s No.2 and No.3 telcos had decided that, united, they had a chance of better
contending with Ambani, who has so far invested $20 billion in the network. Market Leader,
Bharti Airtel Ltd also reacted to it. Just 3 days after the declaration of the Idea-Vodafone
merger, Bharti Airtel decided to buy Tikona Digital Networks Pvt. Ltd’s 4G business, including
its broadband wireless access spectrum and 350 cellular sites in 5 telecom circles, for
approximately Rs1,600 crore.

3
Source- http://www.livemint.com/Industry/Y4kRfbFwmZU826um17967N/Telecom-firms-take-merger-route-
to-counter-Reliance-Jio-onsl.html Date of Access- 16/08/2017
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3. Legal & Regulatory Framework related to M&A in India.4

1. National Telecom Policy, 2012 has simplified M&A in Telecom Service Sector while ensuring
adequate competition.
2. 100% FDI is allowed.

Source- IBEF Telecom Document Date of Access- 26/08/2017

Link- https://www.ibef.org/download/Telecommunication-July-2017.pdf

3. The merger of licenses shall be for respective service category. An access service license
allows provision of internet service, the merger of ISP license with services license shall also
be permitted.
4. In a service area, market share of merged entity should be less than 50%. (earlier it as only
35%)if it is more, it has to reduce it below 50% in 1 year.For calculation of market share,
both subscriber base & adjusted gross revenue will be considered.
5. Total spectrum held by merged entity should be less than 50% in a service area. If it is
excess, it has to be surrendered within 1 year.
6. An acquirer will have to pay the differential between the auction-determined market price &
the administrative price for anything beyond 4.4 MHz in the GSM band and 2.5 MHz in
CDMA, if an acquired company has got spectrum after paying administrative price.
7. If due to merger/transfer of license in any service area, any entity becomes a “significant
market power”, then TRAI’s Telecommunication Act of 2002 will come into place. It will take
steps so as to reduce its market power.

4
Source- Ministry of Communication & IT Merger Guidelines, 2014 Link-
http://www.dot.gov.in/sites/default/files/DOC200214_0_0.pdf?download=1 Date of Access- 18/08/2017
7|Page

4. Deal Structuring

1. Post-Closing Organisation- Mostly the merger and acquisitions have followed

corporate/division structure as they are in same line of business. Chances of realization of
operational, managerial and financial synergy are highest in case of corporate structure.
Example- Idea- Spice, Telenor-Unitech, etc.
2. Form of Payment- Form of payment is mostly stock due to acquirer’s bad liquidity condition,
huge debt and risks present in the industry. Example- Upcoming Airtel- Telenor deal,
Reliance-Aircel Merger, Rcom-Sistema etc.
3. Form of acquisition- Form of acquisition has been mixture of asset sale and equity sale. In
case of asset, mostly spectrum is sold.

Source- http://www.livemint.com/Industry/n02lQV04A2ui4x37XKVzmL/Its-the-survival-of-
the-biggest-in-Indias-telecom-industry.html Date of Access- 22/08/2017

4. Managing Risk- There has been provisions for managing risks like earn out agreements due
to various legal risks present in telecom industry. Example- Rcom-Sistema deal5, Upcoming
Vodafone-Idea Deal.

5. M&A Case Study

We will discuss 3 different types of deals (Reliance-Infotel & Telenor-Unitech) that took place in
Indian Telecom sector.

1. Reliance Industries-Infotel Broadband- conglomerate merger between companies in

different line of business.
2. Telenor-Unitech- A cross-border deal
3. Vodafone-Idea- A horizontal merger between arch rivals to counter Reliance Jio.

5.1 Reliance Infotel Broadband

Infotel Broadband Services Private Limited (IBSPL) in 2010

A little-known firm in 2010, promoted by Anant Nahata, was a private company with paid- up capital
of 2.51 Crore, and net worth of Rs. 2.49 Cr and an account balance of 18 Lakhs. Its Promoting
Company IDPL (Infotel Digicom Private Limited) had equity capital of Rs. 6lakhs and Net worth of Rs.
8.55 Lakhs on its balance sheet. In 2010, IBSPL was the only company which won the E-auctions of
4G spectrum conducted by Department of Telecommunication (DoT). It was the only firm to win

5
Source- www.rcom.co.in/Rcom/aboutus/ir/pdf/RCOM_Sistema_Press_Release_02102015.pdfDate of Access-
25/08/2017
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broadband spectrum across 22 circles in India for which it paid Rs. 12, 484 Cr. Bharti Airtel and
Qualcomm won four circles each and Aircel bagged the spectrum across 8 circles.

Reliance Industries,2010

It was Indian conglomerate holding company. It owned business in Petrochemicals, energy, natural
resources and organised retail until 2009. It also was the highest tax payer and contributed to 5% of
Govt. Income from excise duty and customs. It was a flourishing conglomerate, expanding its
business across all businesses.

The Acquisition of Infotel Broadband Private Limited 6

Deal Structure – Mukesh Ambani led, Reliance Industries, bought a stake in Infotel Broadband of
95% for fresh equity of Rs. 4800 crores and would also pay the bid price of Rs. 12484 cr. for Infotel.
Infotel went onto to becoming a subsidiary of Reliance Industries.

Stock Price Effect: The stock price of both HFCL and HFCL Infotel rose to the maximum of Rs. 11.39
and Rs. 10.14. The share price of RIL also increased by 3%, showcasing that the investors value the
deal and has faith in RIL’s decision to enter Telecom business.

Motives:

1. Diversification: Given that Indian Telecom market was all set to be the future, and had loads
of opportunities for a conglomerate like Reliance to enter the market for which it had ample
of money power up its sleeve to take over the market in a short span if time.
2. Market Power: Infotel was the only company who was successful in winning the bid across
22circles in pan-India. This deal would have surely given reliance a first mover advantage in
the Telecom market with higher spectrum

Deal And its Effect:

1. This deal marked the entrance of Reliance Industries limited in the Telecom sector in India,
adding one more feather to its businesses.
2. It was only after the deal that the competitors realised that the BWA spectrum will be used
by Reliance for the mobile services instead of using it for fixed line internet services. Reliance
in a way outsmarted the competitors in the way of seeing what value does the spectrum
holds in the future.
3. A futuristic perspective of Mukesh Ambani, wherein he said, “"We see this as the next wave
of value creation opportunity in the wireless broadband space. We believe this will pole-
vault India's economy into the digital world at an accelerated pace while creating next
generation tools that will enhance productivity and create world-class consumer
experiences."

6
Sources- http://economictimes.indiatimes.com/industry/telecom/reliance-jio-moves-to-merge-infotel-
telecom-with-
itself/articleshow/35958288.cmshttp://economictimes.indiatimes.com/industry/telecom/lenders-may-
recall-rs-1-9-crore-loans-
ttml/articleshow/59977678.cmshttp://economictimes.indiatimes.com/industry/telecom/reliance-
industries-buys-95-stake-in-infotel-broadband-for-rs-4800-cr/articleshow/6037260.cms Date of Access-
28/08/2017
9|Page

4. The company also said that the BWA (Broadband Wireless Access) of 20MHZ spectrum used
with LTE (Long Term Evolution also known as 4G) will provide greater capacity as compared
to the then present infrastructure.
5. In 2012, reliance used and expanded Infotel’s infrastructure to set up its 4G services across
India, which gave Reliance an already established infrastructure rather than to start all over
again for the services it was going to offer in the next 3 years.
6. Later in 2013-2014, Infotel was renamed as Reliance Jio Infocomm Limited(RJIL), a wholly
owned subsidiary of RIL and went on to steer the market with Jio as 4G service provider
across India in 2016.

5.2 Telenor- Unitech Deal7

Deal Type-Acquisition
Target Company-Unitech Wireless
Acquirer- Telenor

Date-February, 2009

Percentage acquisition-

In 2009, Norwegian Telecom major Telenor was in the process of acquiring controllingstake of
67.25% in Unitech wireless via equity infusion. The enterprise valuationof Unitech Wireless was
about Rs 10,900 crore. As per the deal, Telenor will infusecash in four stages and at each phase, by
increasing its stake in UnitechWireless. In the first phase, they got 33.5% ownership in Unitech
Wireless. In the second phase, they completedthe acquisition for a 49 per cent stake inUnitech
Wireless by paying Rs 1,130 crore for a further 15.5 per cent stake inthe company. Telenor has
funded the deal through combination of cash flow & additional debt.The bridge loan of the Indian
arm of Telenor has been raised from SBI amounting to Rs. 5,000 crores.

Due Diligence Phase-

The two sides have been involved in a public spat over several issues involving their joint venture,
notably management and funding.
Also, Telenor took time to arrange funds. The delay has been caused as Telenor was evaluating
alternatives to fund the deal with Unitech. Telenor was expected to raise 12 billion Norwegian
Kronor (about Rs 8,285 crore) through a rights issue, but the market conditions and the lower
valuation do not seem very viable.

A decision on allowing the investment into the company was deferred and a clearance from the FIPB
was mandatory for Unitech for Telenor’s investment in the company to go throughas automatic
foreign investment in the telecom sector is allowed only up to 49% and Telenor had acquired up to
60% stake in Unitech.

Synergies-

7
https://telecomtalk.info/telenor-unitech-deal/4200/
http://mergers-in-india.blogspot.in/2009/03/m-atelenors-unitech-deal-finalised-to.html
10 | P a g e

1. The newly formed company will get both National and International Long-Distance Licenses
(NLD and ILD).
2. The NLD and ILD licenses will enable the telecom operator to provide cost-effective STD and
ISD call services to its mobile subscribers. It will also help the operator to save on traffic
carriage expenses as it will be carrying its own traffic in NLD and ILD segments.
3. The deal will help Unitech Ltd reduce its debt as it will no longer have to guarantee the
loans, which have been given by banks to Unitech Wireless
4. Telenor's Unitech deal finalized; to get 67.25% instead of 60%,so effectively valuing the deal
11 per cent cheaper.

Finally,Telenor has readjusted its stake valuation to get 67.25% stake in Unitech Wireless for Rs 61.2
billion, as against 60 per cent as per the agreement signed in October 2008.

Currently Telenor is going to be acquiredby Airtel due to the consolidation that is happening in the
industry. Telenor will exit India. Airtel will be acquiring it to fight with Reliance Jio.

5.3 Vodafone-Idea

It will be the biggest deal in Indian Telecom sector. It will create India’s largest telecom company.
Legal due diligence is very important in this merger as it will create an entity with huge market
power.

SEBI role:8
As per the plan submitted to SEBI, in the new combined entity, Vodafone will initially hold a
50% stake, while the Aditya Birla Group and public shareholders will hold 21.1% and 28.9%,
respectively. Vodafone will then divest a 4.9% stake to the Aditya Birla Group. This will take
the Aditya Birla Group’s stake from 21.1% to 26%, thus crossing the threshold for an open
offer. The takeover code stipulates that if an entity acquires 25% of a listed firm, it has to
make an open offer for an additional 26% from public shareholders. “Sebi’s concern, which
it expresses in cases like these, is the possibility of such a merger bypassing the takeover
regulations,” said Sandeep Parekh, founder of Finsec Law Advisors.
Under the agreement, Vodafone will own 45.1% of the combined company after
transferring a 4.9% stake to the Aditya Birla Group for Rs 3,900 crore in cash, concurrent
with completion of the merger.
The Aditya Birla Group will then own 26% of the combined company and Idea’s other
shareholders will own the remaining 28.9% stake. Beyond this, it can pick up another 9.5%
stake from Vodafone under an agreed mechanism with a view to equalizing the
shareholdings over time.

Deal structure

8
Source: http://economictimes.indiatimes.com/news/company/corporate-trends/vodafone-idea-mega-
merger-heres-everything-you-need-to-know/articleshow/57746946.cms Access Date- 28/08/2017
11 | P a g e

As per the deal structure, Vodafone and Aditya Birla Group will hold 50 percent and 21.1
percent respectively in the combined entity. Later, Vodafone will transfer 4.9 percent of its
stake at a pre-agreed price of Rs 109 per share to AB Group, bringing its stake down to 45.1
percent.
Additionally, the Birla’s have a call option wherein they can increase stake by 9.5 percent to
reach 35.5 percent at a pre-agreed price of Rs 130 per share over a period of three years
post the closure of the deal.
The Birla’s also have the option of picking up the stake from the market in the fourth year. If
they do not exercise that option of raising their stake, then Vodafone has the option of
reducing its stake to equalise ownership with that of AB Group.

Upside in case of an open offer9

However, if SEBI’s examination of documents leads to an open offer by AB Group under the
takeover code, then “the open offer would be at the price close to Rs 109 per share,” said
SP Tulsian of sptulsian.com.
There are two conditions that trigger an open offer - the acquisition of 25 percent or more
shares of the target company by the acquirer company and the change in the ownership.
Since none of these conditions is getting fulfilled in Vodafone–Idea merger, the probability
of open offer event is low.
Should this happen, the upside is limited to 24 percent for investors from the current share
price of Idea of Rs 88 per share.

Source- http://www.moneycontrol.com/news/business/companies/vodafone-idea-merger-
what-are-the-chances-of-an-open-offer-2326301.html

9
Source- http://www.moneycontrol.com/news/business/companies/vodafone-idea-merger-what-are-the-
chances-of-an-open-offer-2326301.html
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6. Future Impact of M&A on Indian Telecom Sector10

In future 3 to 4 players will exist in the market due to the ongoing consolidations. The positive effect
of M&A on various stakeholders like Customers, Service Providers, Government Regulatorybodies
will be as follows:

Advantage to customer

 QoS (Quality of Service) will become better because there will be better utilization of
spectrum.Also, there will be improved coverage &fewer call drop.
 Price war will exist but in limited space, thus cost paid by the customer should remain low.
 Telecom Firm will offer all roaming services free of cost due to availability of its own
spectrum.

Advantage to Service provider

 Sufficient spectrum will be available for companies.

 Operating cost will decrease and these M&A will remove the duplicity of operation.
 These M&A will bring the diversity for Service Providers. Companies after merger may offer
different service in different geographical areas.
 Sufficient infrastructure will be available.
 It will be become easier for businesses to raise fund either by bank loan or IPO as after
merger Telecom Firms will become larger in size.

Advantage to Government Regulatory Bodies

 Easy monitoring as there will be very few operators

 Sufficient spectrum for auction.
 Easy regulation.

Few Disadvantages of M&A

There are certain probable disadvantages also associated with these M&A in Indian Telecom Market.
 First is hike in service price as operator may create a cartel.
 Second is due to presence of less players, Government has to sellspectrum at low price
which in turn result in revenue loss to Government.
 Thirdly M&A will lead to Job Cut as after merger companies will focus on operational
efficiency and remove the duplicity of operations.

10
Source- Indian Telecom Sector: Pros & Cons of Merger and Acquisition for different
players of Telecom Sector Link- http://www.ijirmf.com/wp-content/uploads/2017/07/201707094.pdf Access
Date- 17/08/2017
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7. References

 IBEF Telecom Document Link- https://www.ibef.org/download/Telecommunication-July-

2017.pdf
 Indian Telecom Sector: Pros & Cons of Merger and Acquisition for different players of
Telecom Sector Link- http://www.ijirmf.com/wp-content/uploads/2017/07/201707094.pdf
 http://www.moneycontrol.com/news/business/companies/vodafone-idea-merger-what-
are-the-chances-of-an-open-offer-2326301.html
 M&A Trends in Indian Telecom Sector by Tanmay Gupta IIM Ahmedabad Link-
http://www.yieldopedia.com/paneladmin/reports/14123057dd51d264e178883afc830107.p
df
 Ministry of Communication & IT Merger Guidelines, 2014 Link-
http://www.dot.gov.in/sites/default/files/DOC200214_0_0.pdf?download=1
 http://www.livemint.com/Industry/Y4kRfbFwmZU826um17967N/Telecom-firms-take-
merger-route-to-counter-Reliance-Jio-onsl.htm
 www.rcom.co.in/Rcom/aboutus/ir/pdf/RCOM_Sistema_Press_Release_02102015.pdf
 http://mergers-in-india.blogspot.in/2009/03/m-atelenors-unitech-deal-finalised-to.html
 https://telecomtalk.info/telenor-unitech-deal/4200/
 http://economictimes.indiatimes.com/industry/telecom/reliance-jio-moves-to-merge-infotel-
telecom-with-itself/articleshow/35958288.cms
 http://economictimes.indiatimes.com/industry/telecom/lenders-may-recall-rs-1-9-crore-loans-
ttml/articleshow/59977678.cms
 http://economictimes.indiatimes.com/industry/telecom/reliance-industries-buys-95-stake-in-infotel-
broadband-for-rs-4800-cr/articleshow/6037260.cms
 http://www.moneycontrol.com/news/business/companies/vodafone-idea-merger-what-
are-the-chances-of-an-open-offer-2326301.htm
 https://www.gizbot.com/telecom/news/top-mergers-acquisitions-indian-telecom-sector-
038300.html
 http://www.livemint.com/Industry/n02lQV04A2ui4x37XKVzmL/Its-the-survival-of-the-
biggest-in-Indias-telecom-industry.html
 Mergers & Acquisition Course Material, IIM Indore

http://shodhganga.inflibnet.ac.in/bitstream/10603/54456/7/07_chapter%201.pdf

https://www.capgemini.com/wp-content/uploads/2017/07/ma_pov_05082014.pdf