3G auctions slated on April 9

DoT to issue NIA for prospective bidders on Thrusday

Bhaskar

New Delhi: The government has announced to hold the 3G spectrum auctions on April 9. The Notice Inviting Applications from prospective bidders will be issued tomorrow. The last date for receiving applications from bidders is on March 19. The government will hold mock auctions on April 5 and 6. Two days after the 3G auctions are held, the government will start the auction for Broadband Wireless Access (BWA) or WiMax spectrum.

© Time

Twice-failed Econet little threat to Bharti-Zain deal

Sixth time name change due for Zain Celtel Nigeria BV unit

Bhaskar Hazarika & Sanjeev Sharma

The effort by Bharti Airtel to acquire the Africa business of Zain for $10.7 billion is unlikely to be stalled by efforts of Econet Wireless, a five per cent stakeholder in Zain Celtel Nigeria BV — if history is an indication.

Econet has raised objections to the deal, saying that under the agreement with Celtel (now Zain) it has the right of first refusal. A spokesman for Econet Matt Ridsdale confirmed that the company had objected to the deal between Bharti and Zain. But this is not the first time that Econet has raised objections on sale to a third party — without success.

Bharti and Zain are in exclusive talk till March 25 to forge a deal whereby the Indian telecom major will pick up the African assets of the Kuwait-based company.

In 2003 when Vodacom of South Africa acquired the Nigerian unit, Econet raised objections. But Vodacom was able to acquire the unit. In 2006, Celtel a subsidiary of Zain picked up 65 per cent stake in the company. Once again, Econet moved the court. Again it was unable to stall the deal.

In a statement Econet said it was pursuing arbitration proceedings against Celtel and others to challenge the transaction by which Celtel attempted to purchase a majority stake in Vee Networks (now Zain Nigeria).

“Under the terms of the original shareholders agreement, Econet had the right of first refusal over the stake, a right which was denied in 2006. In those proceedings Econet made an application for interim measures to prohibit Celtel (now Zain), from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until such time as the Arbitral Tribunal has published its final award,” the statement said adding that it was in response to this application that Celtel had provided certain undertakings to preserve the status quo. And these undertakings should be applicable in the case of Bharti’s move to acquire Zain Africa, it said.

The history of telecom in Nigeria is a convoluted thread. Zain’s Nigeria unit was set up as Econet Wireless Nigeria in 2001, named after the South African holding company Econet Wireless International.

In 2003 Vodacom of South Africa entered into talks to buy the company. Econet declined the takeover offer. Despite Econet’s objection, in 2004 Econet Wireless Nigeria was renamed Vee Networks and branded Vodacom. Econet moved the court against the move.

Within less than two months, Vodacom pulled out of the contract. The Nigerian ministry of finance took over the management control of the company and it was branded V-Mobile. In May 2006, Celtel International, a subsidiary of MTC Group (now Zain) reached an agreement with Nigeria to acquire 65 per cent in V-Mobile for $1.005 billion. In September 2007, MTC Group, re-branded the unit to Zain and by August 2008 it had done so for all Celtel operations in Africa.

Econet had started legal proceedings against Vee Networks shareholders and Celtel seeking to declare the sale as void. The case is pending in the court.

If the proposed Bharti-Zain deal goes through, the Nigeria unit will be re-branded for the sixth time.

© Financial Chronicle

Telecom babus have no official mail IDs

WPC employees do more paper work as they do not have official email IDs

Bhaskar Hazarika

New Delhi: India might move to the faster wireless broadband once the government decides to auction the WiMax and 3G spectrum, but the employees of Wirless Planning and Coordination (WPC), wing under the ministry of Communications and IT responsible for spectrum management, are yet to be connected with an official email address.

An official in the ministry of communications and IT told Financial Chronicle that apart from the Wireless advisor and five to six deputy wireless advisors, the majority workforce of 500 people does not own an official email address. “When the country is moving to the next generation technology and we are talking about broadband wireless access spectrum and high speed data on 3G, the authority responsible for frequency management does not have access to email. The employee grade above only the deputy wireless advisor has access to an official email,” he said.The government is planning to conduct the auctions for the 3G and WiMax spectrum by the end of this year.

WPC is the national radio regulatory authority responsible for frequency spectrum management, including licensing and caters to the needs of all wireless users in the country. The government before allocation of spectrum consults WPC on spectrum issues. On the recommendations of WPC, spectrum is allotted to operators depending upon the availability. The Department of Telecom has also allotted official email addresses to officials only above the rank of assistant advisor and assistant director. With India moving ahead to implement next generation technologies, the authority is yet to implement it in their respective departments. “For the government employees email is treated as a perk and not a facility. You are allotted email addresses after an official is promoted to a certain level,” said the communications ministry official.

But other government ministries such as finance and petroleum have allotted official email addresses to employees. An official in the finance ministry said, “Employees are allotted official email addresses but most of them prefer to use their personal emails. We have access to official email.”

© Financial Chronicle

Zain deal could generate free cash flow of $11 billion for Bharti

Analysts suggest Zain deal high priced

Sanjeev Sharma & Bhaskar Hazarika

New Delhi: Telecom major Bharti Airtel’s $10.7 billion proposed transaction to buyout Kuwait-based telecom company Zain’s African assets could generate free cash flow of $11 billion in five years. Morgan Stanley report states, “The consolidated entity would address 1.5 billion population with over 164 million subscribers, with Ebitda 26 per cent higher than Bharti standalone, growing at 11 per cent per year (financial year 2010-2012E).

Analysts say that Bharti would be able to de-leverage itself in a couple of years. The report says the consolidated entity’s cash flows would be $13 billion in five years.

Bharti in an official statement said, “The total agreed enterprise valuation of $10.7 billion is likely to result in a total payout of around $9.00 billion (which includes any loans payable by the operating companies to Zain Group) based on the estimated net debt of approximately $1.7 billion as on December 31, 2009. It has been agreed that a sum of $ 700 million out of the total payable amount would be paid after one year from closing.”

Just after Bharti and Zain announced payment milestones, Econet Wireless, which holds 5 per cent stake in Zain’s Celtel Nigeria BV unit, has clearly opposed the deal, citing first right of refusal over the Nigeria operations. Official statement from Econet said, “It is currently pursuing arbitration proceedings against Celtel (now Zain) and others to challenge the transaction. Under the terms of the original VNL shareholders agreement, Econet had a right of first refusal over the stake, a right, which was denied in 2006. Econet made an application for interim measures to prohibit Celtel (now Zain), from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until such time as the Arbitral Tribunal has published its final award.”

According to Macquarie report, “The valuations look very expensive, in our view, even assuming no debt is being acquired by Bharti. This is a loss-making business at the PAT level, even while it makes an Ebitda margin of 31.4 per cent with average blended ARPU of $6.2. Bharti may be banking on significant improvements in capital expenditure efficiencies and better financing terms for this business, but quick comparisons with MTN suggest that this business is significantly inferior in terms of profitability, operating metrics and growth outlook.”

Bharti stock has fallen almost 14 per cent in the last two days.

Talking about regulatory hurdles Morgan Stanley states, “We suspect some licenses in Africa will face change of control reviews, but we do not see this as a major stumbling block for a potential deal. We are waiting on clarity on the Kuwait Investment Authority – a 24 per cent shareholder – position on the deal though in the past it has been supportive of such a transaction.”


© Financial Chronicle

Analysis: Incumbents operators fight back competition

If government auctions spectrum beyond 4.4 MHz, it will seriously dent DoCoMo

Bhaskar Hazarika & Sanjeev Sharma

New Delhi, February 14: After the bearing the burnt in the in the third quarter revenues, incumbent operators have started to fight back the competition from new entrants.

The entry of new players in to the telecom space, saw introduction of aggressive tariff plans from in the third quarter 2009, forcing incumbents to introduce per second billing plan. Citigroup report states, “Tata DoCoMo in its five initial circles has captured 100-280 basis points revenue share since launch. Even Mumbai & Maharashtra, launched in August, has witnessed an improvement. However given incumbents have now replicated DoCoMo’s offering, this success may not be easy to replicate going forward. If Department of Telecom decides to auction spectrum beyond 4.4 MHz, it will seriously dent DoCoMo’s ability to launch full-fledged in the rural areas.”

The report states that, while new launches have gained revenue share at the expense of incumbents, who were initially reluctant to cut tariffs, all of them have now matched the lower tariffs of the new competitors. Operators such as Vodafone and Idea, who had been more proactive, at least in their new launches, have shown healthy growth, while Bharti, which cut tariffs only in November, witnessed a quarter-on-quarter revenue decline.

Managing director, Tata Teleservices, Anil Sardana said, “If you see our revenues it is increasing. On the pressure on margins for the industry innovation is the step ahead.”

Analysts state that with the overall industry revenues grew marginally (0.6 per cent) in third quarter, Bharti’s revenues declined by 2.1 per cent quarter-on-quarter (1.7 per cent in second quarter), bearing the brunt of the heightened competition with 40-480 basis points revenue share loss in 14 of the total 22 circles. The bulk of the loss occurred in DoCoMo’s five initial launched circles, which contributed ~60 per cent to Bharti’s quarter-on-quarter revenue decline. Citigroup report states Bharti however should regain some lost ground in fourth quarter, given its new tariffs were launched only in November.

“Idea and Vodafone managed to reverse the declining trend with 5.5 per cent and 2.6 per cent revenue growth. While new launches explain the bulk of the growth, they also managed to recapture some revenue share in their core incumbent circles (such as Vodafone in Gujarat, Idea in Kerala and Gujarat). Meanwhile Aircel’s revenue growth at 10.5 per cent was highest amongst all operators. Rcom’s revenue was at 1.7 per cent.

© Time

Zain board approves Bharti's bid for Africa

Bharti eyes high-growth markets to beat competition at home

Bhaskar Hazarika & Sanjeev Sharma

New Delhi, February 14: Kuwait-based Zain telecom could be the second major overseas expansion plan for the largest Indian telco, Bharti Airtel after it failed to ink the deal with South African telecom operator MTN. Zain board on Sunday unanimously accepted the bid from Bharti Airtel to buy Zain's African assets.

Kuwait Investment Authority (KIA), which has a 24.6 percent stake in Zain has put its stake on the block. Bharti has offered a bid of $10.7 billion to buy a stake in the company for its African assets excluding except for Sudan and Morocco.

When contacted Bharti Airtel spokesperson declined to comment. An email sent across to Zain failed to elicit any response.

Director telecom, KPMG, Romal Shetty said that Africa is one of the lucrative markets for operators. "In the next 3 to 4 years India will continue to be the most difficult market with 12 to 13 operators. For Bharti getting in Africa market, it could be the right time. As the company has pioneered the low cost concept, it can replicate the India success in Africa," Shetty said. He said that the compared to India the ARPUs in African market is around Rs 480 to Rs 500 ($8-10) compared to India, where ARPUs stand at sub- Rs 200.

According to Citigroup report, net debt for Bharti reduced by Rs 23 billion to Rs19 billion during the third quarter. "Overall net debt is down Rs 50 billion this fiscal, indicating strong free cash flow generation with lowering capital expenditure intensity. In the third quarter capital expenditure stood at Rs 17 billion," the report stated.

Managing director, Taurus mutual fund, RK Gupta said, "Costumer growth in India will be become stagnant in 3-4 years and Bharti has to look out for growth beyond Indian geography. African is an unexplored territory where growth can happen, compared to other geographies such as South East Asia, Europe where growth has declined. In case of Bharti, picking up a stake in Zain will add to the subscriber numbers and will boost the revenue. Only major area of growth in India is adoption of 3G."

An investment banker close to the development in condition of anonymity told Financial Chronicle, "Bharti had earlier said that it would continue to pursue international expansion. The company had clearly mentioned that Africa remains to be an important geography for expansion. Zain will offer Bharti access to one of the growth markets globally, with only three operators. This would also help Bharti to beat the pressure on their margins, which has witnessed a decline."

In December Bharti has picked up 70 per cent stake in Bangladesh telecom operator, Warid Telecom with an initial investment of $ 300 million.

Zain is the third-largest telecom operator in the Arab world. Last year a consortium n October halted talks to sell the African assets to appease potential buyers of a 46-percent stake in the parent company, Zain Group.

In October 2009, Indian telecom PSUs BSNL and MTNL joined the consortium with an Indian firm, Vavasi expressing their keenness to take a majority stake in a joint special purpose vehicle (SPV) to buy 46 per cent in Zain, along with Malaysian billionaire Al Bukhary.

Bard al-Khorafi, whose Khorafi Group holds 20 per cent in Zain, announced in September that they, along with other shareholders, were selling 46 per cent of Zain to a consortium made of Malaysia’s al-Bukhari Group, BSNL, MTNL and the Indian group called Vavasi.


© Time

TRAI gears up for 2G allocation policy

Regulator set up a spectrum cell to look at 2G and 3G allocation policy and pricing

Bhaskar Hazarika

New Delhi, February 15: Auctions for third-generation (3G) spectrum may have delayed, but there could be hope for telcos waiting for allotment of 2G spectrum. Telecom Regulatory Authority of India (TRAI) is readying itself prior to the allocation of 3G and 2G spectrum by setting up a spectrum cell. The spectrum cell would facilitate recommendations for both 2G and 3G allocation policy.

Department of Telecom (DoT) had received 232 applications for Unified Access Service License (UASL) till September 25, 2007. Of the total 122 applicants have been Letters of Intent (LoI). Apart from existing telecom companies seeking for additional spectrum, new operators such as Sistema Shyam, Uninor and S Tel are in the queue to receive fresh spectrum in some of the selected circles.

This move comes after the regulator received mixed response from the telcos on allocation of additional 2G spectrum. The regulator is yet to take a call on auctioning of 2G spectrum.

A senior official from the ministry of communications and IT told Financial Chronicle that the spectrum cell would include experts dealing with spectrum allocation and auctions. “At present the spectrum cell has two people, one from TRAI and the other from Wireless Planning and Coordination (WPC). Additional number of experts are likely to join the cell, which will look at different aspects of spectrum allocation and pricing,” the official said.

He said that the spectrum cell has been created with the objective to look at the minute details on the auction of additional 2G spectrum. “There have been mixed views on the auction of 2G spectrum. The regulator is yet to decide if 2G spectrum should be auctioned to telcos, up and above the start up spectrum of 4.4 MHz or above 6.2 MHz. Also there have been discussions on the pricing of 2G, the expert committee will take a call on formulating the recommendations. It would also look in to sharing and trading of spectrum, cap on the number of service providers in a circle and merger and acquisition,” the official added.

The operators have been demanding early allocation of 2G spectrum, prior to the start of 3G auctions, which is scheduled to take place in September 2010. Telecom regulator is working to come up with a consultation paper on allocation of additional 2G spectrum.

WPC, wing under the Ministry of Communications and IT, is responsible for spectrum management. In a recent move WPC has written to the ministry for hiring experts for managing the 3G spectrum and WiMax auction processes. With 3G and WiMax spectrum auctions round the corner, WPC has sought for additional manpower to manage the auctions. With this initiative from the regulator in setting up the spectrum cell, it is unlikely that the government would grant additional manpower to WPC.

© Financial Chronicle

Telcos EBITDA margins to fall further by 5 to 10 per cent: Analyst

Outlook grim as tariff war rages, 3G delayed

Bhaskar Hazarika


Competitive pricing is likely to result in muted top line growth for telecom operators over the next four to six quarters. With per-second billing being launched by telcos, analysts foresee a further decline in average revenue per minute (ARPM), which has been a constant challenge for the industry. Analysts estimate that the revenues of telcos are likely to be stagnant and the earnings before income tax depreciation and amortisation (Ebitda) margins would fall further by 5 to 10 per cent.

According to a Fitch Ratings report, incumbent operators with stronger balance sheets and comfortable liquidity profiles would be stable, while the outlook for new entrants and public sector telecom operators is negative. “The revision in the outlook from 2009 is primarily due to stiff competition and a faster-than-expected decline in tariffs, which has had an impact on revenue and profitability. However, the credit profiles of all operators are subject to the event risk of 3G and broadband wireless access (BWA) auctions,” the report says.

3G auctions and the implementation of mobile number portability (MNP) will be key themes in 2010.

Entry of new players in the telecom space saw the introduction of aggressive tariff plans from September 2009, forcing incumbents to introduce per-second billing plan. Analysts expect competitive pressure to continue in 2010, impacting revenue growth and putting pressure on Ebitda margins.

Director of telecom of KPMG Romal Shetty said 2010 would be one of the more difficult years for telecom operators and a positive year for customers. He said that there would be further correction in tariffs that are likely to come down further.

“Ebitda margins will go down by 5 to 10 per cent. Revenues for operators may remain stagnant. In the short term, it will be a difficult market but there is huge growth potential in the long term. Tariffs of high-end services such as international roaming, value- added services and data services are likely to come down further,” he said.

He said this year, some consolidation in this sector is likely. However, the mergers and acquisitions would be purely based on spectrum acquisition. “Due to the delay in the auction of 3G spectrum, some consolidation is likely to happen. We could see telecom biggies looking at smaller players for mergers. Thirteen telecom operators is a large number. Ideally, it should be six to eight operators,” Shetty said.

The increase in voice minutes is not proportionate to the decline in tariffs, putting margins under pressure. Shetty said that to combat falling Ebitda margins, operators would soon look at a change in the revenue contribution from voice and data segments. He said that once data revenues increase to 20 to 25 per cent, the revenues would start showing positive overall growth.

Principal analyst of Gartner Kamlesh Bhatia said, “Hyper competition on tariffs would have a pressure on both top line, as well as bottom line for operators. We see this is a difficult year for the telcos because tariffs have already reached the bottom, but there could be some corrections. Declining tariffs are eroding the margins of telcos and operators are going to have a competitive year ahead.”

Executive vice-president of Telenor group and head of Asia region Sigve Brekke said that going forward, if low tariffs are to continue, margins for operators would be under pressure. “It has always been a challenge for operators as the average revenue per user (ARPU) have been witnessing a steady decline. Operators offer low tariffs and are successful in increasing the minutes of usage, as such the pressure on margins could be rectified. However, the industry is likely to see such fluctuations in the future before the sector witnesses any consolidation,” Brekke said.

Price-led competition intensified in the third quarter 2009-10, with major operators cutting tariffs aggressively during the quarter (switching to per- second billing from the previous per-minute system). Consequently, ARPM declined at a faster pace of 5 per cent 6 per cent quarter-on-quarter in 2009. Voice ARPM declined from Rs 0.75-0.85 in the first quarter of financial year 2008 to Rs 0.45-0.55 in second quarter of financial year 2010. Fitch expects ARPM to continue to decline in 2010 due to the addition of mainly lower-end incremental subscribers and expected further pricing pressures due to the entry of new greenfield operators. However, the rate of decline will be lower than in 2009 due to growing data revenues.

Fitch states that capital expenditure, as a percentage of revenue remained high in financial year 2009-10 for private telcos (an average of 55 per cent), on the back of increased network coverage in smaller cities.

Capital expenditure for financial year 2010 is expected to be lower, however for financial year 2011, it will be higher for the 3G licence auction winners, assuming the 3G licence fees and its subsequent rollout in financial year 2011 is implemented. The free cash flow (FCF) of major private telcos has remained negative since inception due to higher capital expenditure and financing costs, and this trend is likely to continue, except for Bharti Airtel, which is expected to generate mildly positive FCF in financial year 2010 and financial year 2011, excluding the 3G licensing outlays.

According to a Macquarie report, the ongoing tariff war is likely to cap any meaningful re-rating of Indian telecom stocks in the next six to nine months. “Recent tariff actions are likely to result in muted top line growth for next four to six quarters for the Indian wireless operators. In addition to the slowdown in top line, intense competition leaves little cost cushion — hurting the margins of these players,” the report said.

However, mobile number portability is considered only a modest risk, and revenue from 3G services is not likely to be significant in 2010.

This is due to the fact that the Indian wireless market is already predominantly pre-paid and has a high annual churn rate of 40 to 48 per cent. Increased retention costs would mainly relate to the post-paid segment, which only accounts for around 5 per cent of overall subscribers in India.


© Financial Chronicle

Every second mobile sold is a dual-SIM handset

Micromax beats Motorola, Sony Ericsson, LG, reaches third slot

Bhaskar Hazarika & Sanjeev Sharma

New Delhi: Every second mobile sold in the Indian market is a dual-SIM handset. Around 50 per cent of the mobiles sold in the Indian market are in the dual-SIM card handset category.

The handset market in India is attracting a large number of new vendors, taking the number of vendors from 8 to 56.

Citigroup report states, “The total number of new handset sold in India are about 9-10 million per month and multi-SIM subscribers to be 40-50 per cent of reported addition.” The report states that Nokia is leading the market, followed by Samsung and Micromax.

Incumbent handset vendors such as LG and Sony Ericsson are in the league.

According to market estimates Nokia has a market share of around 58 per cent, Samsung at 13 per cent and Micromax at 10 per cent. The mobile handset market is pegged at Rs 35,000 crore in 2010 and with the availability of entry-level cheap phones in the market, the market is likely to escalade.

Business director of Micromax Mobile, Vikas Jain told Financial Chronicle that in January the company sold 1 million handsets and the numbers are increasing. “We are clearly the third largest handset vendor in the market today. In January we sold 1 million handsets and within this fiscal ending March we are planning to sell around 11 million units. If we look at the consumer buying pattern 40 per cent of our customers are first time users and 60 per cent are upgrades,” Jain said.

At present the around new entrants have a market share of more than 15 per cent. The new entrants into this space include Micromax, Lava Mobiles, Karbonn, Mobell, Videocon, Movil and also some know brands such as Usha, Salora, Onida and Orpat.

The Indian handset industry shipped around 130 million units in 2009 and the numbers are likely to escalate to 150 million in 2010.

With Indian telecom industry adding between 15 to 17 million subscribers every month, analysts see space for new players in the market. Analysts say that these new entrants forecast huge competition primarily in the tier two and three markets. From the average price of a handset from Rs 5500 it has come down to Rs 2300, encouraging customers to switch to new handsets. Usually a lifeline of a mobile handset is estimated to be around 18 months.

© Financial Chronicle