Price war to infect post-paid and international roaming charges

S Tel and Uninor garner substantial subscriber addition in January

Bhaskar Hazarika & Sanjeev Sharma

New Delhi: The price war sparked by new entrants like S Tel and Uninor in prepaid rates, that has helped them garner a substantial number of subscribers, may now be looming on the postpaid rates, corporate connections, wireless data, international roaming and SMS.

According to analysts, competitive pricing is likely to spread. The director for telecom at KPMG, Romal Shetty, said that the short term would be difficult for the operators but positive growth was possible in the long term.

"We will next see a fall in tariffs of other services such as international roaming, data services and postpaid," Shetty said. In January mobile operators added 19.9 million subscribers. Vodafone added 2.74 million, Bharti Airtel 2.85 million and Tata Teleservices 2.98 mil- lion.

On the other hand, S Tel added 3,64,000 in three circles and Uninor 1.33 million in eight circles.

According to a Macquire equities re- search report, "A further ramp-up and rollout of services by greenfield entrants will likely lead to a further cut in prepaid rates. The report says that as greenfield op- erators Uninor and S Tel ramp up their GSM services, competition will intensify, hurting the revenue market share and profitability of older GSM operators.

Industry net additions, says the report, reached 13.9 million, helped by a ramp-up by the newcomers, with Uninor capturing 33 per cent of the net additions in its eight circles and S Tel cornering 20 per cent in January.

Uninor's executive vice- president of corporate af- fairs, Rajiv Bawa, said that in a market this competitive, there was bound to be price competition in all telecom products. "But our view also is that a differentiation based only on pricing is always shortlived. It will last only as long as the next lower offer. A long- term dif- ferentiation has to be based on much more  better cus- tomisation of the product for distinct consumer needs and an overall focus on quality of service," he said.

"For Uninor, it is much more than how many paise are raised every second," he added.

Commenting on the pressure of margins on oper- ators, Bawa said, "Some op- erators look at subscriber additions at any cost. Others look at a low-margin, high- volume play. Then some others seek to deliver the lowest costs, but to a certain kind of customer. Irrespec- tive of the approach, howev- er, it is clear that the tele- com sector requires a long- term commitment and long- term business ambition.And the model must make for a sound business case."

The CDMA operators lobby, Association of Unified Service Providers of India's secretary-general, S C Khanna, said the market was under pricing pres- sures. "However, we do not see further cuts, but there will be competitive offers and packages for cus- tomers," he said.

The chief corporate officer of Idea Cellular, Rajat Mukarji, said, "We are in a hyper competitive market. But this is not sustainable in the long term for new opera- tors, as they do not have the coverage others have. Serv- ices such as wireless data are niche segments not mass subscriber services. It is difficult to forecast if the competitive pricing will enter these segments."

The CEO of S Tel, Shamik Das, was not avail- able for comment. Bharti Airtel and Vodafone did not respond to the calls made by Financial Chronicle.

© Financial Chronicle

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

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

Bangla Regulator sees no issues with Bharti bid

New Delhi, Dec 18 2009

Bhaskar Hazarika

The Bangladesh Telecommunication Regulatory Commission sees no legal barrier to Bharti Airtel picking up 70 per cent in Warid Telecom.

The commission secretary, Mahboob Ahmed, in an email communication to Financial Chronicle said, “According to the provisions of the Bangladesh Telecommunication Act, there is no legal bar on transferring shares of the company with the prior permission from the commission.”

Bharti has reportedly made a $300 million bid for a 70 per cent stake in Bangladesh’s Warid Telecom. This is the Indian company’s second bid to buy up a foreign telecom operator, after a failed attempt for a merger deal with South Africa’s MTN. Over four months of ‘exclusive talks’ and two extensions, the proposed $24 billion Bharti-MTN deal foundered on regulatory hurdles.

The Bangladesh regulator has sought details from Warid on the proposed stake sale to Bharti. The regulator is also likely to meet Bharti and Warid officials.

“We have asked for some information and documents relating to the sale. The commission will examine these will take a decision. The commission is expecting a meeting with Warid and Bharti officials as early as possible,” Ahmed said.

The commission’s move comes after the Dhabi group, which fully owns Warid, sought approval for going ahead with the deal.

A Bharti spokesperson said on Wednesday, “We have nothing more to comment on it.”

In 2008 Japan’s NTT DoCoMo paid $350 million to pick up 30 per cent in another Bangladesh operator, AKTEL, majority owned by Axiata of Malaysia.

Warid is the fourth largest among Bangladesh’s six telecom operators with 2.79 million subscribers at the end of October, when the total mobile subscriber base in the country was 51.4 million. The largest operator is the Grameen Phone with 22.30 million subscribers, followed by Orascom Telecom (12.27 million) and Axiata (10.99 million). The other two operators are PBTL and Teletalk.

© Financial Chronicle

Mobile customers shying away from post-paid

Only 3 per cent of the subscriber base is in post-paid

Bhaskar Hazarika

New Delhi, Dec 16 2009

India is set to cross 500-million mobile phone users by the end of the year. But just about 3 per cent are still logged onto the post-paid story. This means a mere 15 million consumers actually pay regularly on a monthly basis for their connection. The rest, a staggering 485 million, are literally free birds who charge their phones with denominations they deem fit.

This explains the steep fall during the past five years in postpaid connections. The prepaid subscriber base has grown from 84 per cent five years ago to more than 97 per cent today. Majority of the 15 million existing postpaid connections fall in a particular socio-economic category that pre-supposes a mid to high-income level segment.

The 15 million figure is an interesting pointer to the actual size of the Indian middle income groups, especially viewed in context of the fact that India as of today has close to 35 million income tax payers (as on March 31, 2009), 10.2 million Demat account holders and 12 million registered passenger vehicles.

The shift from post-paid to prepaid has an explanation. T R Dua, director general of Cellular Operators Association of India, in an email communication, told Financial Chronicle, “There has been an increase in prepaid subscriber base as the service providers are increasingly expanding to the rural areas and are acquiring more and more subscribers from the bottom of the pyramid.”

He predicted the migration trend to continue arguing, “Prepaid would continue to be the preferred choice, as it is economical and enables the rural subscribers to control their costs. Prepaid also enables service providers to reduce their bad debts.” Easy availability and accessibility of prepaid mobile cards was also encouraging migration from the postpaid model to prepaid.

An analysis of the latest subscriber data suggests that the decline in the postpaid subscriber base is also evident from the fact that more and more new subscriber additions are in the prepaid segment.

Telecom operator Bharti Airtel has a prepaid customer base of 95.2 per cent as on quarter ended September 2009. The prepaid subscriber base for the company increased from 92.9 per cent in September 2008. At Reliance Communications, for the quarter ended September 2009 the prepaid subscriber base stood at 94.4 per cent. For that quarter the net subscriber additions in the prepaid was 99.2 per cent.

“In the past five years, the telecom subscriber pattern has witnessed a paradigm shift from postpaid to prepaid regime due to the competitive tariffs and innovative offers by operators, making universal rates for prepaid and postpaid,” director (telecom) of KPMG, Romal Shetty said. He added that the Indian telecom market, which started with a dominant postpaid subscriber base, is eventually witnessing the phenomenal growth of the prepaid category.

“Earlier prepaid call rates were higher compared with postpaid. However, as the market is maturing, the call rates have gone cheaper making it equivalent to post paid. There are three major reasons why the prepaid model is picking up in India-- quick availability, easy documentation and fast activation of service. At present, only a small per cent of the corporate employees are on the postpaid platform,” Shetty said.

©Financial Chronicle