I recently commented on how we should expect fewer takeovers as a result of the Government’s policy that any operator acquiring another must pay the difference between administrative prices paid in the past for spectrum and the latest auction-determined price. Whilst this is likely to be the case, there is another way to look at it.
Let’s recap what the Government regulation in respect to spectrum valuation means. Any operator being taken over will already have a quantum of spectrum that has been allocated to it by the Government. Such spectrum could have been allocated in the era when spectrum was allocated through prices which were determined by the DoT, or through auction subsequently. The era of administratively allocated spectrum licences ended in 2008, the last year when spectrum was allocated through administratively determined prices.
The Government regulation now stipulates that post merger, the merged entity will be entitled to hold only one block of 4.4 MHz of spectrum in the GSM band or 2.5 MHz in the CDMA band for the entry fee the companies have paid prior to auction of spectrum in 2012 onwards. For the remainder of any administratively allocated spectrum, the acquirer should pay the government the differential between the
auctioned-determined spectrum price and administrative-allotted spectrum price, on a pro rata basis for the remaining period of validity of the license.
This regulation seeks to achieve a degree of fairness in spectrum allocation in the market, by ensuring that anybody acquiring spectrum today should do so at rates others have paid, and not benefit unduly from advantages carried over from a previous era when licence allocation had not been undertaken with market demand for spectrum moderating prices. The Government cannot intervene directly to demand all carriers pay up the difference now, since their use of spectrum is already sanctioned through agreement, but in the case of M&A the opportunity arises to stipulate a condition for the transaction.
Given that the recent auctions resulted in an 84% premium paid for 900
MHz spectrum, and 29% premium for 1800 MHz, post M&A top-up payments could be substantial. This regulation may indeed “dampen” interest in M&A as a result, introducing a higher payment burden on the part of the acquirer, and in turn greater valuation pressure and more funding requirements.
But, and this is my point today, that may not be an altogether bad thing. Transactions may be fewer, but they should be higher quality deals which lead to more sustainable outcomes for the parties concerned, attracting more committed investors, who are ready to commit funds, people and expertise for longer-term return, driving more innovation and a more compelling and sustainable customer proposition. Indian telecom has seen a few operators come and go in recent years, and whatever transactions take place in future should be encouraged to be more robust commercially. Fundamentally, the regulation aims to introduce a greater degree of fairness and thus attempts to right past wrongs. This is consistent with how the regulatory authorities have acted in the past few months in general.
(Follow me on Twitter @mtchowdhury for updates on what’s happening in telecoms…plus the odd gripe from my following England and Bangladesh at World T20; I support two teams but still expect to lose)