Hello Euphony

If you think the recent M&A mania has only hit maverick domestic investors, you are wrong. In the past three months, global (especially Asian) firms have bet big bucks on the sector. Since Malaysia’s Maxis Communications completed a $1.08-billion acquisition of a controlling stake in Aircel last December, others like Europe’s Vodafone, Telekom Malaysia and Singapore Telecom have walked the equity path to either enter India or increase their presence here. Other foreigners are waiting in the queue, raring to ring in new M&A tones. Prashant Singhal of Ernst & Young estimates that the total value of deals in the telecom sector in the 2005-06 fiscal totalled nearly Rs 20,000 crore—the highest in a single year.

For the foreigners, the sudden interest stems from the ongoing India story—both at a macro level and within the telecom segment. Says a Mumbai-based analyst: "The economy is on a roll, there’s political stability and the sector is galloping—a combination not found even in faster-growing economies like China." A Merrill Lynch report states that India’s wireless subscriber base alone will, by March 2008, jump to 200-250 million: a figure that’s higher than the government’s target of an overall (wireless plus landline) base of 250 million by the same year.

It’s possible since India’s current subscriber base of 134 million is increasing by 4.5 million every month. Of this, 95 per cent opt for mobile connections. Teledensity too has jumped from 10 to 12 per cent in just two months. Such statistics make foreigners feel that India may turn out to be the fastest-growing telecom market, and clock consistent growth rates of over 50 per cent in the next 3-5 years. Even hardware manufacturers have realised it. Last year, Korean giants LG and Samsung shifted a portion of their handset-making capacities to India. This month, Nokia, the world’s largest manufacturer, commenced operations in Chennai. Says Kobita Desai, principal analyst (telecom), Gartner group: "Within a year, India is expected to surpass China in terms of net monthly subscriber additions." No global firm can ignore this.

What makes it more difficult for the foreigners to overlook India is the bitter fact that other telecom markets are saturated. Agrees Alok Shende, director (ICT practice), Frost & Sullivan: "These companies are faced with expansion compulsions as their domestic markets are saturated, leaving them little scope of growth. Also, it’s becoming difficult to do business in matured markets. India’s telecom sector, in comparison, is still in the early stages of growth." Singhal says Singapore and Malaysia have seen a flat to stagnant growth, while Korea saw a mild growth. China too witnessed low incremental growth. That leaves just India.

Another factor that adds to the frenzy is that several Indian firms, especially the smaller ones, have no option but to sell out or invite strategic investors to survive. With tariffs coming down dramatically and competition hotting up with each operator bending over backwards to woo customers, only those with deep pockets can ride these topsy-turvy times. And even those with cash won’t mind getting easy funds from foreigners who are keen to bite into the Indian telecom pie.

At the end of the day, it’s a win-win situation for both the buyers and the sellers. To get back on the growth track, foreign firms need to invest in attractive markets. Faced with intense internal competition, Indian operators too require huge capital to improve existing infrastructure and expand services. Explains Mohit Rana, principal (telecom and technology practice), A.T. Kearney: "Except for European firms, others are flush with funds. With Indian companies’ requirement of capex increasing, India is where the investors are looking at."

This logic explains why many deals were for minority stakes like Tata Teleservices’ sale of 9.9 per cent to Temasek Holdings for over $300 million or Bharti’s sale of 10 per cent to Vodafone for over $1.5 billion. The Vodafones can closely monitor the Indian market and, at a later date, decide to commit more investments. The Indian promoters get the money to invest without losing control over their companies. It also turns into a cat-and-mouse game with each one trying to outwit the other or play one bidder against the opponents so as to get the best possible deal.

During such turbulent times, arbitrageurs sense an opportunity to make a fast buck. For, they can easily buy at a lower price at the right time and later sell at a huge profit. This is possibly what Singh and Sivasankaran, who know this game well and have played it successfully in the past, plan to do. For instance, Singh has made money in all the previous telecom deals—he sold his original stake (41 per cent) in Hutch for Rs 560 crore in 1998 and, last year, he sold a small stake of 3.16 per cent for Rs 657 crore. Now, he can do the same with the 8.33 per cent he has picked up for Rs 1,019 crore. Agrees Shende: "With telecom on a high growth curve, it is an investment that can easily fetch high returns."

A few key developments in the past few months have aided all the players. For example, the regulatory environment has changed to attract the foreign investors. Explains Desai, "Some far-reaching changes have happened. First, the unified licence opened up the sector. Then the long-distance market was opened up and now the rationalisation of the ADC (access deficit charge) regime has sent the right signals to overseas carriers." Couple this with the fact the FDI limit in telecom has been increased from 49 to 74 per cent. Adds Desai: "In many countries, the limit is still 49 per cent. And this limit is applicable across the board in India irrespective of the technology the firm is using. In China, one cannot invest like that." Rana points out that, until a year ago, the only foreign investor in India was Hutch. But now, there are quite a few of them. And, more are coming in.

Once this phase of M&As, consolidation and part-shakeout is over, it will be the turn of the Indian firms to look outwards. Singhal predicts that a firm like Bharti has no option but to invest abroad to seek new revenue avenues. Others likeVSNL and Reliance have already made a few global acquisitions. So, the stage is set for the next act of this ongoing telecom drama. One that will either turn Indiantelcos into new MNCs, or see them cashing out to the existing ones like Vodafone, Singapore Telecom and China Telecom.