New Norms to Make Indian Telecom Mergers & Acquisitions Costly

The department of telecom’s decision to maintain a key clause about spectrum pricing in mergers and acquisitions will make such deals costly for both parties and has dampened industry enthusiasm considerably.

In its announcement of guidelines for mergers and acquisitions for Indian telecom companies, the DoT has said that even if a company got its spectrum ‘on the cheap’ under the previous first-come-first-served regime, when that spectrum is now sold, the buyer must pay full market price for it, and that too, to the government.

In other words, if Tata DoCoMo, which is reportedly in takeover talks with Vodafone India, is sold, Vodafone must pay the difference between the ‘cheap’ (Rs 1,650 crore for pan-India) price that Tata paid, and the current market price (about Rs 13,500 crore). Of course, Vodafone can pay a pro-rated price depending on the remaining validity of Tata DoCoMo’s spectrum.

This is likely to be a major disappointment to all companies in the sector. While big companies like Bharti Airtel, Vodafone and Idea Cellular were hoping to buy spectrum and subscribers from others like Tata DoCoMo, Aircel, Videocon Telecom and Uninor, the requirement to deposit the difference between the ‘cheap’ price and the real price is likely to dampen their enthusiasm.

Most of the small players, such as Aircel, are largely attractive due to the 4.4 MHz of pan-India spectrum they hold, rather than for their subscribers.

By maintaining this clause, the government has ensured that big operators like Airtel and Vodafone cannot use mergers and acquisitions as a cheap way of buying spectrum compared to auctions.

In other words, whatever is the price they would pay in an auction would also be exactly the price they would now pay for spectrum acquired in a merger deal as well.

Many companies had an idea that this clause would be retained in the guidelines, and therefore participated in the recently concluded spectrum auction.