Bharti Airtel’s Rs 1,600 cr Tikona buy: Smart move to gain pan-India 4G spectrum but challenges remain


New Delhi: So why is Bharti Airtel on a shopping spree? First, India’s largest telecom service provider struck a deal to buy out Norwegian telco Telenor’s Indian operations and now, it has announced a definitive agreement with Tikona Digital Networks to acquire its 4G business, including the Broadband Wireless Access (“BWA”) spectrum and 350 sites, in five telecom circles for Rs 1,600 crore.

Tikona currently has 20 MHz spectrum in the 2300 MHz band in Gujarat, UP (East), UP (West), Rajasthan and Himachal Pradesh circles. Airtel plans to roll-out high speed 4G services on the newly acquired spectrum in the five circles immediately after the closure of the transaction, it said in a statement.

As per the agreement, the acquisition of the 4G business in Gujarat, UP (East), UP (West) and Himachal Pradesh will be undertaken by Airtel, while in the Rajasthan circle, it will be accomplished through Airtel’s subsidiary Bharti Hexacom Limited.

Post-acquisition, the combined spectrum holding of Airtel in these five circles will be within the spectrum caps prescribed by the Government. It is another smart buy by Bharti, since this acquisition will enable Bharti to fill BWA spectrum gaps in the 2300 MHz band in Rajasthan, UP (East) and UP (West), thereby securing a pan India footprint in the band.

Representational image. Reuters

That the future telecom wars will be fought in the fourth generation (4G) airwaves’ space has been quite clear from the day Reliance Jio Infocomm entered the market with its 4G ready network and eye-popping freebies to lure data hungry customers away from incumbent telecom operators. RJio’s USP, besides the pricing, has been its 4G-ready network and the speed with which Indian subscribers have ramped up data usage since Rjio’s entry last September is the stuff of legends.

This rapid transformation of a primarily voice market into a rapidly scaled up data market has forced incumbent telecom operators to bolster their 4G footprint. Now, when in addition to the RJio threat, Bharti is also set to face competition from the merged entity being formed after the merger of Vodafone India and Idea Cellular, it makes sense for the market leader to stock up on 4G spectrum. This is precisely what it has done with the Tikona deal.

Parag Gupta and Amruta Pabalkar of Morgan Stanley (MS) have said in a note to clients that between now and 2020, data subscriber growth will be driven by 3G/4G users. In a series of charts, the two analysts have predicted that 3G/4G subscribers will grow to comprise 80 percent of data subscribers by 2020 from a mere 43 percent now. By 2020, over half a billion Indians among data subscribers will be consuming data on 3G/4G ecosystems.

The two MS analysts have gone on to say that “Currently, there are ~120 million (~10 percent penetration) 4G handsets in the India telecom market and incremental additions are ~10 million per month. On average, 4G data users consume 6-7x more data than do non-4G users. Incrementally, since 2H F16, over 85 percent of the smartphones shipped are 4G in India – a positive for data consumption in the long term. We expect overall wireless data users to reach 678 million in FY20, 80 percent of whom will be 3G/4G users, thus representing ~40 percent penetration, with each user consuming ~1.3GB/month of mobile data by FY20.”

Given the rapid scaling up of the 4G ecosystem, Bharti’s alacrity in acquiring 4G spectrum is welcome. But will all this franctic M&A activity actually help incumbents (Bharti, Vodafone, Idea being the top three telcos affected most by RJio’s entry) fight back? The Morgan Stanley analysts do not hold out much immediate hope on this front for the three biggies.

Their analysis shows that while per GB price across India’s telecom industry was Rs 299 in 2015 and fell to Rs 250 in 2016, by January 2017 it had crashed to Rs 151. Obviously this happened due to RJio’s arrival in September 2016 with data freebies and offering voice free, for life. By January, RJio’s per GB price was a third of this crashed industry average, at just Rs 50. Is it any wonder then that the incumbents are scrambling to staunch the red ink spreading across their balance sheets?

The MS analysts have predicted that Bharti’s market share will fall to 30 percent from FY18 as RJio’s increases, from 12 percent in FY18 to almost a fifth of the market by FY20 (the analysis does not take Bharti’s Tikona buy into account). “Airtel’s F3Q17 (December quarter) India wireless revenues declined 6 percent QoQ, driven by a 13 percent decline in data revenues and a 4 percent decline in voice revenues. The decline in data revenues was driven by a 3.5 percent QoQ decline in volumes (as volumes shifted to RJio) and a 10 percent decline in average revenue per megabyte (ARMB) pricing. Average revenue per minute (ARPM) for voice pricing also declined, ~9 percent QoQ, as a result of higher traffic of incoming minutes. We expect these downward revenue pressures to continue as RJio plans are currently at ~40-60 percent discounts to that of Airtel’s (and other incumbents’) standard plans and hence competitors will likely see volumes shift to RJio or they will have to drop pricing to retain customers/usage.”

So while Bharti is being smart in buying out telecom operators who can bolster its spectrum footprint and get it additional subscribers, the threat from RJio, changing market dynamics towards data and resultant profitability decline has not abated yet.