Bharti Airtel to acquire Telenor India as Jio threat grows

Bharti Airtel Ltd said on Thursday it will acquire the local unit of Norwegian operator Telenor ASA, in the latest consolidation move in India’s telecom sector triggered by the entry of billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd.

The acquisition will help Bharti strengthen its market leadership position in the wake of growing threat from Reliance Jio and the proposed merger of the second- and third-largest players—Vodafone India Ltd and Idea Cellular Ltd.

Bharti Airtel will acquire Telenor (India) Communications Pvt Ltd’s operations in seven telecom service areas, the two companies said in a statement. The areas are Andhra Pradesh, Bihar, Maharashtra, Gujarat, eastern and western Uttar Pradesh, and Assam.

The companies didn’t disclose the deal size but said Bharti Airtel will take over Telenor’s outstanding spectrum payments and other operational contracts, including tower lease. People familiar the matter said Bharti will not pay any cash to Telenor and estimated the spectrum payments to be around Rs 1,600 crore. Telenor India has borrowings of about Rs 1,500 crore but it could not be immediately ascertained if Bharti will take on this debt.

Analysts at Deutsche Bank estimated that Bharti’s acquisition cost of Telenor India is likely to be around Rs 2,000 crore ($300 million), including $230 million for spectrum payments. Analysts at BNP Paribas said Airtel is acquiring Telenor India at a “seemingly bargain price”.

The acquisition will also bolster Bharti Airtel’s holdings of airwaves with the addition of 43.4 MHz spectrum in the 1800 MHz band.

Gopal Vittal, managing director and CEO for India and South Asia at Bharti Airtel, said the proposed transaction will create substantial long-term value for shareholders given the significant synergies.

The acquisition is subject to regulatory approvals, including from the Department of Telecom and the Competition Commission of India. The companies expect the deal to complete within 12 months.

The merger announcement pushed telecom stocks higher. Bharti Airtel jumped as much as 11% to a one-year high of Rs 400.65 a share before paring gains. Idea climbed 8.5% and Reliance Communications Ltd rose 5.5% on the BSE in morning trade.

Jio’s threat

Bharti Airtel is India’s largest wireless operator with about 269 million subscribers and a revenue market share of 33%. The deal with Telenor will help it add 44 million customers.

While this may stretch its lead over Reliance Jio, which has 100 million users, it may not be enough to take on the combined might of Vodafone and Idea, which together have almost 400 million users.

For now, however, Reliance Jio remains the main threat. The company—controlled by India’s richest man Ambani—has thrown India’s telecom industry into a price war after its launch in September last year. The price war has hurt profit margins and market share of Bharti Airtel, Vodafone and Idea.

Bharti Airtel last month reported a 54% drop in consolidated net profit for the quarter through December. Controlled by billionaire Sunil Mittal, Bharti Airtel is India’s largest telecom operator.

Idea Cellular, part of the billionaire Kumar Mangalam Birla’s diversified Aditya Birla Group, reported its first quarterly loss ever for the October-December period of 2016.

Vodafone Group Plc slipped into the red for the six months through September after it wrote down the value of its Indian business by 5 billion euros ($5.5 billion). Vodafone Group also injected Rs 47,700 crore into its local unit to repay debt, purchase spectrum, expand its network and deploy new technologies.

Earlier this week, Ambani said Jio will start charging customers for data, after offering services free for almost six months until March. But it will still offer its services at highly discounted rates.

Industry consolidation

The Bharti-Telenor deal comes less than a month after Vodafone India and Idea proposed a merger in what would be the biggest consolidation activity in India’s telecom sector.

The Vodafone-Idea deal trumps the merger of the wireless operations of Reliance Communications Ltd, controlled by Mukesh Ambani’s brother Anil, and Aircel Ltd that created India’s fourth-largest telecom operator. Reliance Communications had earlier acquired Sistema Shyam Teleservices.

Reliance Communications and Reliance Jio have also been trading and sharing spectrum assets, which Anil Ambani had labelled as a ‘virtual consolidation’.

In another consolidation move, Tata Group’s telecom arm is now reportedly in talks with Reliance Communications and its partners for a merger.

But the consolidation activity is unlikely to ease competition pressures, say analysts. Brokerage Edelweiss said in a note that it expects competitive intensity to remain high, as new operators continue to aspire for higher market share and would be looking to cut prices, forcing others to follow suit.

In another note, Fitch Ratings said Reliance Jio’s entry is spurring incumbents to consolidate to better meet the intense competition and weaker companies to exit altogether.

“The ongoing consolidation is likely to leave four larger operators—Bharti, Jio, the combination of Vodafone India and Idea Cellular, and the combined Reliance Communications and Aircel… the consolidation is not likely to return any pricing power to the operators in the near term,” Fitch said.

Telenor’s troubles

For Telenor, the deal will help it exit a market where it never managed to establish a strong foothold despite pumping millions of dollars since its entry in 2008 in a tie-up with real estate firm Unitech Ltd.

The Telenor-Unitech joint venture started services in a few areas in December 2009, but received a jolt in February 2012 when India’s Supreme Court cancelled its licences along with those of many other companies after ruling that the permits were granted illegally. Telenor subsequently bought out Unitech and won licences for seven telecom areas.

Telenor India’s revenue was 6 billion Norwegian kroner, or about Rs 4,800 crore, in 2016. This was less than a tenth of Bharti’s revenue. Telenor has accumulated losses of 24 billion Norwegian kroner in India.

“The decision to exit India has not been taken lightly,” said Telenor Group CEO Sigve Brekke. “After thorough consideration, it is our view that the significant investments needed to secure Telenor India’s future business on a standalone basis will not give an acceptable level of return.”

Telenor said the transaction will not trigger any impairment. As of the fourth quarter 2016, the remaining value of tangible and intangible assets in Telenor India amounted to 300 million Norwegian kroner, or about Rs 240 crore.

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