Scale Matters

Several global telecom companies have begun stepping up their focus in India
following the successful re-entry of Vodafone Plc of UK. Sistema of Russia
entered India after it acquired stakes in Shyam Telelinks. Also, US-based AT&T,
Telecom Malaysia International, and MTN of Africa are other names in talks with
Indian telecom operators for deals and tie-ups. While the international players
are already all set to invest in India, the dawn of 3G in the country will
further boost their interests.

There are other examples of foreign players in negotiation with Indian
operators for strategic partnerships, though a few might not have seen the light
of day. AT&T, which exited from its cellular venture in India by selling 33%
stake in Birla-AT&T-Tata, is said to be in talks with Maxis Communications to
buy 74% of its stake in Aircel. Aircel has grown from a regional cellular
company to a pan-India operator. MTN, after a failed possible deal with Bharti
Airtel, and now Reliance Communications, seems to be caught in the corporate
tussle between the Ambani brothers.

Maintaining a low profile as far as M&As go, in the past couple of year, Idea
Cellular has hit a goldmine after buying out stakes in Spice Communications and
getting TM International as an equity investor.

The renewed interest in India comes at a time when the domestic economy is
facing unprecedented fears of inflation, global economy downturn with rising oil
prices and food crisis, and the current political turmoil in India.

The immense growth in the mobile user base in India, expected to continue
till 2011-12, seems to be the silver lining for global telecom companies
investing in the country. During the last fiscal, the cellular subscriber base
grew by 66% to touch 261 mn from 157 mn in FY 2006-07. The telecom services
revenue rose by 21% to Rs 130,561 crore.

By 2011-12, it is expected that operators would have covered a large part of
the yet untapped rural India, while the top 20 cities from the cellular
operation point of view may face a near-saturation situation. Saturation in
developed nations has forced many global companies to scout for market share in
India.

Scale Matters

When Vodafone landed in India in 2007 with the billion-dollar
Vodafone-Hutchison deal, operators such as Reliance Communications, Bharti
Airtel, Tata Teleservices, Idea Cellular, and BSNL felt the heat (despite its
troubles with partners). With 260 mn subscribers worldwide and an ambition to
buy more assets in Asia and Africa, this UK-based company enjoyed economies of
scale. It even pursued one of the best low-cost ultra handset outsourcing deals
with ZTE to strengthen its presence in emerging markets.

The global scale assisted Vodafone to source telecom infrastructure at highly
competitive rates. In FY 2007-08, the Vodafone group revenue crossed $67 bn, an
increase of 14.1%, with organic growth of 4.2%. Its growth in Europe stagnates
at 2%, while the growth in EMAPA is 45.1%, reflecting acquisitions in India and
Turkey. Vodafone's investment in India, as part of its emerging markets
strategies, made sense for the company. Vodafone Essar grew its revenue by 46.5%
to Rs 15,477 crore in FY 2007-08 from Rs 10,565 crore. Its subscriber base
reached 44 mn from 26 mn, showing 66.9% growth.

Venturing overseas lets operators eliminate risks. If India faces a
recession, operators in India do not have enough capacities to withstand the
pressure from a global operator who has business in India and elsewhere in the
world.

Reliance Communications, Bharti Airtel, Tata Teleservices, Idea Cellular, and
BSNL never had economies of scale as their primary focus had been on India,
though Bharti Airtel, the Tatas, and Reliance Communications have attempted to
pursue acquisition strategies overseas. While Reliance Communications is looking
for mobile licenses in Africa and the Middle East, the Bharti Airtel group,
which is focusing on both the Middle East and Africa for expansions, has
presence in Seychelles, Jersey (Channel Islands), and Sri Lanka. Being a
state-run company, BSNL is not even trying to build telecom assets outside
India.

Though total revenue of BSNL, Bharti Airtel, and Reliance Communications is
at $9.7 bn, $6.8 bn, and $4.8 bn, respectively, these companies do not make it
to the top of the global telecom companies list on financial parameters. On the
subscriber front, however, they are doing well. The telecom subscriber base of
BSNL, Bharti Airtel, and Reliance Communications in the country stood at 72.3 mn,
70.7 mn, and 46 mn, respectively. But global telecom giants are spreading their
wings faster than Indian operators and this may be a cause of concern.

“Business is all about achieving scale. And, expansion is the only option to
achieve scale especially since the world has become small. Some of the Indian
telecom service providers would go to foreign markets to further expand their
base. Thus, if one needs to be competitive and needs to contribute to
shareholders, achieving scale is a must,” Sammy Sana, country president and MD,
Motorola India, says.

“Scale matters a lot in the current scenario. If cellular companies need to
maintain their financial viability, they must go for expansion. A global company
can advertise on a global platform that reaches India as well. This apart, large
scale means huge profitability and better negotiation power with vendors,” said
N Srinath, MD and CEO, Tata Communications, in a recent interview to VOICE&DATA.

Over a period of time, the $5.5 bn Telecom Malaysia group scaled up its
presence in Asia through its operations in Malaysia, Indonesia, Sri Lanka,
Bangladesh, Singapore, Iran, Pakistan, Thailand, and Cambodia, besides India. In
FY 2007, the group revenue grew by 8.8% to $5.5 bn, mobile subscribers touched
40 mn, growing at 39.6%, and broadband users rose by 46.4% to 1.27 mn.

The group, including subsidiaries and associates, has over 44 mn mobile
subscribers in Asia, putting it among the largest mobile telecommunication
providers in the region in terms of turnover. It has approximately 13,000 people
under employment in ten countries.

The MTN Group has spread its wings through acquisition of new operations,
licenses, and strong operational performance. The group has also ensured that
the country in which it intends to plunge has a strong GDP growth. With more
than 61 mn subscribers in 21 countries in Africa and the Middle East, revenue of
MTN grew 42% to $9.5 bn, mainly driven by revenue in South Africa, which rose by
15%, and Nigeria, which increased by 36%.

Global telecom giants' initiatives to ensure large-scale and viable
operations do not stop at trimming down vendors and acquisitions. Branding is a
major focus area like in the case of Vodafone Essar, which changed from Hutch
soon after the deal. MTN has recently completed the re-branding of Investcom to
MTN. Re-branding has helped MTN to further establish the group's leadership
position across its markets.

AT&T, which is the largest telecom company in the world, with revenue of $119
bn, cannot afford to miss the telecom growth in India. In the wireless business,
AT&T has its focus in the US, where it has a wireless subscriber base of more
than 70 mn. It is also the world leader in transport and termination of
wholesale traffic, with customers in more than 200 countries spread across six
continents.

VOICE&DATA research based on ITU data

Tasting Success

The pressure from existing and new operators prompted Idea Cellular to go
for its first deal post the IPO. Through the acquisition of Spice Group's 40.8%
stake in Spice Communications for Rs 2,700 crore, the Aditya Birla Group has
also ensured that it has now a strong partner, Telecom Malaysia, which has
presence across Asia.

Post-acquisition, TM International, which was a strategic partner in Spice,
will have a 15% stake in Idea Cellular.

As part of the deal, Idea and TMI are planning a business co-operation pact
to leverage TMI's presence in ten Asian markets, including neighboring countries
like Sri Lanka and Bangladesh where TMI is a market-leader. Idea will be
utilizing TMI's experience of operating 3G in similar markets. And both the
companies will work together on segments ranging from international traffic to
roaming, mobile VAS, etc.

According to Kumar Mangalam Birla, chairman, Idea Cellular, “This association
marks a major step in Aditya Birla Group's telecom business. Idea will benefit
operationally by leveraging synergies with TMI which will be a significant
shareholder in our company.”

With the success of the deal with Spice, Idea Cellular, which has licenses to
operate in all twenty-two circles with commercial operations in eleven circles,
gains entry in the wireless markets of Punjab and Karnataka, which account for
11% of India's total wireless subscribers.

VOICE&DATA research based on ITU data

Sanjeev Aga, managing director, Idea Cellular says, “The strategic import of
this move travels beyond Punjab and Karnataka. By the end of the year the Idea
yellow will increasingly color the Indian landscape.” With the planned launch of
services in Mumbai, Bihar, and Jharkhand in Q3, and Orissa and Tamil Nadu
(including Chennai) toward the end of the calendar year, Idea's footprint will
soon cover approximately 90% of India's telephony potential.

Try and Re-try

MTN, following its earlier failed attempt to attract Bharti Airtel for a
merger, started looking for a partner in India. Feeling the pressure from
competitors, Reliance Communications, keen to spruce up its presence overseas,
came into picture as a possible partner for MTN within 24 hours of the collapse
of talks with Bharti Airtel.

The merger would have created a company with a market cap of around $70 bn
and presence in twenty-two countries.

Both the companies have a lot of synergies. Both Reliance Communications and
MTN are actively seeking telecom licenses in Africa and other emerging markets.

ARPUs of MTN have declined marginally in most operations, consistent with
increased penetration into lower segments of each market. According to MTN, the
combined size of all operations of the MTN group is estimated to be over 300 mn
subscribers by 2012. It is also focused on accelerating infrastructure roll out
and extracting regional synergies.

However, the ongoing family feud between the Ambani brothers forced MTN to
pull out of merger talks with Anil Ambani controlled Reliance Communications.
With this, Reliance Communications lost a big opportunity to look beyond India.
Mukesh Ambani's tough stand against his brother resulted in a deadlock in
negotiations. Reliance Industries claimed the first right of refusal if Reliance
Communications is looking for a strategic equity partner. RIL moved to
arbitrator to solve the issue. The possible prolonged legal tussle was
unacceptable to MTN.

MTN's talks with Bharti Airtel collapsed as Sunil Mittal never wanted to give
up control of the company. Bharti Airtel, fresh from the failure of
negotiations, will be looking at options to improve its revenue and subscriber
base, and there are indications that MTN may approach the Mittals again to
restart negotiations.

A Second Shot

Once bitten, AT&T is preparing to re-enter India's wireless business. This
time, it is considering buying out Maxis Communications' stake in Aircel.
However, Maxis Communications has denied this and reiterated its commitment to
build Aircel's mobile business in India. Earlier, AT&T had approached the
government when spectrum was available to new USAL licenses. AT&T has already
received national and international long distance licenses in the country.

Adding telecom license in a country like India is important for the $119 bn
company. AT&T's wireless business in the US is nearing saturation. Its voice
business is under competition and pricing pressure, though it is the global
leader. Since too many operators are not available for sale at present, AT&T's
main option would be to buy out a pan-Indian operator like Aircel or go for a
new license.

Aircel has invested close to $2 bn. Its revenue during FY 2007-08 was Rs
2,528 crore on a subscriber base of more than 10 mn in ten circles. The company
has also received spectrum in the remaining twenty-three circles. AT&T's
presence will definitely spice up the Indian telecom market. Enterprise
customers are really looking at a player like AT&T for enterprise applications.

Regulatory Issues

The union government, in the face of elections, should re-look into telecom
policies of the country in order to ensure that it achieves its mobile and
broadband targets. A well defined 3G policy has the potential to bring in more
FDI. Several telecom companies are waiting for a clear policy and timely
spectrum allocation.

Scaling up broadband penetration will improve the top line of operators as
well. This will contribute to growth of the Indian economy, which may be
affected if the present global downturn continues for some more time.

Considering the population, both Asia and Africa hold promises for future
growth. The population and mobile users in Africa stood at 964 mn and 271 mn,
respectively. Asia has a mobile subscriber base of 1,466 mn against a population
of 3,977 mn in 2007. While Europe is already overexploited, operators can tap
into Americas, which has a mobile user base of 653 mn on a population of 910 mn.

Indian operators have already kicked off their initiatives to buy telecom
properties abroad. But they need to step up their efforts as global telecom
companies are eyeing the Indian presence, giving tough competition in their home
turf.

Baburajan K

baburajank@cybermedia.co.in