Bharti Airtel will be open to acquisition talks with Aircel, chairman Sunil Mittal said, indicating the possibility of an eighth buyout for the market leader since 2012, which includes spectrum trading deals as well. Speaking to Romit Guha and Gulveen Aulakh, Mittal said that Reliance Jio’s entry with prolonged free offers has led to unexpectedly rapid consolidation. This has benefited Airtel, which has seen its revenue market share grow, and it could well be the No 1 telco by March 2019, outpacing the Vodafone India-Idea Cellular combined entity.
Edited excerpts:
Around 15 months after Reliance Jio, how is the telecom sector looking to you?
Market has consolidated to a level which was an aspiration, but never thought would be a possibility. Now we’re looking at 3-4 players. No 2 Vodafone and No 3 Idea being put together, is unprecedented… you never see two strong companies merging…this is just because the market structure has got completely damaged.
My estimate is that about $40-50 billion have been written off by various companies, a large part of them are international investors. Vodafone is over $13-14 billion in 2-3 tranches. Then there’s Telenor and Etisalat. Reliance Communications has announced closure by the month-end, Tata and Telenor are merging with us.
Would you say that this write-off has primarily happened due to Jio’s entry?
It is largely due to Jio, the pricing. Having such a long, free promotional period and in some sense, decided by laws of the land in their favour, is unheard of. In my opinion, in Europe or US, this would have been stopped. It would have been seen as predatory. Airtel has been a beneficiary of this consolidation. Revenue market share is increasing, albeit on a revenue pie which has shrunk. Vodafone and Idea together will be settling at about 40%. By the time the merger happens, we will be around 37%-38% with Tata and Telenor. I would say by March FY19, we should be back at No 1.
Airtel seems to be the natural suitor for Aircel…
I think for them (Aircel), it’s only the Vodafone-Idea combination or us. Whenever there will be a possibility of a conversation, I have no doubt, we will be a part of that conversation…conversations have taken place in the past.
Jio reported on their numbers for the first time. Your views?
I think we’ll have to see those numbers in the next few quarters, because as per analyst reports, there seems to be some grossing up of previous quarters, carry forward numbers and Jio has itself described some of the accounting policies it has adopted as being different from those in the industry, in terms of amortization of spectrum, depreciation…
In your view, is the most aggressive phase of Jio’s entry over?
A) I really feel that this is going to carry on for some more time until they (Jio) get it to a point where they have an economic case. In our industry, coming from behind is never easy. Anywhere in the world, getting into the first 10%, 11% or 12% is easy. Sometimes, the early flush gives you the confidence that things are moving in the right direction. Then you kind of start to slow down and even in Jio’s case, we have seen this slowdown in the last few months.
The function of the freebies, which keep on coming, suggests that when the momentum is lost they come back onto the table, then when customers come, they begin to withdraw the freebies and increase (tariffs), it’s a cycle, it will slowly and slowly get to the point where they are comfortable.
So the hope that pricing stability is returning to the sector, is still some time away?
Yes. But if there are only three people serving a billion people, cut it whichever way you want, it (telecom sector) is a strong play.
When so much is happening, why has your stock risen to the level that it has?
Precisely for this reason, that there is a hope that every customer will have to make a choice between the three (players). What you will start seeing is multiple SIMs dropping dramatically, because you can’t have two bundles. Singular offers (will go), time has come to even start pulling it out.
Should the next logical step be phone bundling as well?
There we have a problem of adjusted gross revenue, unless that resolution happens from the Supreme Court. Because today, if you sell a phone, you have to pay spectrum usage charge and licence fee on that, it makes no sense. But once that is resolved, then yes, that will be the last piece to follow.
When do we see the next pieces of the Tata buy, in terms of DTH, fibre etc?
Let’s see. We’ve focused on Tata Tele. We’ve had lots of conversations with them around many other pieces, but finally given our state and their state, we decided to focus on the first deal.
There have also been talks about merging with Tata Sky…
After Dish and Videocon merged, you have seen one big champion emerge, that calls for an introspection to ask if there should be some more activity in that area. And, in our minds, that conversation is happening. But we haven’t come to the point of engaging counterparties or bankers so far.
What are your views on the Trai suggestions for relaxing spectrum cap rules?
Moving 25% to 35% is very good given there are only four operators left. But in every band, there should have been a 50% cap. This whole thing is designed to allow more than 10 MHz in 850 MHz. Because 900 MHz is already done, and in 700 MHz, nobody can afford to have more than 10%. So, logically, it is only for 850 MHz, but it’s all right. We accept it.
Do you think the IMG recommendations are adequate?
16 years (to pay for auctioned airwaves) without reduction of interest is not giving any benefit. It’s absolutely inadequate. By setting up the IMG, the government recognised the crisis in the industry of billions of dollars being written off, companies closing down, employees losing jobs in very large numbers, and surviving companies being weakened by the loss of revenue and margins. On top of that, the government was alarmed at the loss of revenue that it was receiving from the industry.
But one operator opposed any relief package for the industry, which is rare. I think the outcome of the IMG recommendations therefore was weakened from the objectives it started with.
We still have hope that there will be a review and consideration, for example, of lowering interest rate on auction-related payments, license fee and spectrum usage charge.
The industry has always said that the spectrum prices have been very high…
It’s not so much the government but the competition among telcos and the auction model which are to blame. But I don’t think the government will be able to receive such high prices for spectrum in future auctions. Because most of spectrum in M&A and trading have been sold well below the last auction prices.
As (Idea MD) Himanshu Kapania said, from a spectrum-starved nation, we have gone to a spectrum-surplus nation. And you will see that the bids which the RCom spectrum receives, will show that they will be significantly lower than the last auction prices.
Any updates on the Infratel stake sale?
Lots of conversations are going on. We should be able to report back to you by the next quarter results.
Africa seems to be turning around…is the plan still on for consolidation in markets where you are not that strong?
$3 billion in sales, a billion dollar in Ebitda. It’s looking healthy now. Rwanda and Kenya are two other places where we are in the negative. We need to get out of these. So there could be an intra-country sale, purchase, merger… we are holding active discussions. Tanzania — we are Ebitda positive there, but the pricing is very low, there are too many players in that market, and something needs to be done there. And of course, Nigeria. Etisalat is up for sale. We have shown our interest.
What are the key things that the government should look at in the new telecom policy?
Telecom policies have always had one element — revenue maximisation will not be at the core of the policy. But the outcome has always been absolutely on the other side, whether it’s license fees, SUC, USOF or auction reserve pricing. I hope this time around, it gets enshrined in the core of the policy…if there are auctions, why should there be license fee and SUC. Right of Way should become a law. All these will spawn the success of visions like Digital India. Issues on net neutrality, cybersecurity and privacy laws should also be clearly defined.
You have recently turned 60. So what, if any, are the succession plans?
If you look at our structure, Gopal Vittal is the CEO of the company, I am not. If something were to happen to me, the company would run very well. There is a solid and a very diverse board. It’s not a friends and family board. All our companies have CEOs. There is nothing to be done in terms of succession in our system.
Children are doing their own things. They don’t want to come into the business, at least not as yet. We don’t even have our children on our Board.
Will the financial services piece be scaled up to becoming the second largest piece in the coming years?
I would say yes.
And will there be inorganic growth as well?
Yes. We are already looking at some opportunities.
The government has been insisting that telcos pass on the input tax credit benefit to subscribers. Your thoughts?
We are already heavily taxed. This industry is gasping for margins, it’s not profiteering. The government is right in its views that people shouldn’t line up their pockets to make money. But it’s not applicable here.
