M&A Activity in India Telecom - Part II

The Industry is continuing to see reducing ARPUs and a squeeze in MOU per subscriber per month

Top three operators/companies that are most likely to sell or exit are: 

1. Loop Telecom Pvt. Ltd
2. Etisalat DB Telecom India Pvt. Ltd.
3. Videocon Telecommunications Ltd

Loop has a wireless subscriber base of 2.84 million. Their market share is 0.46%
Gross Revenue is 162.40 Cr (%age change of -2% over last year)

Etisalat is at 0.0004 million with Market share at 0.00%
Gross Revenue is 20.46 Cr (%age change of -20% over last year)

Videocon is at 0.03 million subscriber base with Market Share at 0.01%. They have launched in only five of the 22 circles. They have been forced to launch as they are under probe by both the Central Vigilance Commission as well as the Prime Minister’s Office for delaying the roll-out of their operations

A few companies looking to acquire:
Among existing operators: 

STel is looking to acquire stake in companies or buy out a company as it has license to operate in only six small circles.
Among other options, STel investor C. Sivasankaran is looking to purchase a stake in Loop Telecom Pvt. Ltd

Companies looking to enter the Indian market:
- US giant AT&T
- European giants like Telekom Italia
- Middle East telecom giants Mobile Telecommunications Co (Zain) of Kuwait
- Qatar Telecom (Q-Tel)
- Russia’s Altimo

Regulatory Constraint: A three-year lock-in period for most of the new operators before they can sell out, therefore chances of consolidation in Indian telecom sector will likely start in early 2011. The government has been talking about allowing operators to sell or surrender their stake but a final decision is yet to be taken.

Data Source: Some information derived from TRAI July 2010

M&A Activity in India Telecom

The answer to the question "Are we going to see M&A in India telecom?"
Majority seem to say "Yes"
A few companies/operators who hold the 2G license were not able to get 3G licenses. It seems that it will be the end of road for them. If not this they will have to get into sharing agreements with operators owning 3G licenses.
In addition, many operators are finding it very difficult to operate in this highly competitive environment. Currently, there are about 15+ operators in the telecom space. Pricing is very competitive leading to miniscule profits. 
The operators in the lower segment seem to be most likely to the first ones acquired or exiting the market. 
I will write more on this in my next few posts.

Nokia Siemens (NSN) exploring PE funding

NSN is open to the idea to get funding from PE firms. (Potential investment of USD 1 billion)

It is talking to a few PE firms like Blackstone, Bain Capital, etc.

Implications:

• Liquidity (+ve)
• NSN has not made a profit in the recent past 
• Recent acquisition of Motorola for USD 1.2 billion
• More stakeholders in decision making (-ve)
• NSN makes a statement that they are looking for new ideas (-ve)
• Nokia and Siemens are not ready to put money in the JV (-ve)

Ericsson India acquires minority stake in Novatium

Novatium has a cloud computing, virtualization and PC-as-a-Service where people can simply plug and compute

Market for cloud computing: 

The cloud services market was estimated at $46.4 billion in 2008 — and is expected to increase to $150.1 billion by 2013. The overall compound annual growth rate (CAGR) is forecast to be 26.5 percent

Ericsson gains:

•  Ericsson becomes a prime driver in an all-communicating world, voice, data, images and video to share ideas and information wherever and whenever they want.
• Provide affordable communication for all 
• Get a piece of existing revenue pie: Network providers are supporting bandwidth increases for cloud computing. But the revenue from cloud services still flows chiefly  to cloud service providers, with little if any going to network providers. 
• New revenue opportunities – benefit by switching enterprise-hosted services to private or virtual private clouds (“everything-as-a-service (XaaS) solutions). This approach offers better margins, along with decreased management demands.
• New business opportunity - explore advertising partnerships  
• Growing “service orientation” for new and existing partners
• Economies of scale - using excess capacity in core network 
• Gain partnerships with leading Indian operators - Bharti, BSNL, MTNL and Tata along with successful pilot and deployments in other countries

Vodafone Essar Partnership

Vodafone agreed to adjust the payments that would be made under the fair market value put arrangements with the Essar group.  
This amount has now been calculated as INR 3400 Crore and is payable in the event that the Essar group exercises its put option to sell some or all of its Vodafone Essar Limited shares at fair market value provided that the maximum aggregate amount payable shall not exceed US$5 billion. 
This additional amount is not payable in the event that the Essar group decides to sell its 33% shareholding in Vodafone Essar Limited at the underwritten value of US$5 billion.

History: In 2007, Vodafone had taken a stake of 67% in Essar group with a payment of $10 billion. At that time the put option was to a limit of US$5 billion


Take 1: This option that been put in place to take account of the upfront cost of 3G licences, based on the total price of the licences secured. The total price paid by Vodafone to get licenses to 9 circles was INR 11073.6 Crore. A 33% of this amount puts Essar's stake at INR 3691.2 Crore


Take 2: Due to the payments made for 3G, the company has become highly leveraged and this has resulted in lowering of its value. It would seem that the current value of 33% stake is about $4 billion to $4.2 billion. Essar had shown its reluctance towards the high bids being made by Vodafone for 3G. Clearly, Essar was in it for the short term. Vodafone wanted to be a 3G player if it was to be here for the long haul. This is Vodafone's way of opening the path for Essar to move out. 

NSN acquires Motorola - Analysis

Motorola's Revenue for Networks

2009				2010
Q1	Q2	Q3	Q4	Q1
$966 million	$1.0 billion	$1.1 billion	$964 million	$896 million

Total Revenue for 2009: $4.03 billion (approx)

Network group comprises:

1. Cable Broadband

2. Cellular Networks – includes iDEN

3. LTE – Long Term Evolution

4. Private Broadband Networks

5. Telco Broadband Networks

6. Wireless Broadband Networks - WiMax

7. Wireless LAN

8. Wireless LAN Security

WiMAX revenue in 2009 was $600 million

· Shipped 1 million WiMAX device (CPE and dongles)

· Shipped 10,000 WiMAX Access Point Base Site

Motorola will keep:

· $150 million in accounts receivable, cash and some other assets (assuming it is related to Networks)

· Technology it developed called iDEN. It generated $400 million of the Networks business’

· Wireless infrastructure-related intellectual property (IPR).

1. Net revenue of the group that NSN acquires:

= $4.03 billion - $150 million - $400 million

= 3.48 billion

2. NSN paid $1.2 billion to acquire

3. NSN pays 0.34 times annual revenue

Essentially many products overlap. WiMAX is welcome but paying $1.2 billion for a $600 million revenue business raises questions.

Basically the money spent on this acquisition is for customers, geographical diversity and the opportunity to cross sell in the future. Future developments will give a better picture on the value created.

Nokia Siemens Networks acquires Motorola

July 19, 2010: Telecom equipment vendor Nokia Siemens Networks (NSN) unveiled a deal to pay $1.2 billion for the majority of U.S.-based Motorola Inc.'s network equipment business

History: Nokia Siemens Network’s formation was announced on 19 June 2006. Nokia Siemens Networks was officially launched at the 3GSM World Congress in Barcelona in February 2007

Acquisition: Initial Analysis

NSN Story

• Gains foothold in North America, Japan, and China
• Gets access to WiMAX (Worldwide Interoperability for Microwave Access) technology and CDMA technology. Currently, NSN had no foothold.
• Gains 50 new relationships. Opens up the ability to cross-sell
• Emerging Market: Gives NSN an advantage in India - having both (WiMAX & LTE) options for BWA (Broadband Wireless Access) implementation

Motorola Story:

• Gets a valuation of about 0.3 to 0.5 of revenue
• Able to get rid of a business which was losing market share and was lacking in technology.
• Concrete on its jewels (Enterprise Mobility & Set top boxes). Increase the value to its shareholders

Risks for NSN:

• Which product does NSN concentrate on for next generation? It has two products one from Motorola and another from NSN that can possibly conflict based on features/ability. Motorola offers a migration path from WiMax-to-LTE whereas NSN product lacks this ability.
• Motorola: converged platform, the WiMAX Evolution – Single RAN, which supports 802.16e (mobile WiMax), 802.16e Enhanced, 802.16m (WiMax 2.0), and LTE
• NSN: single radio access platform, the Flexi Multiradio Base Station (BTS), that supports TD-LTE
• What happens to the existing customers who are on WiMAX? Do they move to WiMAX 2.0 or are they forced to move to TD-LTE (Long Term Evolution Time Division Duplex)? There are 41 customers in 21 countries that can get impacted.
• Among other integration issues, what happens to the two research teams? I am not getting into integration issues among other teams/groups. This one seems to be the most pertinent at this time.

Stock Movement:

• Nokia's stock started higher but ended the day at a gain of approx 4%
• SI stock ended the day losing at about -2%
• Motorola stock showed a gain of 12% at the end of the day