CONSOLIDATION OF TELECOM INDUSRY

See telecom industry consolidating in 2 yrs: Sunil Mittal

Sunil Mittal, Chairman, Bharti Enterprises expects consolidation in the telecom sector in the next two years. Speaking to CNBC-TV18 on the sidelines of the World Economic Forum in Davos, Mittal said he expects the government and the regulators to look at a comprehensive M&A policy in a month or two, which will address the issue of spectrum consolidation. “Blood letting has started to happen and there is enough blood to be seen on the streets. Market caps of companies have halved, companies are making losses. Only a few who have the scale are doing okay,” he added.

He doesn’t see more than six operators surviving in the industry. “Certainly not 12, and two in the waiting queue and taking it to 14. That isn't going to happen. This is a natural phenomenon. When you have too much capacity, capacity has to consolidate,” he added

Here is a verbatim transcript of his interview

Q: We are in 2010 at the beginning of a new decade. I am going to rewind a little bit and go back to the early part of the pervious decade, I am going to quote form an interview you made in 2003 when you said only four telecom players will survive. You then went on comment on regulation and you spoke of how the competitive intensities being very high, some smaller companies are bound to get consolidated, you also said that we have had some unbelievable regulation if you look at it from outside India, I think that is also settling now. Then you said you said four players will survive in India and Bharti has a ticket to be one of those. When asked about tariff reductions you then said I think we have now come down to mere paisa and there is not much more scope for tariff reduction maybe a 5-10 paise here and there, but we have really hit rock bottom of the barrel now. I want to fast forward now to 2010 and say how much of this scenario has changed?

A: I think one can make the same statement today and perhaps each one of that is relevant even now. An unbelievable regulatory intervention, things are settling down a bit. We have hit the floor. You are right, we have come down so many steps in those paisa. But now instead of four operators we'd have perhaps six and we will be certainly one of them.

Q: The fact is that ARPUs are down, the average minutes per user is down as well. So it is not just ARPUs are down because the cost and the price of every call has come down. There are now over a dozen telecom companies, how difficult is this blood bath going to be and when are we finally going to be seeing it happen? What will the end game be and how will it play out and considering that fact that the spectrum was supposed to be the key M&A currency in this space, that is so warmed up in regulation it is going to be difficult to happen?

A: There is enough pressure on the government and the regulators now to look at a comprehensive M&A policy. It is not players like us who are pushing for that. But it is players who have come into the market who need a way out now.

We are going to have something in a month or two now from the TRAI, which will also address the issue of spectrum consolidation. What will be the charges from the government, will there be some levy on that, how much spectrum will be allowed or be kept with each player.

So something has to come, blood letting has started to happen and there is enough blood to be seen on the streets. Market caps of companies have halved, companies are making losses after so long. Only a few who have the scale are doing okay.

This is inevitable whether it is going to be 5-6-7 or 8 players but certainly not 12, and two in the waiting queue and taking it to 14 that isn't happening. So this is a natural phenomenon when you have too much capacity, capacity has to consolidate.

Q: How long do you think it will take for this consolidation to happen?

A: In this industry there are very large amount of capital intensity. You need to invest billions of dollars. If people are having a view that it is going no where, the investment is going to stop and if the new player are not going to invest, their networks are going to be in patchy conditions.

They will not have traction of customers, the millions of customers that you have seen, you must see what is coming at the end of the pipe, very tiny revenue streams, free minutes. As soon as those become chargeable it just falls off. Therefore I would say you re going to see this happening in 24 months.

Q: So in 24 months you think we will start seeing players fold up in about 2 years from now?

A: If not earlier.

Q: What about the fact that many of these new players that have come in now have substantial foreign partners that are hoping to make something of the market seeing the success of players like Bharti. Are they going to give up that easily?

A: Yes and you already see where the stocks of these foreign companies who have invested in India are. I wouldn’t name the companies but they have fallen off the cliff because they have made commitments to India.

When you come in as a tenth or eleventh player it doesn’t matter who you are or how big or small you are, it’s a very tough game. It is possible that some of these players may want to up the game and become the consolidators. But on a standalone basis there is no hope in hell. Yes they can go out and pick up one or two companies, merge between themselves and survive. That scenario is not ruled out.

Q: This will be the second time that foreign companies will come into the country and leave because things just didn’t work?

A: Look at Vodafone, came in, took 10% in Bharti, light the place and upped the game. Took USD 12 billion of a bet in a competing company and they are fine. So all I am saying is that you cannot stay in the place you are. You are either going to step up the game or you step out.