Etisalat first to pull out of 2G auction

Etisalat will not take part in the second generation (2G) telecom spectrum auctions, scheduled for November.

“Following the publication by India’s Ministry of Communications and Information Technology of the information memorandum for the planned auction of spectrum in 1800 MHz and 800 MHz bands, the Emirates Telecommunications Corporation (Etisalat) wishes to confirm that it has decided not to participate in the auction,” the UAE-based operator said in a statement.

The statement, however, clarified that the company still believes the Indian telecom industry has significant potential.

In February this year, Etisalat DB — a joint venture between Abu Dhabi-based Etisalat and India’s DB Realty Group — pulled out of the telecom sector, following the cancellation of 15 of its licences by the Supreme Court in connection with the 2G scam.

At that time, Etisalat had also written off its investments worth $827 million in Etisalat DB.

Besides Etisalat, two telecom players have so far exited the telecom sector following cancellation of their 2G licences — S Tel and Loop Telecom.

More exits are seen after the 2G auctions, slated to take place in November, leading to a major consolidation in the telecom sector.

“There are likely to be just 4-5 big players in the telecom industry post the auctions, to allow for sustainable growth,” said Dominic Lowndes, managing director, TMT Finance.com, an international telecom consulting firm.

“Smaller players may exit in case they see a squeeze in profit margins after consolidation with a big player. There is also the question of finances, wherein some operators are more financeable than others, in terms of acquiring bank loans and funding to participate in the auctions,” said Lowndes.

Mahesh Uppal, director, Com First (India), a firm dealing in regulatory affairs, also feels more exits cannot be ruled out as the conditions are tough for new players, with a high base price.

“Besides, the market is no longer as exciting as it used to be, margins are shrinking and the regulatory environment is tougher. Bidding is thus expected to be subdued and not the same as it was for 3G. Telenor and SSTL may bid cautiously, considering they have significant investment and subscriber base,” he said.

For all that, however, there is no word yet from any of the other players who may be planning to pull out of the auctions.
“We have not received any information that any other player will pull out,” said Rajan Matthews, director-general, Cellular Operators Association of India, or COAI. “At the same time, we have not received any queries from foreign investors to enter into the telecom sector — so the likelihood of new telecom players entering is also nil.”

According to Matthews, most operators have said that they will bid selectively. “While Telenor has indicated that its interest to participate, SSTL hasn’t confirmed. Videocon is also expected to bid selectively, as per its earlier intent.”

Another possibility is mergers and acquisitions, where smaller players with significant investments and assets in the telecom sector, may be acquired by bigger players or merge with them to complement each other’s circles of operation. This will help in offering multiple technologies, which the new 2G spectrum can now be used for.

“Mergers or acquisitions will depend on how strong a company’s assets and spectrum availability is,” said Uppal.

The possibility of an incumbent getting cheaper spectrum by merging with or acquiring a new player, rather than buying fresh spectrum in the auctions can also not be ruled out.

However Matthews believes the current climate is not conducive for M&As. “Limitations like only 25% holding of spectrum, cross-holding rules, foreign-domestic limitations, and moreover, the cancellation of 122 licences makes it risky for any player to go in for an M&A at this point. Even after the auctions, M&As will depend on spectrum availability, need and viability for each player. All spectrum with players has been put on the block for auctioning, so it is not clear what spectrum any player will hold post the auction.”