Vodafone, Bharti pay total $5.1 billion for 3G spectrum

Vodafone and Bharti paid a combined $5.1 billion for 3G mobile licences, ending an epic auction that yields a bonanza for a deficit-strapped government but puts winners under pressure.

Reliance Communications also won the right to provide third-generation services in an auction that lasted 34 days and will generate $14.6 billion (Rs67,710 crore) for the government, authorities said on Wednesday, nearly twice what it had expected.

"It's good news for the government, no doubt," said Arun Kejriwal, strategist at Kris Research in Mumbai.

"For the operators it's a large sum of money that has to be paid out. We have to see how these services are priced and received by the subscribers and how it will [affect] their profitability," he said.

India is the world's fastest growing mobile phone market with some 500 million subscribers. The three biggest carriers — Vodafone, Bharti Airtel, and Reliance Communications — each won the key licences for Delhi and Mumbai.

Nine private operators participated in the auction for three sets of licences, which ended with no single carrier winning high-speed third-generation spectrum in all 22 circles up for bidding.

Seven different carriers, including Idea Cellular and the unlisted Tata Teleservices, ended up winning spectrum. Japan's NTT DoCoMo owns 26% of Tata Teleservices.

A fourth licence will be sold separately and has been reserved for state-run operators. India is a late adopter of 3G and is the biggest economy not to offer such premium services on a wide scale, though the state-run telecom firms have 3G services in some zones.

Vodafone Essar, the UK giant's India unit, will pay about $2.5 billion (Rs11,617 crore) for its India 3G mobile spectrum, according to data on a government website.

Bharti, the country's biggest carrier in which SingTel has a stake, is paying about $2.6 billion (Rs12,295.46 crore). The Anil Ambani-led RCom will pay Rs8,585.04 crore.

The auction will help the government plug a fiscal deficit that last year reached a 16-year high, and may enable it to cut back on borrowing, bringing relief to satiated bond investors.

"The 3G auction results demonstrate that the government borrowing will sail through smoothly," said Paresh Nayar, head of foreign exchange and money markets at First Rand Bank in Mumbai.

The spirited bidding has been a drag on the share price of operators competing in a market that is saturated with 15 different operators.

Vodafone Group Plc signalled increasing frustration with its key India unit on Tuesday, taking a charge of £2.3 billion due to fierce competition and rapidly escalating spectrum costs.

On top of the auction, the Telecom Regulatory Authority of India (TRAI) has called for mobile operators to pay a one-time fee for the 2G radio spectrum with high bandwidth, which they won several years ago, a move that has drawn fierce criticism from all involved.

The rollout of 3G mobile telephony is expected to exacerbate the gap between the haves and have-nots in the country's crowded mobile market and eventually trigger a wave of  consolidation.

It also puts pressure on the winners, who must justify their licence outlays and may find themselves constrained from making further investment.

They will need to spend billions of dollars more on 3G network equipment.

India is adding roughly 16 million new cellphone users a month, and heavy bidding was driven in part by the need to secure additional capacity to provide basic voice service.

"Obviously, the spectrum pricing looks very high, but if you look at 500 million subscribers, that 3G has the potential as it can be used for both voice and data, the spectrum price may be viable," said Naresh Singh, an analyst at Gartner in Mumbai.

The 3G auction will be followed in two days by an auction for wireless broadband spectrum, for which 11 firms are vying for two national licences for private operators, with one slot reserved for the state-run telecom firms.

ANALYST'S VIEWS

NARESH SINGH, analyst, Gartner, Mumbai: "Obviously, the spectrum pricing looks very high, but if you look at 500 million subscribers, that 3G has the potential as it can be used for both voice and data, the spectrum price may be viable.

"This shows that the Indian telecom market has matured, and now I think the operators have taken into consideration that this market will require longer time of gestation and are willing to take that risk."

HARIT SHAH, telecom analyst, Karvy Stock Broking, Mumbai: "This was along expected lines. Considering the operators were spectrum starved, they had to bid high. We were not expecting a pan-India bid, as operators were focusing on circles, revenue, markets etc.

"It is going to be a fairly long gestation period, the companies should take roughly 3-5 years to earn back their investments."

KK MITAL, head of portfolio management services, Globe Capital, Mumbai: "It is definitely going to be a huge burden on the companies' balance sheets and cash flows for a few years. But in the long term I think it is going to pay off in terms of the services they are going to offer.

"With the kind of services which is possible, they will have large corporate clients who will not mind paying a premium for them."

ARUN KEJRIWAL, strategist, Kris Research, Mumbai: "It's good news for the government no doubt. The concern would be if all the money will actually come in. For the operators it's a large sum of money that has to be paid out. We have to see how these services are priced and received by the subscribers and how it will impact their profitability."

PARESH NAYAR, head of foreign exchange and money markets, First Rand Bank, Mumbai: "The [bond] market has discounted that the 3G inflows would be larger than what was expected. The 3G auction results demonstrate that the government borrowing will sail through smoothly and there won't be much of stress."

ROMAL SHETTY, director at consultancy KPMG, Bangalore: "The risk is in terms of straining of balance sheets. 3G is not going to take off in the next one or two years.

"EBITDAs will definitely come down in the next few years. For the next three years it will be difficult for all Indian telecos.

"But from the companies' point of view, the next tranche of spectrum might come only 3-5 years later so they may as well get first-mover advantage.

MANESH PATEL, partner, Ernst & Young, Mumbai: "The fact that most of the companies have not gone for a blanket bidding [for all circles] and no single company has emerged as a winner for all circles clearly shows that each operator has invested in circles where they are incumbents and have strong presence. This will enable the companies to monetise the spectrum in the long run."