M&A activity in India's telecom industry booms to $14.7 billion

2017 was a banner year for mergers and acquisitions (M&A) in the Indian telecom industry. According to a new report from EY, the sizable growth in M&A activity is a harbinger of a more consolidated, less fragmented Indian telecom market, which generated nearly $15 billion through deals last year..

The value of the Indian telecom sector in terms of M&As ballooned to $14.7 billion in 2017, more than five times the value of the previous year’s deals. Indeed, 2017’s huge figure was the highest yearly deal value recorded in the last ten years. The value of M&A in the telecom industry far outstripped the nearest most active industry, with oil and gas deals valued at $6.2 billion in India.

Other sectors that generated significant M&A value were infrastructure, financial services, and technology, all of which were relatively close to the oil industry, but far behind the telecom sector. Within the telecom sector, while the number of deals (19) remained unchanged between 2017 and 2016, the deals appear to be much bigger and earth-shaking, according to a recent report by professional services firm EY.

The growth is on the back of a dichotomous market scenario, wherein the extremely cost-effective Reliance Jio network has threatened other firms, but has also led to the rapid spread of online access, bolstering other channels of income such as digital advertising and online content consumption. Telecom companies are, therefore, looking to boost profitability and stem falling rates by reducing the amount of competitors through M&A and consolidation.

When examining activity in the top rungs, 2017 was a big year in terms of M&A for Bharti Airtel; India’s largest mobile network operator. In February, the company bought Norway-based Telenor’s India unit in order to expand its network and customer base (which is over 386 million subscribers currently). The telecom giant also purchased Tikona Digital Network’s Private’s 4G business, as well as its wireless access spectrum and 250 of its cellular sites for $244.5 million, while also merging its consumer mobile business with that of Tata Teleservices.

The year’s blockbuster deal was the $11.6 billion merger of Vodafone India and Idea Cellular. The merged entity will become India’s largest telecom provider, in terms of both revenue and subscriber base. Towards the end of the year, Reliance Jio bought the wireless spectrum, tower assets, fiber optic network, and node assets of Reliance communications.

EY believes that the current surge of consolidation in Indian telecom will continue in the future. In essence, the wave of M&A is expected to alter the landscape from one of a fragmented industry with fierce competition between multiple providers – which depresses consumer costs – to a more “stable” market with 3-4 large players.

The firm adds, “The industry is likely to be more stable with tariff wars easing out and companies focusing on assembling their merged entities and realising synergies from them.” In addition to gaining costs saving and additional benefits from their mergers and acquisitions, the new telco super-companies will also face less competition, allowing for rates to rise. One can look to the example of Canada, where the domination of the mobile network market by only 3 companies (Rogers, Bell, and Telus) means that Canadians pay among the highest rates for mobile phone plans in the developed world.

Regulatory changes in India will further accelerate the trend of consolidation in the telecom industry. The easing of the spectrum cap to 35% from 25%, and the removal of the 50% cap on the holding of the total spectrum will spur on the further creation of mega-sized telecom companies in India like recently merged Vodafone-Idea Cellular. 

Commenting on the future, Amit Khandelwal, Managing Partner of Transaction Advisory Services at EY said, "In 2018, we expect the M&A activity to stay healthy on the back of a stable economy, and continued efforts by the Government to remove regulatory hurdles and attract foreign investment. However, we might see certain challenges such as soaring valuations and high capital market benchmarks, which might cause a temporary slowdown in deal- making.”