Telecom Mergers & Acquistions – Rationality Returns to Sector

India Telecom Mergers AcquistionsThe Telecom Ministry released M&A norms which had been approved by the Empowered Group of Ministers (EGoM) in December 2013. The ministry has retained most of the guidelines and reduced the equity lock-in period of the new entity (in case of M&A) to one year from three years earlier.

Key highlights of Indian Telecom M&A guidelines
If an acquired company holds spectrum which had been assigned against the entry fee paid (not acquired through auction), the resultant company at the time of merger will have to pay the government the differential between the entry fee and the market determined price of spectrum from the date of approval of such arrangement on a pro-rata basis for the balance period of validity of the licence. No separate charge to be levied for spectrum acquired through auctions (liberalised) conducted from 2010. The validity period of the spectrum acquired in the merged entity will remain unchanged i.e., same as it was in the acquired company.

Combined adjusted gross revenue and subscriber market share of the merged entity not to exceed 50%. If it exceeds 50%, the resultant entity should reduce it to 50% within a year. The merged entity to hold not more than 50% of the total spectrum in each circle. However, in case of the transferor and transferee companies being allocated one block of 3G spectrum through auctions in 2010, the merged entity will be allowed to retain two blocks of 3G spectrum, provided it is within 50% of the spectrum band cap.

We believe the new guidelines will be positive for incumbent players (Airtel, Vodafone, Idea) as any acquisition by them of new players will not attract any payment as the spectrum held by new operators is liberalised. At the same time, any merger between new operators looks unlikely due to weak balance sheets.