Bloomberg News

Airwave Sale May Falter as Billionaires Balk: Corporate India

November 09, 2012

India’s auction of wireless spectrum reclaimed after a corruption probe into the award of licenses may raise 53 percent of the government’s target as prices deter billionaires from Russia to Malaysia.

The auction of second-generation airwaves set to start on Nov. 12 may raise 210 billion rupees ($3.9 billion), according to an average estimate of five analysts surveyed by Bloomberg. Finance Minister Palaniappan Chidambaram said Oct. 29 the government expects the sale to raise 400 billion rupees.

Companies controlled by billionaires Vladimir Evtushenkov, T. Ananda Krishnan and Anil Ambani are staying away from the sale following the government’s decision to start bids at $2.6 billion as it seeks to bridge a budget deficit. Just five of the nation’s 13 operators are in the fray, signaling investor concern about intensifying competition and the fallout from India’s biggest corruption probe.

“The government might now take a slightly more realistic view of the reserve price,” said Mohammad Chowdhury, telecom practice leader at PricewaterhouseCoopers. “There’s huge demand for spectrum, but it just means that at this price, nobody can buy it. It’s partly the extremely high reserve prices and also the distress the industry is under because of a lack of ability to finance further investments.”

India’s cabinet decided Aug. 4 that operators will have to pay a minimum of 140 billion rupees to buy wireless spectrum in the 1,800 megahertz band for the global system for mobile communications, or GSM, networks. That price is only 16 percent lower than the winning rate of high-speed third-generation airwaves in a 2010 auction, Mumbai-based Goldman Sachs Group Inc. analyst Sachin Salgaonkar wrote in a note to clients.

‘High Expectations’

“We have high expectations for aggressive bidding to bring as much as possible to the kitty,” Kapil Sibal, India’s minister for communications told reporters in New Delhi yesterday. India also aims to raise 310 billion rupees by charging a one-time fee from GSM operators using a large amount of spectrum, he said.

To promote aggressive bidding, India revised foreign borrowing rules today that would allow winners of the Nov. 12 auction to refinance local debt with cheaper overseas loans, according to a Finance Ministry statement. Units of carriers including Vodafone Group Plc (VOD) and Norway’s Telenor ASA can also borrow from their parents, the ministry said.

Cutting Deficit

The sale of 3G airwaves in May 2010 drew 9 bidders and earned the government $13 billion of revenue after prices rose to nearly double what the government expected.

Bharti Airtel Ltd. (BHARTI), India’s largest mobile operator, Idea Cellular Ltd. (IDEA), Vodafone South Ltd., Videocon Telecommunications Ltd. and Telewings Communications Services Pvt., a unit of Telenor, are qualified bidders for the GSM auction.

The government, which is trying to reduce a deficit that has climbed to 5.3 percent of gross domestic product, also plans to sell airwaves used for the code division multiple access technology.

Tata Teleservices Ltd., 26 percent owned by Japan’s NTT DoCoMo Inc. (9437), withdrew from an auction of CDMA airwaves, Bloomberg TV India reported, while the Economic Times said Nov. 3 Videocon pulled out, leaving no buyers for the auction of the 800 Mhz airwaves.

“There’s no business case for us to spend this kind of money,” said Vsevolod Rozanov, chief executive officer at Evtushenkov’s Indian unit Sistema Shyam Teleservices Ltd., which had its spectrum canceled. “Our long-term presence in the market is in jeopardy because of a combination of two factors: the price is too high and our licenses have been unduly canceled.”

Pre-Auction Bid

Idea Cellular, controlled by billionaire Kumar Mangalam Birla, made the largest pre-auction deposit of 13.07 billion rupees, enabling the company to bid in all of India’s 22 telecommunications zones, although CLSA Ltd. expects it to only bid in the seven zones where it had licenses canceled. Bharti is likely to focus on five zones, according to CLSA.

Telenor, which had its airwaves taken away, will focus on nine “priority circles” and not bid in all zones that are offered, the company said in a July 24 statement. The nine are Uttar Pradesh west and east, Bihar, including Jharkhand, Kolkata, West Bengal, Andhra Pradesh, Mumbai, Maharashtra and Gujarat.

Billionaire Ambani’s Reliance Communications (RCOM) Ltd., which has lost 16 percent of its market value this year and disconnected 20 million inactive subscribers in July, is not bidding in the auction.

Incumbent Operators

Reliance Communications fell 1.5 percent to 57.80 rupees at 1:37 p.m. in Mumbai, while Idea, which has advanced 14 percent this year, rose 3.2 percent to 94 rupees. Bharti Airtel has dropped 19 percent this year, making it the worst performer on the benchmark BSE India Sensitive index.

Aircel Cellular Ltd., which had a 7.35 percent share in India’s mobile market at the end of September, is also staying away from the sale. The company is 74 percent owned by Malaysian billionaire Krishnan’s Maxis Communications Bhd.

“Demand for spectrum blocks may be lower than the number offered,” Deepti Chaturvedi, a Mumbai-based analyst at CLSA, wrote in an Oct. 31 note to clients. “The auction will not be a complete success, which would disappoint the government, although it would be positive for the sector and incumbent operators in particular.”

The auction of licenses, which were canceled in February after an investigation into their initial sale, must begin by Nov. 12 and the telecommunications department must allocate the spectrum by Jan. 11, India’s Supreme Court ruled Aug. 27. The government may face contempt-of-court charges if the schedule isn’t met, the judges said.

Graft Probe

The high court canceled 2G licenses after sales of the permits in 2008 sparked a corruption probe that led to the jailing of India’s former telecommunications minister. The state auditor said in 2010 the sale lacked transparency and ineligible bidders bought airwaves at “unbelievably low” prices, denying the treasury of as much as $31 billion.

The Indian joint ventures of Telenor, (TEL) Emirates Telecommunications Corp. (ETISALAT), Videocon, Idea Cellular and Russia’s AFK Sistema were among companies that lost their licenses.

Existing operators will be allowed to buy as many as two blocks of 1.25 megahertz each in the auction of 1,800 megahertz spectrum for GSM networks, according to Department of Telecommunications guidelines released July 3. Most of India’s second-generation network is GSM.

New entrants will be required to bid for a minimum of four blocks each of 1.25 megahertz. In the auction of spectrum in the 800 megahertz band, used by operators that run CDMA, networks, three blocks of 1.25 megahertz each will be sold. That sale will begin two days after the auction for GSM airwaves closes.

“The outcome of this auction could be determined within a day or two,” compared with 34 days for the 3G sale, said Ganesh Ram, an analyst at Kim Eng Securities Pvt. in Mumbai. “The bidding won’t very aggressive. It certainly won’t be like the 3G auction was, not even half of that.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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