Indian M&A Could Spell Trouble for Vendors
India's telcos are continuing to invest in upgrading and modernizing their networks in the face of growing competition. But the wave of consolidation sweeping the industry could put some of their suppliers under pressure in the months ahead.
Bharti Airtel Ltd. (Mumbai: BHARTIARTL), the current market leader, recently said it had doubled its number of mobile sites in India by deploying 180,000 new base stations since April 2015. The operator claims this investment program ranks as one of the largest mobile network rollouts globally.
Rolled out as part of its Project Leap network modernization iniatitive, the new sites should help Airtel to fight competition from an aggressive new entrant called Reliance Jio that launched its low-cost services in September last year, fuelling M&A activity in the Indian market. Indeed, network modernization will be imperative if telcos are to withstand RJio's market entry and minimize churn.
Besides adding towers to its footprint, Airtel has doubled the overall transmission capacity and increased its mobile backhaul capacity eightfold. It has also added another 14,500 kilometers of fiber as well as 3,666 more nodes.
Whether spending will increase or fall in 2017 is currently unclear. During an analyst call to discuss its results for the third quarter (ending in December 2016), Airtel said that it would not provide capital expenditure guidance until reporting results for the current fiscal year. In the 12 months to March 2017, however, it expects total investments to hit just under $3 billion, having spent about $3 billion in the fiscal year ending in March 2016. "Over the last two, three years, we have been investing reasonably disproportionately higher than competitors and from our perspective of getting the right coverage in India," said Harjeet Kohli, Airtel's chief investor relations officer.
Nevertheless, Airtel is not the only company investing heavily in network upgrades and expansion in India. RJio has also been splashing the cash. Earlier this year, it extended a deal with Samsung Electronics Co. Ltd. (Korea: SEC) to expand its 4G network in rural areas. It has also awarded a contract to Cisco Systems Inc. (Nasdaq: CSCO) to deploy IP equipment for its data centers. Other deals include a small cells agreement with Airspan Networks Inc. (Nasdaq: AIRN), a fixed-line digital services contract with Team F1 and an OSS project with Ericsson AB (Nasdaq: ERIC).
Meanwhile, number-two player Vodafone India received a $7.2 billion funding boost from parent company Vodafone Group plc (NYSE: VOD) in September last year. Those funds will "enable Vodafone India to continues its investments in spectrum and expansion of networks across various technology layers," said Sunil Sood, Vodafone India's CEO, in a statement.
Vodafone's plans, however, may undergo significant change following its merger deal with number-three player Idea Cellular Ltd. The companies are anticipating "substantial cost and capex synergies with an estimated net present value of approximately INR670 billion ($10 billion) after integration costs and spectrum liberalization payments," they said in a press release about the tie-up.
And merger activity involving Airtel could also have an impact on overall spending. The operator's takeovers of Tikona Digital Networks Pvt. Ltd. and Telenor India, aimed at boosting spectrum in key circles (service areas), mean there will be significant duplication of infrastructure in some areas.
Of course, consolidation will affect all of the equipment vendors, as well as shrinking the revenue pie for IT vendors and tower companies. And it could have implications for a number of existing contracts.
"In case of 15% site rationalization by the Idea-Vodafone combine, it will lead to 5.9% revenue contraction for [towers company] Infratel, while 20% rationalization will lead to 7.9% revenue contraction," says a note from Edelweiss Finance.
IBM Corp. (NYSE: IBM) is another firm that might take a hit. It has contracts with both Idea and Vodafone, and their terms and conditions might need reworking post merger. Similarly, equipment vendors, including Nokia Corp. (NYSE: NOK), Huawei Technologies Co. Ltd. and Ericsson, which also provide managed services, might lose some business as consolidation gathers pace.
Gagandeep Kaur, Contributing Editor, special to Light Reading