Analysts: Bidding for BWA to Be as Fierce as 3G

Bidding in India's upcoming BWA (broadband wireless access) spectrum auction is likely to be as fierce as that in the 3G spectrum auction that has just finished, industry analysts believe. (See India's 3G Auction Ends, Raises $14.6B.)

The 3G auction raised nearly US$15 billion, with leading carriers such as Aircel Ltd. , Bharti Airtel Ltd. (Mumbai: BHARTIARTL), and Reliance Communications Ltd. shelling out INR65 billion ($1.4 billion), INR123 billion ($2.66 billion), and INR85.9 billion ($1.86 billion) respectively for their new wireless capacity.

Those three, and eight others, are now set to participate in the BWA auction, so there's a possibility that, with so much spent on the 3G spectrum, some purse strings may have been tightened and the bidding action will be a bit more subdued. (See Bids Flood In for India's Spectrum Auctions.)

But bidding in the BWA auction, which is due to start Monday, is expected to be just as frenetic.

"BWA spectrum is a very strategic asset for an operator, and I think the bidding for BWA is going to be as fierce as for 3G... definitely not less," says Harit Shah, research analyst for IT, telecom at Karvy Stock Broking Ltd.

The minimum price for a pan-India BWA license is 17.5 billion Indian rupees ($384 million), half of the 3G auction's minimum. And there are only two slots of spectrum up for grabs in each of India's 22 circles, unlike the 3G auction, where three or four slots were available.

But in other ways it could be quite similar to the 3G process, which lasted 34 days.

"The BWA auction is not going to be a quick affair. From a long-term perspective, it is a very important asset, since BWA spectrum can be used for WiMax as well as for TD-LTE. The operators are not likely to let an opportunity to own BWA spectrum pass by," says Shiv Putcha, principal analyst at Ovum Ltd. This view is shared by Neeraj Jain of KPMG International . "The operators who wanted to get pan-India spectrum but were unable to will definitely try to get BWA spectrum in those circles. Their finances are stretched, but there is still room, and spectrum is scarce, so definitely they are going to try to get the maximum from this auction."

However, analysts believe that the operators will now be re-evaluating the amount they're prepared to bid in the new auction, as it's clear it will take very many years before they will get a return on their new spectrum investments. In addition, some of the key operators are under pressure from some new Telecom Regulatory Authority of India (TRAI) recommendations regarding new fees for 2G spectrum they already own. (See TRAI Mulls New 2G, M&A Rules and Bharti Airtel Slams Indian Regulator.)

And then there's the matter of paying for all the 3G assets: The money the carriers have to raise to pay for the BWA and 3G spectrum and the resulting new infrastructure rollouts is set to come from new debt, and that will put further pressure on the bottom lines of the operators.

"Most of the same players are bidding for both 3G and BWA [spectrum], and they will certainly be rethinking of the amount they would be putting in BWA auction. However, this is not likely to stop them from going all out to get the spectrum," adds Putcha. Because spectrum is such a rare commodity, some industry sources believe the final amount raised might be as high as that raised for 3G.

Because of all those factors, analysts continue to have a negative view of the telecom segment.

"We believe the steep prices required to be paid for acquiring 3G spectrum in key telecom circles will lead to a further lengthening of the time-frame required to make 3G telecom services a viable business model. With significant upfront costs as well as no guarantee of spectrum receipt until several months after completion of the auctions, as well as back-ended revenue streams, we believe 3G services are unlikely to lead to any positive impact on company financials for at least a period of three years," states a recent Karvy Stock Broking report on the telecom segment.

Besides, in the initial years following the auctions the operators will face higher amortization costs and financial charges owing to debt required to pay for the spectrum, thus leading to pressure on current earnings forecasts. "It will be at least three-to-five years before they break even the money that is being put in the spectrum auction," says Putcha.

Tata Teleservices Ltd. , for instance, recently received board approval to raise INR85 billion ($1.8 billion) for the 3G auction. And according to the industry sources, Bharti Airtel recently raised around INR100 billion ($2.1 billion) to cover the expected costs of the auctions.

Now India's 3G winners face the challenge of developing the business models that can help them attract high-value customers that, in time, can help them generate the level of revenues needed to support the billions that are about to be spent kick-starting a competitive 3G market.

— Gagandeep Kaur, India Editor, Light Reading

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