FT : India 3G Bonanza
Tuesday, May 11, 2010
India’s very easy guide to reducing a budget deficit, chapter one: allow a dozen or so mobile phone operators to compete in your country, block market consolidation and repeatedly postpone the release of third-generation spectrum. Then as competition descends into a price war, auction off far fewer spectrum chunks than there are potential bidders. No wonder prices in India’s 3G spectrum auctions have gone stratospheric. After a month-long process, the price of a nationwide allocation of spectrum has reached $3bn, almost four times the reserve price and a good $1bn more than even the boldest analysts’ predictions. Whether by accident or design, the Indian government stands to reap at least $10bn from the 3G auctions, with a broadband auction to follow. Inevitably, the spectacle stirs memories of the irrational exuberance displayed in European 3G auctions a decade ago; the UK government netted more than $35bn from bidders that nearly crippled themselves with debt.
India’s bidders are not in such a precarious position. The technology that makes 3G spectrum useful is already available (unlike a decade ago) and those expected to be big bidders can absorb some extra borrowing. It will be an unwelcome expense, though, given that the ongoing price war in India’s mobile market is set to keep a lid on revenue growth and margins for the foreseeable future. Indeed, Bharti’s profits fell in the first quarter for the first time in three years. That situation will only change when regulators allow the market to consolidate. Here the 3G spectrum auctions may have thrown up an unexpected consequence: as BarCap notes, they have placed – or revealed – an extremely high valuation on spectrum. Small players such as Norwegian company Telenor’s lossmaking venture, which were allocated 2G chunks a few years ago, are sitting on more valuable assets than anyone assumed. Do not expect them to roll over on the cheap when the M&A party begins.