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India's mobile phone sector headed for rash of mergers and acquisitions

A fresh wave of mergers and acquisitions looks likely to shake up India's fledgling cellular phone business in coming months, analysts say.

The reason? The government's decision to launch a bidding war for licences to allow a fourth cellular company to operate in each of India's 21 telecom zones.

This, analysts say, will drive some smaller groups to sell out and larger players to consolidate and become pan-India operators.

"There's going to be another wave of consolidation in the cellular industry," says Rajeev Chandrashekhar, chairman of BPL Communications, one of India's leading private telecom groups.

The interest in the fourth cellular licences is huge as India's cellular subscriber base at around just 3.6 million in a billion-plus population offers massive potential, analysts say.

Analysts say smaller cellular firms may be forced to sell out because they will not have deep enough pockets to bid for more licences or to pump in funds to grow their business.

For larger groups, this could be the chance to gobble up smaller companies, as it will spare them bidding for all licences to build a nation-wide presence.

Some private groups, like Escotel Mobile Communications Ltd, part of tractor and auto parts maker Escorts, unlisted telecoms group Bharti Enterprises and fast-growing conglomerate Reliance, have already started building war chests to expand.

NEW LICENCES

The government set the ball rolling in March by issuing licence-bidding forms and expects to declare the winners by the end of August or early September.

"We see just three or four groups remaining in India's telecoms business," Bharti chairman Sunil Bharti Mittal said.

Analysts say once the dust settles; just four big groups may dominate the cellular landscape -- Bharti Enterprises, Reliance, Hutchison Whampoa and the Birla-AT&T-Tata cellular combine.

Bharti has already announced it has won commitments for additional funding worth $460 million for funding expansion.

The first round of M&As was in the late 1990s.

This led to AT&T and the Birla group merging their joint cellular venture with another founded by the Tata group, India's largest private conglomerate. Hong Kong's Hutchison Whampoa and Bharti group acquired a host of smaller cellular companies around India.

Analysts say one big merger candidate this time could be BPL.

Investment banking sources say BPL, which has cellular services in Bombay and the states of Maharashtra, Kerala and Tamil Nadu, is in merger talks with Bharti and Hutchison.

Chandrashekar denies the merger talk but analysts say BPL may find it hard to raise money to fund expansion. It had to drop plans for an initial public offering last year because of the battering the telecom sector received in global markets.

BPL may also find it tough to get more funding from partners France Telecom, which owns 26 per cent of operating firm BPL Mobile Communications, and AT&T whose company MediaOne owns 49 per cent of another operating firm BPL Cellular.

The fortunes of France Telecom and other global telecom giants have been battered by the huge bids they made for next generation mobile licences.

"France Telecom has its own set of problems and may not be willing to pump in more money" into BPL, an analyst with a Bombay-based brokerage said. "AT&T on the other hand is likely to go along with the Birla and Tata groups" because of its existing cellular alliance with them, he said.

SMALL IS NO LONGER BEAUTIFUL

And if a big player like BPL faces these possible hurdles, smaller firms could find the going even tougher, analysts say.

Global telcos, reeling from huge debts from investing in next generation mobile services, are unlikely to look beyond home shores to invest in these ventures. IPOs are out of the question and raising debt is also tough for many of these indebted firms.

And what's worse is the domestic cellular industry will now have to face competition from an unexpected quarter -- the fixed-line industry.

The government in January allowed fixed-line firm to offer a cheaper limited radius "poor man's mobile service" to customers.

Analysts say this could hit the smaller groups hardest and mean that only the big players who have plans to offer both the cheaper and the regular mobile service survive.

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