Bharti Airtel has emerged the frontrunner to acquire Loop Mobile, one of Mumbai's oldest cellular networks, as the company's owners, Dubaibased IP Khaitan and family, seek to exit the telecom sector, said multiple sources aware of the negotiations.
Discussions with Airtel have been going on for some time and have gathered momentum in recent weeks. But a final deal is dependent on clarity on guidelines governing mergers and acquisitions in the telecom sector and the renewal fee for Loop's licence, before discussions begin on the valuation and other commercial terms. Loop's licence expires in September 2014.
Loop, the fourth-largest operator in Mumbai, started operations in 1995 as BPL Mobile. In 2005, Khaitan Holdings Group took ownership control of the company. Loop has over 3 million customers as per July subscriber numbers.
What is, however, of strategic interest to likely buyers including Bharti is the 8 MHz of spectrum in the 900 MHz frequency band that Loop operates in. Both Bharti and Idea, in the Mumbai circle, have spectrum in the 1800 MHz band. The 900 MHz frequency band is preferred by cellular companies as it is more efficient, in that a lesser number of cellphone towers are required, thus reducing capital spend.
Loop's subscribers have stayed on despite number portability — which allows them to switch to another operator while retaining their phone number — and the company generates among the highest average revenue per user (ARPU) per month. Nearly 30% of its subscribers are post-paid, and spend more per month. Comparable figures for Airtel in Mumbai are not available, but the number is likely to be much lower.
The acquisition of Loop will help Airtel become the leader in Mumbai in terms of number of subscribers, thus propelling it to the top slot in the key metros of Delhi and Mumbai.
Loop Mobile's Deal with Bharti Hinges on Regulatory Clarity
A Bharti spokesperson declined comment on what he described as market speculation. Loop Mobile's spokesperson also declined comment.
The deal, however, hinges on key regulatory issues and will close once there is clarity on them. Notably, these include the quantum of licence renewal fee that has to be paid in 2014, along with the M&A guidelines. "With the licence expiry due, Loop has just one year of business value left.
An acquirer would want to buy into future cash flows for a longer time. So, if Loop gets to retain its 900 MHz for another 10 years, then it will be a prized asset. However, the government may decide to take back a portion of that (spectrum) for the auction pool and swap it with 1800 MHz (frequency). This clarity is essential for the deal and the final valuation," said an investment banker privy to the discussions.
Moreover, the guidelines for telecom sector M&As may impose a spectrum acquisition fee for non-market trades. "The minister has been hinting at plugging the loophole and asking telcos to pay a fee if they acquire spectrum from non-government sources, that is, via M&A. That will be a negative for any consolidation efforts," added another official on condition of anonymity.
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