India telecom sector -Stage set for Bharti‟s Qualcomm buy? ::Macquarie Research,

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India telecom sector
Stage set for Bharti‟s Qualcomm buy?
Event
 The government‟s Department of Telecom has (finally) granted Qualcomm the
Internet Service Provider license. Qualcomm had bid and won 20MHz BWA
spectrum (2.3GHz band) for over US$1bn in 4 circles (Mumbai, Delhi, Kerala
and Haryana) at the auction held in June 2010. We believe this clears the
path for sale to an incumbent. In our view, Bharti is the most likely buyer.
Impact
 The wait for Qualcomm is over. The grant of license was on hold due to a
technicality. In the wake of the 2G investigation, government authorities are
doing detailed due diligence before taking any decision. This would ensure
that there are no allegations of favourable treatment for any individual.
 Why would Qualcomm sell? In a 2010 press release, Qualcomm mentioned
that the company “has a history of participating in spectrum auctions to
expedite commercialisation of new wireless technologies. By participating in
India's BWA spectrum auction, Qualcomm can foster the accelerated
deployment of TD-LTE”. Prior to India, the company had similarly purchased
spectrum in multiple countries- e.g. the US (LTE) and Australia (3G). The
intention was clear through the sale to AT&T in the US and Optus in Australia.
 Purpose served in India: Based on recent news articles, it is now
increasingly clear that TD-LTE will emerge as the standard in India - leaving
WiMax behind. In fact, news reports suggest that Bharti has already identified
vendors for deployment of BWA (TD-LTE) in the circles where it already holds
spectrum. Qualcomm (which holds a 74% stake in the entity which holds the
spectrum) may therefore feel comfortable exiting at this stage. Qualcomm‟s
partner Tulip Telecom (13% stake) may also sell out. This may help the
company fund its growth plans and upcoming FCCB conversion (in 2012).
 Potential buyers- Bharti most likely: For the incumbent #1 Bharti, buying
the spectrum makes perfect sense from a five-year perspective. We believe
Bharti would like to maintain leadership in the next generation of wireless
technology – especially in Mumbai and Delhi. This would also help position
against new entrant Reliance Industries (RIL). RIL holds BWA licenses in all
22 circles and we expect it to acquire an existing operator to expand services
to 2G and 3G. The 20MHz spectrum would also become more valuable if
regulations evolve over the next three years and the „Next Generation Unified
License‟ is introduced. Importantly, Bharti has the ability to pay - we expect it
to generate free cash flow of over US$1bn every year.
 We believe that other incumbents (Idea/ Vodafone) may be interested but
their balance sheets may not support this. We do not rule out the possibility
that another player (Augere) may be interested in buying the smaller circles
(Kerala and Haryana). Since the spectrum in the four circles is held in a single
Qualcomm subsidiary, the structuring of such a deal may be tough.
Outlook
 We think the grant of license will lead to a sell out by Qualcomm to a strong
incumbent such as Bharti. We expect operational rollout by middle of CY2012.