Bharti & Tata Merger: What is the real gain for Bharti?

Yesterday's newspapers had reported that Bharti will combine its business with that of Tata's. The press release says that it is a cash free and debt free deal, with Bharti assuming a small portion of the unpaid spectrum liability of Tata’s towards the DoT, which is to be paid on a deferred basis. Earlier on 30th June 2017, I had written a note titled "Bharti + Tata: Spectrum Synergies". The purpose of the current note is to refine my earlier findings on the real gain for Bharti from Tata's spectrum and to find out why Bharti is paying only a small portion of Tata's unpaid spectrum liability. The note also discusses the additional steps that Bharti needs to take to enhance its ability to offer 4G using Tata's spectrum. For this purpose, I have overlapped the spectrum holdings of both the entities (one below the other for each circle) for enhanced visualization - this is embedded in this note, as under.

Spectrum Matrix (Bharti & Tata)

The legend describing the details are listed below the table.

The description of columns is as under.

Column 1 - Lists the Licensed Service Areas (LSA), Column 2 - Maps the entity to its spectrum holdings; Column 3 - Indicates the quantum of liberalized spectrum in the 800/900 MHz band (MHz); Column 4 - Indicates the quantum of un-liberalized spectrum in the 800/900 MHz band (MHz); Column 5 - Indicates the quantum of liberalized spectrum in the 1800 MHz band (MHz); Column 6 - Indicates the quantum of un-liberalized spectrum in the 1800 MHz band (MHz); Column 7 - Indicates the quantum of liberalized spectrum in the 2100 MHz band (MHz); Column 8 - Indicates the quantum of liberalized spectrum in the 2300/2500 MHz band (MHz); Column 9 - Indicates the steps that Bharti needs to enhance its ability to offer 4G using Tata's spectrum. Note - Spectrum marked as "Liberalized" can be used for deploying any technology, and those marked as "Unliberalized" can be used for offering 2G only.

The description of the color codes is as under.

LSAs marked with "steel grey" color indicates the relevant circles (where Tata's spectrum can be used by Bharti to enhance its ability to offer 4G); Cells marked with "RED" color indicates those with insignificant quantum of spectrum; Cells marked with "Yellow" color indicates those with 5 MHz of contiguous spectrum (minimum required for offering 4G); Cells marked with "Green" color indicates those with 10 MHz or more of contiguous spectrum.

Cells marked with "Black Thick Border" indicates the spectrum blocks where 4G has been already deployed. Cells marked with "Black Dotted Border" indicates the spectrum blocks where 4G can be deployed in future (subject to taking some steps). Cells marked with "Black Thin Border" indicated spectrum blocks which are not suitable for offering 4G.

Cells encircled as "Sky Blue" indicates the spectrum blocks of Tata which can be combined with that of Bharti to offer 4G. The exact manner in which it can be used (along with constraints if any) is mentioned in the last column (marked as "Remarks").

The text colored "RED" indicates spectrum which is expiring in next 4 to 6 years.

Summary of Findings

1. Bharti can use Tata's spectrum (subject to meeting some preconditions) in only 14 of the 22 circles.
2. Tata's 2100 MHz spectrum can be combined with Bharti's in only 3 of the 8 circles to create a larger block of 10 MHz or more. The rest will require harmonization (switching of frequency spots by service providers).
3. Tata's 1800 MHz liberalized spectrum in 3 circles (AP, Maharashtra, and Mumbai) are NOT adjacent to that of Bharti's and therefore will need harmonization to create a larger block of 10 MHz or more.
4. Tata's 1800 MHz un-liberalized spectrum in 5 circles can be used by Bharti to refarm (parking GSM subscribers) its existing 900 MHz band for deploying 4G.
5. Tata's 800 MHz liberalized/un-liberalized spectrum is fragmented and cannot be used for offering 4G immediately except Delhi.
6. In Delhi, Tata can immediately offer 4G in the 800 MHz band by liberalizing its 3.75 MHz un-liberalized spectrum (it is adjacent to its 1.25 MHz liberalized spectrum) but only for 4 years (as 3.75 MHz is expiring in 4 years).

Using Tata's 800 MHz for 4G

Bharti can use Tata's 800 MHz for 4G only after liberalizing the un-liberalized spectrum (see column no 2) and by acquiring additional carriers in the upcoming auctions (see column no 6), as the current amount (held by Tata) falls short of 5 MHz (minimum required for offering 4G). The table below list the outflow for Bharti to liberalized and acquire additional carriers in the 800 MHz band in the next auction for offering 4G (see column no 7).

Please note that in Delhi Bharti does not have to wait but can offer 4G immediately by liberalizing 3.75 MHz by paying Rs 620 Crs. But the services can continue only for 4 years after that Bharti has to reacquire it in auctions (column 4 list the expiry period of all the un-liberalized spectrum). Total outflow for Bharti for using Tata's 4G spectrum (assuming auctions were to take place immediately - column 5 list the inventory) is Rs 13,226 Cr at current 800 MHz prices. This includes the price of liberalizing the un-liberalized spectrum. For full visualization of the 800 MHz spectrum in all the circles please refer to my earlier note titled - "Stabilizing 4G".

Conclusion

Most of the Tata's spectrum is not that useful for Bharti unless it is able to execute some follow up actions like harmonization (aligning frequencies with other operators), and liberalizing (paying for un-liberalized 800 MHz spectrum), and acquiring new spectrum in the upcoming auction in the 800 MHz band. This probably explains why Bharti is paying only a small portion of Tata's unpaid spectrum liability. But the merger will enable Bharti to gain crucial access in the 800 MHz band, and be an active voice in future activities in this band. This will give Bharti much-needed leverage in future auctions, and in the harmonization of the 800 MHz band.

(Views expressed are of my own and do not reflect that of my employer)