Telecom Sector - 3G auction guidelines – Incumbents at advantage

3G auction guidelines – Incumbents at advantage

The DoT released the guidelines for auction of 3G spectrum. The key highlights include:

1) Eligibility: Existing license holders and foreign players with 3G experience to be allowed to bid in upcoming auction. Non licensees will have to acquire UAS license prior to the launch of commercial operations, if successful in the auction, which would cost them Rs16.6bn more than the existing players.

2) No of blocks at auction in each circle – No of blocks of 2x5 MHz of 3G spectrum (2.1 GHz ) at auction are; West Bengal - 1, Gujarat & Delhi - 2, HP & UP (w) - 3, Nil in Rajasthan & North east and 4 in the remaining 15 circles.

3) Only one block per participant: Only one block of 3G spectrum (2x5 MHz) and 1 block of BWA spectrum (20 MHz) shall be allotted to any single bidder in a service area. A block of 3G and BWA spectrum each is reserved for MTNL /BSNL at the price to be determined in the auction.

4) No further spectrum release in next 12 months: No further allotment of spectrum (other than currently at auction) is expected within next 12 months. However, if any auction is held within 12 months, the reserve price would then be the auction winning price for that service area.

5) Application deadline 5th Jan-09, Mock auction to be held on 12th & 13th Jan-09 and final 3G auction to commence on 16th Jan-09. BWA auction to begin 2 days after he close of 3G auction.

6) Auction amount to be paid within 15 days: Successful bidders will have to pay the auction bid amount within 15 days, including 25% payment in 5 days from auction.

7) Spectrum to be auctioned via 2-stage simultaneous ascending e-auction method (widely adopted method, also used by US & UK), consisting of

(a) Clock stage – Multiple round bidding process which ends when no of bids left are =< no of blocks. Winning price in each round would be the lowest of the qualified bids. Provisional winning price at end of each round would strictly be higher than in previous round, subject to cap on price increments at 10% of previous bid or 25% of reserve price.

(b) Assignment stage – Among winning bidders for selection of specified frequency blocks.

Our observations and views on 3G guidelines:

n On spectrum usage charge, TRAI and DoT have agreed for 1-2% increase and have discarded 1% incremental charge on 3G spectrum. Also the 3G spectrum is being excluded in determining the slab for calculation of spectrum usage charge, subject to approval by DoT.

n The 8, Metro & Cat ‘A’ circles (high revenue generating circles contributing 60% of industry revenues) and circles with fewer blocks (Delhi, WB, Gujarat) for auction would likely see intense bidding, in our view.

n The guidelines remain silent on 3G spectrum for CDMA players (450/800 MHz) and allotment of additional spectrum beyond 2x5 MHz.

n We would be closely watching out for the list of pre-qualified bidders which could partly give an indication on intensity of likely aggression in upcoming auctions.

n We continue to believe that incumbent operators remain at an advantage given the strong subscriber base which helps in cross selling, lower incremental cost to upgrade networks to 3G and cost advantage of Rs16.6bn v/s new entrants towards UAS license fees.

n We highlight that simultaneous ascending auction process (similar to that in US & UK) could stretch into too many rounds of bidding especially when it comes to the lesser blocks and/or higher revenue circles. However, we continue to believe that any bidding in excess of Rs42bn (aggregate for 22 circles) would be negative for all the operators, more so for players lacking pan India presence (Refer our earlier report 3G Auction: How much to pay? for details).

n We believe that incumbent operators Bharti Airtel, Vodafone, RCOM, Idea Cellular and Tata Tele would be serious contenders in the 3G auction. Regional /new players like SWAN, Unitech and Aircel may also participate in the auction, but may not contest aggressively due to funding issues and focus on yet to be established 2G business. The details of all qualified bidders to be released by DoT on 9th Jan-09 would give an indication of auction intensity (especially with respect to participation from foreign telcos).

n While we remain bullish on the growth in the telecom sector, Bharti Airtel remains the only BUY (TP Rs1,025) in the sector, in our view.