Etisalat's interest in RCom well-founded

UAE-based Etisalat looks like it’s emerged as the frontrunner for a stake in India’s Reliance Communications, but is investing in the hyper-competitive market really worth it?
Etisalat certainly thinks so - and it’s probably right.
The firm’s chairman Mohammad Omran confirmed to Reuters yesterday that Etisalat is “studying several opportunities in India, among them is Reliance.” 
AT&T has denied reports that it is in talks to buy a minority stake in RCom.
Similarly, South African telco MTN says it is “definitely not” in any merger talks with Reliance, reported Bloomberg.  
One thing that is clear is that Reliance, backed by billionaire Anil Ambani, is seeking a strategic partner to help reduce its $6.2 billion debt burden and help pay for network expansions.
The board approved the sale of up to a 26% stake in the firm on Sunday.
As the second largest operator with 105 million subscribers, the company certainly has scale, deep pockets and is in for the long-haul.
Indian mobile operators are adding 15-17 million new customers a month, and with 600 million subscribers, there’s still another 600 million or so customers left to sign up.
Etisalat wants a bigger piece of the pie. It has already stumped up $900 million for 45% in GSM1800 start-up Etisalat DB Telecom, which is still on the drawing board but has start-up spectrum in 15 circles.
Reliance has mostly 4.4MHz of start-up 1800MHz spectrum in 15 circles.  It also has 6.2MHz of spectrum in six circles, while in Bihar it has 8MHz of 900MHz spectrum.
Last month, RCom also picked up 5MHz of 2100MHz spectrum in each of 13 circles for $1.8 billion.
India’s dismal 1% broadband penetration adds to the country’s 3G opportunity.
Further, India’s late W-CDMA/HSPA entry and its low-cost 3G model could see the country leapfrog ahead of global penetration norms.
3G handsets in India are already available for a low $110.
According to leading vendors, 10%-12% of monthly handset sales are 3G-enabled devices.  And there are an estimated 50-60 million 3G handsets already in circulation.
Financial services firm CLSA estimates India’s 3G customers could reach as many as 130 million by March 2013.
So much for the pros of investing in India, now here come the cons.
RCom’s debt of $6.2 billion is not to be sneezed at – and that’s only going to get worse with the rollout of a 3G network across 13 regions.
And with only 5MHz of spectrum per circle for 3G, any 3G success is quickly going to be impeded by spectrum limitations and further capex spending.
On the 2G front, with 12-14 operators already present in each of India’s 22 circles, and more GSM1800 operators to come, the tariff environment could get even worse.
The market could also be given a stir should Mukesh Ambani, Anil’s estranged brother, pick up a cellular play, now that their non-compete mobile agreement has lapsed.
The cream of market has already been scooped up - the next wave of subscribers will come from even more remote rural regions.
Etisalat is going to also have to add regulatory uncertainty to the mix as the jury is still out on the regulator’s proposed new 2G licensing regime, which includes the controversial recommendation that operators pay for spectrum held above 6.2MHz.
TRAI’s blueprint also includes changes to the country’s M&A regulations.  The regulator’s proposition that operators can merge so long as they don’t end up with more than 30% of total users in a single circle will facilitate Etisalat buying into RCom.
But the problem for Etisalat is that in buying into Reliance that it will always very much have to play second fiddle to Anil Ambani in terms of exercising control over the company.
Having said all that, is India worth pouring big bucks into?
Yes, it’s worth a shot.
There is no other prospect for serious investments to be made in Asia’s other mega market of China.
Indonesia is also enticing but with 200 million people and the country’s Big Three operators already entertaining foreign investors, but the market is just doesn’t have India’s same mega status.
Despite its many flaws, India remains probably the most attractive market for would-be telco investors.