Idea Cellular's Rs 3,310-crore purchase of Videocon's 4G airwaves in Uttar Pradesh (West) and Gujarat was expensive but necessary, experts said, reasoning that although the deal will significantly push up the company's debt it will help protect the revenue and customer base from an expected attack from Bharti Airtel and Reliance Jio Infocomm.
"Idea's spectrum acquisition of two circles from Videocon at a high premium highlights its need to improve 4G footprint given an aggressive push by Bharti (Airtel) and the imminent launch of Jio," Citigroup said in a note to clients.
It added, however, that two of the most important circles for Idea contribute 15 percent to the company's revenue and the acquisition will help it increase its 4G footprint to 75 percent of its revenue base, similar to that of market leader Bharti.
Bharti Airtel has already launched its 4G services in over 300 towns and cities while Mukesh Ambani-owned Jio is expected to launch its own 4G services in late December, as is Vodafone.
Idea, which was forced to advance its 4G plans, expects to start launching in a few towns from January 2016 and cover 750 towns in the first half of next year. The later it starts its 4G services and the lesser coverage it has, the greater chance it will give its rivals to poach its subscribers by marketing their own 4G services.
With this spectrum trading deal, under which the Aditya Birla group company bought one contiguous block of 5MHz airwaves each in the 1800MHz band in the two circles, Idea's 4G spectrum footprint will expand to 12 service areas, from 10 earlier. A contiguous block of 5MHz bandwidth is essential to offer quality 4G services.
Nomura said the price Idea paid for Videocon's airwaves in the two circles was double the final March 2015 auction price, given that the implied price for 5MHz in Gujarat was Rs 1,200 crore and Uttar Pradesh- West wasRs 500 crore.
Goldman Sachs said that adjusting for validity of 17 years of the airwaves, instead of the licence period of 20 years, the deal value implies a 133 per cent premium over the last auction price.
Citigroup said the high price was a reflection of the importance of contiguous spectrum which was critical for 4G. JM Financial termed it as a scarcitycum-strategic premium.