Telenor makes its Indian play amid economic turbulence - Norwegian operator aims to expand global base via acquisition of Unitech Wireless

Norway-based Telenor is the world's eighth-largest mobile group in terms of connections with an operator footprint spread across the Nordics, Eastern Europe and Southeast Asia. According to GSMA Intelligence data, total mobile connections at the Group surpassed the 100 million mark for the first time in third-quarter 2008.

In October, Telenor announced that it was to enter its twelfth global market – India – via the purchase of a 60% stake in the Indian greenfield operator, Unitech Wireless, for US$1.07 billion. Unitech is one of the six new Indian firms to be awarded GSM licenses earlier this year, and is expected to have coverage in place in all India's 22 telecoms circles by next year. Although Telenor has still not finalised how it will fund the acquisition, it is aiming to launch services in mid-2009 with EBITDA breakeven three years later. Capex is estimated to reach US$2 billion over this period. Telenor's longer-term ambition in India is to capture more than an 8% share of the world's second-largest mobile market, which still has less than a 30% mobile penetration rate despite more than ten mobile operators being active in the market. However, the recent investments in India by other international operator groups - including UAE-based Etisalat (via a 45% stake in Swan Telecom) and Japan's NTT DoCoMo (via a 26% stake in Tata Teleservices) - and other new entrants expected to enter the market via the country's forthcoming 3G-license auctions means competition is likely to increase further.

Elsewhere, Telenor's global mobile operator footprint is grouped into three divisions, each containing their own distinct market dynamics and trends: the mature Nordic markets (where Telenor also has fixed-line and broadband businesses), Eastern Europe, and its fast-growing - but often volatile - Asian markets. According to the Group's third-quarter figures, Asia accounted for 50% of mobile capex and 83% of subscriber growth, while - at the other end of the scale - the Nordic region commanded only 24% of mobile capex and accounted for just 3% of subscriber growth. The capex-to-sales ratio in both Eastern Europe (11%) and Asia (21%) have both halved over the last two years, while in the Nordics it has remained stable at around 9%.

For some years, the Group has been executing what it refers to as a "control or exit" strategy, which has seen it either divest its minority stakes in operators or increase ownership to a controlling position. The only outstanding issue in this regard relates to Telenor's long-running legal dispute with Alfa Group, its shareholder partner in both Ukraine's Kyivstar - majority-owned by Telenor - and VimpelCom, Russia's second-largest mobile operator in which Telenor holds a 29.9% voting stake. Analysts predict that a possible out-of-court solution to the various legal cases between the two could be an asset swap that would give Telenor total ownership of Kyivstar and Alfa most of VimpelCom.

Meanwhile, strong growth in Asia has meant that markets such as Bangladesh, Pakistan, Thailand and Malaysia, which are all registering double-digit subscriber growth year-on-year, have quickly become among Telenor's largest markets in terms of connections. Only Kyivstar currently has more connections, though it grew by less than 2% over the year.

But many of these fast-emerging Asian markets have presented Telenor with a raft of challenges: The planned IPO of Grameenphone – believed to be the largest-ever undertaken in Bangladesh - has been scaled back due to the global financial downturn; tax rises and pricing pressures have affected Pakistan; and 3G delays and interconnection issues have hit Thailand. In its more stable Nordic and Eastern European markets, Telenor has been generally successful in maintaining its market position and margins amid the current economic turbulence.

Matt Ablott, Analyst, GSMA Intelligence:

Telenor’s entry into India is a brave move, especially in the current economic climate; it has already been forced to look at alternative ways to fund the Unitech deal after some shareholders objected to its original plan of raising NOK12 billion (US$1.7 billion) via a rights issue. As was the case with Etisalat's similarly-sized US$900 million investment in Swan Telecom, there are also fears that the new Indian GSM licensees are being overvalued by the international players looking for a route into India. Further investment will be required if Telenor wants to secure 3G spectrum in the forthcoming auctions. While the Indian market appears to have plenty of room for subscriber growth, competition is fierce and double-digit competition is probably unsustainable longer term, suggesting some consolidation will occur. On the plus side, the Indian regulator’s move to encourage tower-sharing between operators will help Unitech build-out its network to the more rural B and C circles, which is set to account for the majority of subscriber growth moving forward. Nevertheless, Telenor may still struggle to sufficiently differentiate its Indian offering in such a crowded marketplace.