Are Telenor's shareholders aware of its bad judgment, below average business case and excessively litigant approach in India?
Telenor is at it again. This time it is threatening to hang up on its India operations. Peeved over the high reserve price recommended by the Telecom Regulatory Authority of India (TRAI) for spectrum auctions, as well as the low quantity of spectrum put on the block, Sigve Brekke, Managing Director of Uninor, a joint venture controlled by Norwegian firm Telenor, said last week,
“If these recommendations become policy, we will be forced to exit India. It would be impossible for us to continue operations here.” Uninor then challenged the TRAI's recommendations on spectrum auctions in the Supreme Court for not being in line with the 2G licence cancellation judgment of February 2, 2012.
It is hard to believe that Telenor, one of the world's top 10 telecom players, was not aware of the telecom scam in India, which was being reported on a daily basis by mainstream media for over a year before it struck its deal with Unitech to buy equity in October 2008. The momentum around the scandal in granting spectrum in 2008 at 2001 prices gathered strength since September 2007.
Unitech was in discussions with several multinationals while engaging with Telenor. While those companies walked away from the transaction, Telenor did not. Who is to blame for this foolhardiness?
Also, while Telenor paid a huge premium to buy 67 per cent of Unitech, rather than accept that this was a premium for spectrum, it allowed Unitech to pretend, including through press releases by the Central Government on October 31, 2008, and November 7, 2008, that the valuation was on account of other assets and not spectrum. A bad move in the end.
Telenor's process of due diligence is highly questionable considering that the Comptroller and Auditor General of India's report on 2G spectrum allocation of 2010 revealed that all 22 licence applications submitted by Unitech were an attempt to “fraudulently access spectrum” by submitting defective and false documentation.
On its part, the Telenor group maintains that it did indeed conduct its requisite due diligence on licences processed, scrutinised, stamped and guaranteed by the Indian Government under the same policy that had been established for years. But what of the applications themselves?
Copies of such applications must have been made available to Telenor's lawyers and due diligence team with violations ranging from simple things such as the memorandum of association (MoA) describing real estate as its business rather than telecom. Authorised share capital was found short in every single application, in some cases, merely Rs.5.2 crore, against the requirement of Rs.128 crore.
False certificates of paid-up capital were submitted by company secretaries in several applications. In others, the failure to register alteration in the main object clause of the MoA by the Registrar of Companies was suppressed. It is hard to believe that Telenor, as a large investor, was unable to locate these flaws, despite its due diligence being restricted to examination of these basic documents alone unless it was blinded by the temptation of a sweetheart deal.
Telenor's performance, once it took over, while better than the other entrants, has been average. It was allocated spectrum across most of its 22 circles between April 2008 and January 2009 and was obligated to rollout networks consistent with the licence conditions and rollout obligations cast upon the joint venture.
However, by 2010, the company had started violating rollout obligations in several of its circles. This was not Unitech's fault alone.
By now, Telenor was fully in control as a majority partner. In November 2010, TRAI recommended cancellation of eight of Uninor's licences for failure to rollout while severe financial penalties were imposed on the remaining 13 (it doesn't have spectrum for Delhi) due to a delayed rollout.
The TRAI's report shows that till November 2010, Telenor merely had 16 million subscribers with zero subscribers in eight of the circles where it had received spectrum.
When the cases to cancel licences were filed, Uninor barely had 2.2 per cent market share. Even today, Uninor's market share remains a mere 4.62 per cent. Surely, it can't blame either the government or its partner Unitech for its performance.
Telenor's entry strategy also failed to recognise that participation in the telecom game in India required a serious Indian partner with deep pockets, and not just someone who had wrangled a licence through what the CBI terms as a ‘criminal conspiracy'.
It is no surprise that as things got tough, serious financial differences broke out between Unitech and Telenor. Telenor was committing investments of several thousand crore in its India operations even as the CBI was filing FIRs (October 2009) and public interest litigations (since April 2010) were being heard about the legality of the licences in the courts.
The Supreme Court, in March 2010, upheld the quashing of the press release that led to Uninor's licences. While Telenor keeps flagging its Rs.14,500-crore investment, under whose advice was it taking such massive risks with shareholders' money? The relationship between the two partners is at an all-time low. Board meetings are video-graphed, lawyers accompany both sides to discussions, one arbitration on valuation has already reached Singapore, while a second one on indemnification is rumoured to be on its way. Meanwhile, Uninor's enterprise valuation has plummeted to Rs.400 crore from its 2008 high of Rs.11,620 crore.
Grumbling over auction
Over the last two months, Telenor has grumbled that cancellation of its licences before the auctions occurred or delaying the auctions would hurt its interest. The Supreme Court has granted that licence cancellation be co-terminus with the 2G auctions, which has been extended to August, giving the company more time to plan and acquire. This is exactly what Telenor wanted.
However, Telenor is now protesting against the reserve price and the quantum of spectrum placed on the block. Why does Telenor expect that in a bidding process, it should be guaranteed spectrum or should be offered a price that meets its business case as a new entrant?
India has seven existing operators and though new investment is critical, allocation of spectrum will have to ensure a fair market price while meeting the requirements of the most serious players. An auction process can never guarantee spectrum for any operator.
Even India's largest operators do not have pan-India 3G spectrum, despite the fact that over three slots were offered in most circles in the 3G auctions.
The guarantees and concessions that Telenor seeks in the face of its absence of due diligence, bad judgment, terrible choice of partner and average performance, where network rollouts are concerned, need to be considered carefully before any concessions are made.
Finally, it is unclear what Telenor was telling its shareholders in 2008, and what story it is spinning to them now. Business sense suggests little chance of success for a new entrant in a market which already has 800 million subscribers on the networks of its competitors, even if spectrum is given at half of the current reserve price determined by the TRAI. Unless, as the TRAI chairman points out, spectrum price is a small fraction of overall operational costs. If that is true, then does Telenor really have a case for a reduction in the reserve price?
Telenor's combative and litigant strategy has not paid off either. The company is fighting the government by invoking an international litigation under a bilateral treaty, fighting the court through a review petition and now the TRAI through an interim application. It is also unclear if filing a case against TRAI recommendations in the Supreme Court is savvy strategy considering that since TRAI's recommendations are not binding on the government, they do not provide Uninor any cause of action.
Maybe shareholders need to review Telenor's mistakes and fix responsibility before allowing the company to make further allegations of unfair treatment, threaten more court cases, or even a withdrawal from India. Last week, Telenor's Chairman Harald Norvik, who was the chairman during Telenor's India entry in 2008 announced his resignation after the Norwegian Government, which holds 54 per cent majority share in Telenor, withdrew support for his leadership over the sale of TV2, Norway's main commercial television channel. It is surprising that heads are rolling over the sale of a TV channel but not for flushing $3 billion down the drain by taking unprecedented risks in the Indian market.
Meanwhile, Telenor continues to maintain that it is blameless and that several representatives at the highest level of the Indian Government have also expressed that the Telenor Group is an innocent third party. While it would be an economic loss for India to lose Telenor, the company must acknowledge that it is misplaced to whine for special consideration given its own performance and the multiple red flags that it has ignored right from mid-2008 when it began its highly questionable due diligence process in India. The only real victims here are Telenor's unsuspecting minority shareholders and Uninor's employees.