India Connecting Partners Vodafone paying $1.5 billion (Rs 6,750 crore) for 10 per cent of Bharti Tele-Ventures is big, but the interest of several European telecom majors in the world's fastest growing wireless market indicates there's plenty of action waiting to explode.

Days after UK mobile services giant Vodafone announced it wouldpick up a 10 per cent stake in Sunil Mittal's Bharti Tele-Ventures(BVTL) for an eye-popping $1.5 billion (Rs 6,750 crore), Spanishtelecommunications operator Telefonica agreed to buy O2 PLC, a UKmobile company, for £ 17.7 billion (Rs 1,41,600 crore). Theacquisition of o2, which has been a star performer in the Europeanmobile telephony space for the past three years, enables Telefonicato further expand its footprint across Europe-earlier in 2005, theSpanish corporation had taken over Czech operator Cesky Telekom.

Even as European wireless giants scramble to consolidate theiroperations within the continent, there's a billion-dollar questionnow being asked in global investment banking circles. Post Vodafone'sre-entry into India, how long will it be before operators likeSistema, Telenor, France Telecom-and Telefonica- make theirintentions clear for the world's fastest growing wireless market? AsManisha Girotra, MD & Chairperson (India), UBS Securities (whichrepresented Vodafone in the deal with Bharti), points out, theEuropean operators have little option but to be in India. "Thedemographics work well for them, with the 18-25 age group being ahuge population. Besides, the 3g problems are over in Europe and thenext story will have to be Destination India," she states.

To be sure, there are many who agree with that line of thinking,encouraged no doubt by the policy initiatives taken by the governmentfor the telecom sector, the latest being an increase in the limit onforeign direct investment to 74 per cent. And if the Europeans arelooking at India very closely, two huge triggers have prompted thatinterest. One is the near-saturation levels prevailing in Europeanmarkets. And two, the conviction that Indian telecom has finally comeof age, with the Bharti-Vodafone deal contributing in no smallmeasure in reinforcing that belief. Explains Munesh Khanna, ManagingDirector, N.M. Rothschild India: "One would have expected it (a dealof such magnitude) to come from a place like China. This deal onlyproves that the levels of interest in India have certainly increasedfrom the perspective of the players in Europe."

At the same time, the options for the European players are fairlylimited with some of their markets having penetration levels inexcess of 90 per cent. Stagnant revenues per user compound thatproblem. Against such a bleak backdrop, entry into newer markets isvital. Sure, but why India? According to Kishor Chaukar, ManagingDirector, Tata Industries, the growth in the Indian market-about 35per cent in 2005 so far-is clearly one huge contributor to theinterest in the Indian market. "India is a huge market, and there'salso stability on the regulatory front," he points out. It also helpsthat most domestic players aren't doing do badly for themselves inthis capital-guzzling business. According to Enam FinancialConsultants' Co-Head Investment Banking, Mahesh Chhabria, operatorsare demonstrating healthy cash flows and there have been high-quality network rollouts. "India has major positives like the highestper minute usage rates and the lowest tariffs. With operators lookingto provide more value-added services, there is ample scope for moremoney to flow in," he explains.

Clearly a newer and a more conducive environment has augured wellfor Indian telecom. As av Birla Group Chairman Kumar Mangalam Birlatold BT recently: a lot of the regulatory overhang has been cleared.That has contributed to his group deciding to do a rethink on telecomas a business. "We were in exit mode and under the new circumstances,we thought it made sense to keep telecom as a strategic business.Today, one cannot have a strategy that is rigid and etched in stone.It has to be flexible," he states. The AV Birla Group has, in theprocess, decided to increase its holding in cellular major IdeaCellular to over 50 per cent from the earlier level of 33 per cent.

So, who are the most likely suitors? Russian operator Sistemacomes readily to mind, as it has come close to clinching a deal inIndia on more than one occasion. It was one of the bidders whenCingular Wireless put its 33 per cent stake in Idea Cellular on theblock; Sistema had also offered to acquire a 49 per cent stake in theC. Sivasankaran-promoted Aircel for a whopping $450 million (Rs 2,025crore). Both the proposed acquisitions never saw the light of day,but as the buzz in investment banking circles indicates, thoseaborted bids haven't resulted in India dropping off Sistema's radar.

The case of Telenor is interesting. This Norwegian major, apartfrom a presence in its home country, operates in Denmark, Ukraine,Hungary and Malaysia. It also has a presence in neighbouringBangladesh and will soon commence services in Pakistan. Going by thatgeographical spread, India would be hard to leave out. Here too, thenews is that India is being seriously considered and it could just bea question of time before it comes in. The other players who arescouting around for buyouts in India are said to be France Telecomand Telefonica.

Any potential acquirer wouldn't want to wait too long beforetaking the plunge into India, given that valuations aren't gettingcheaper. The Bharti-Vodafone deal placed Bharti's valuation at $17billion (Rs 76,500 crore)-(same time last year, Bharti's marketcapitalisation was Rs 29,600 crore while it is over Rs 63,000 croretoday)-and this could result in other players, including regionaloperators like Aircel and Spice, commanding a premium. Of course, thechances of Spice and Aircel being gobbled up by a pan-India operatorsuch as Bharti or Hutch or Idea-rather than any of the globalpredators-are pretty strong. Aircel came close to sealing a deal withHutch as it did with Sistema. The need for the smaller operators tosell out comes largely from their inability to expand their presenceto more circles as they aren't in a position to rustle up the hugecapital needed for such growth.

Other than India, China-the largest mobile market after the uswhere it is not easy to invest because of stricter regulations-wouldbe a logical country foreigners should be eyeing, but from a domesticstandpoint, India has its advantages. Regulations, point out bankers,are more sympathetic towards the operators. In 10 years of wirelesstelephony, India has managed to bring in the Calling Party Pays (CPP)regime quite effortlessly. (China does not have a CPP regime.) Smallwonder then over the last couple of years, Indian operators have beenconsistently logging in over two million subscribers each month. Thepolicy to allow a foreign operator to hold 74 per cent in an Indiantelecom corporation is the cherry on the cake. "The increase in fdiwill become an added incentive," avers Chaukar. So, who's it going tobe after Vodafone? Watch this space.

BOX

WHY TELECOM EUROPE IS KEEN ON DESTINATION INDIA

India is the fastest growing market in the world

Quick movement to the CPP regime

European home markets are saturated with slow growth in revenues

India could just be the next big 3G story