M&A Trends in the Indian Telecom Sector

Transcription

1 PGPX-2009 Individual Research Project (IRP) M&A Trends in the Indian Telecom Sector Report by Tanmay Gupta (PGPX 2009) IRP Guide: Prof. Rekha Jain

2 - 1 - Table of Contents EXECUTIVE SUMMARY INTRODUCTION SECTOR OVERVIEW REGULATORY ENVIRONMENT KEY PLAYERS RECENT TRENDS FUTURE OPPORTUNITIES RECENT PARTNERSHIPS, MERGERS AND ACQUISITIONS NTT DOCOMO TAKES STAKE IN TATA TELESERVICES NEW GSM LICENSE HOLDERS TELECOM INFRASTRUCTURE (TOWER) CONSOLIDATION VODAFONE ACQUISITION OF HUTCH TATA S GLOBAL FORAY Tyco Acquisition Teleglobe acquisition Presence in newer developing markets IDEA CELLULAR TAKEOVER OF SPICE TELECOM IDEA CELLULAR OVERVIEW SPICE TELECOM OVERVIEW TM INTERNATIONAL OVERVIEW SYNERGIES ANTICIPATED CURRENT STATUS DEAL STRUCTURE Planned Merger % open offer Non-Compete fee Valuation SUMMARY RELIANCE MTN MERGER FAILURE MTN GROUP RELIANCE COMMUNICATIONS... 29

3 5.3 BHARTI IN FORAY FOR MTN BHARTI BACKS OUT: PREDATOR OR PREY? RELIANCE IN TALKS WITH MTN: EXCLUSIVE NEGOTIATIONS THE FAILURE: SIBLING RIVALRY SUMMARY CONCLUSION AND M&A OUTLOOK EXHIBITS SPICE COMMUNICATIONS EQUITY HOLDING DETAILS SPICE COMMUNICATIONS AUDITED FINANCE RESULTS SUMMARY IDEA CELLULAR EQUITY HOLDING DETAILS IDEA CELLULAR AUDITED FINANCE RESULTS SUMMARY ENDNOTES Tanmay Gupta Page 2

4 Executive Summary Indian telecom industry is the second fastest growing telecom market in the world after China. The overall tele-density India has reached % at the end of January The growth has been fueled by progressive policies of TRAI and deregulation. The telecom industry is changing at a rapid pace with constantly changing policies, new players, alliances and partnerships being announced on a daily basis. In this study, I have looked at various M&A transactions that have taken place in the recent past. After doing a broad review, I have focused on two specific events, namely, Idea Cellular takeover of Spice Telecom and Reliance MTN merger failure. I have identified the following trends and drivers in the industry: Global ambitions of Indian Telecom giants will see acquisitions and joint ventures in growing African and South East Asian markets. Telecom players are also looking to tap into global funds to finance their aggressive growth plans. This will result in partnerships joint ventures and equity sellout to foreign players. New license holders will continue to look to sell their stake at a premium. New policies will seek to curb this license arbitrage. Smaller players with operations in only a few circles will find in difficult to compete with the nationwide players. The industry may see consolidation with these smaller operators being acquired by the larger ones. Unbundling of the corporation will continue as companies will seek for economies of scale and lower startup cost by infrastructure sharing. 3G and WiMax license auctions will spur M&A and partnership activity. Tanmay Gupta Page 3

5 1 Introduction The objective of my project is to study the Telecom industry in India and understand how the recent trends are driving Mergers, Acquisitions and Partnerships in this industry. I will study recent partnerships, merger and acquisitions that have taken place in this industry. I will focus on the following the following two deals in the industry to gain deeper understanding of the M&A nuances in this industry: Idea Cellular takeover of Spice Telecom: I have selected this as it is one of the biggest deals that happened in Telecom this year. It is a deal that will throw light on the consolidation trends in the Indian Telecom industry. Reliance MTN merger failure: Reliance MTN merger saga is an externally focused merger deal and involves two major Indian telecom operators Bharti and Reliance at different points of time. Studying the drivers in this deal will help me understand the global expansion trends in the Indian Telecom industry. The above two deals will provide me with deeper understanding of both consolidation and global expansion trends in this industry. 2 Sector Overview 2.1 Regulatory environment Telecommunications is one of the few sectors in India, which has witnessed the most fundamental structural and institutional reforms since Considering the great potential for the growth of telephone demand with the accelerated growth of economic activities, the Government of India announced the National Telecom Policy in 1994 and the New Telecom Policy in The National Telecom Policy provides for private sector participation to supplement the efforts of DoT in basic telephone services. The opening up of the basic services provided a big opportunity for private & foreign investors. More policy initiatives included Addendum to NTP -1999, Broadband Policy 2004, Amendment to Broadband Policy 2004 etc i. The opening of the sector has not only lead to rapid growth but also helped a great deal towards maximization of consumer benefits. The tariffs have been falling continuously across the board as result of healthy and unrestricted competition. Tanmay Gupta Page 4

6 The Telecom Commission and the Department of Telecommunications are responsible for policy formulation, licensing, wireless spectrum management, administrative monitoring of PSUs, research and development and standardization/validation of equipment etc. Telecom Regulatory Authority of India (TRAI), is an independent regulatory Authority under the Telecom Regulatory Authority of India Act, 1997 (as amended in January 2000). Under the TRAI Act, TRAI carries out various functions. It is empowered to make recommendations, either suo-moto or on a request from the Licensor on a wide range of matters. These include: the need and time for introduction of a new service provider; terms and conditions of a telecommunications license; revocation of licences; measures to facilitate competition and promote efficiency in the operation of telecommunication services; technological improvements in services; specifications as to the type of equipment to be used by the service providers; measures for the development of telecommunication technology and any other matter[s] relatable to [the] telecommunication industry in general; efficient management of spectrum. It is mandatory for the Licensor to seek recommendations from TRAI on the need and timing for introduction of a Service Provider and terms and conditions of License. TRAI's recommendations are not binding on the Central Government. Some other functions of TRAI include: ensuring compliance with terms and conditions of telecom licenses; fixing terms and conditions for inter-connectivity between service providers; ensuring technical compatibility and effective inter-connection among different service providers; regulating arrangements among service providers for sharing revenues; laying-down standards for quality of services; prescribing and regulating periods within which local and long distance telecommunication circuits are to be provided by service providers; maintaining a register of inter-connect agreements; Tanmay Gupta Page 5

7 ensuring effective compliance with universal service obligations. fixation of tariffs TRAI is empowered to issue directions to the service providers for discharge of these functions. The main objective of TRAI is to provide the affordable telecom services by creating competition in the telecom sector. But at the same time also ensuring that the competition is fair and not determinant to the interest of any section of society or service providers. The process of deregulation of Indian Telecom sector is summarized in the figure below ii. Pre-reform Partial Deregulation Further Deregulation Pre Take-off 2002 onwards MTNL - Mumbai and Delhi; DTS elsewhere No mobile service NLD - DoT per/ BSNL ILD - 4 private fixed service providers with less than 1% market share 2 GSM mobile players in each circle 13 players start National Telecom Policy (NTP) 1994 TRAI constituted 1997 National Telecom Policy, 1994 Licenses converted to revenue sharing Private sector share less than 5% in revenue terms Competition in NLD and ILD Licenses on Revenue share 4 mobile operators / circle NTP 1999 BSNL formed 2001 Internet Telephony 2002 New FDI Telecom - 49 % Policy, 1999 Calling Party Pays CDMA launch 3-6 operators in each circle Intra-circle merger guidelines Unified Licensing Broadband policy 2004 FDI - 74% 2005 Unified Licensing Source: IBEF M&A in Telecom sector is guided by many different regulatory bodies. These are summarized in the figure below. Tanmay Gupta Page 6

8 Regulations for M&A in the Telecom Sector are covered below iii : DoT guidelines on merger of licenses in Feb 2004 are based on TRAI recommendations. These include Prior approval of the Department of Telecommunications will be necessary for merger of the license. There should be minimum 3 operators in a service area for that service, consequent upon such merger. Any merger, acquisition or restructuring, leading to a monopoly market situation in the given service area, shall not be permitted. Monopoly market situation is defined as market share of 67% or above of total subscriber base within a given service area, as on the last day of previous month. For this purpose, the market will be classified as fixed and mobile separately. The category of fixed subscribers shall include wire-line subscribers and fixed wireless subscribers. Consequent upon the merger of licences, the merged entity shall be entitled to the total amount of spectrum held by the merging entities, subject to the condition that after merger, the amount of spectrum shall not exceed 15 MHz per operator per service area for Metros and category A service areas, and 12.4 MHz per operator per service area in category B and category C service areas. In case the merged entity becomes a Significant Market Power (SMP) post merger, then the extant rules & regulations applicable to SMPs would also apply to the merged entity. TRAI has Tanmay Gupta Page 7

9 already classified SMP as an operator having market share greater or equal to 30% of the relevant market. DoT has also issued guidelines on foreign equity participations and management control of telecom companies. These have been revised from time to time. The current guidelines are The total composite foreign holding including but not limited to investments by Foreign Institutional nvestors (FIIs), Nonresident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs), convertible preference shares, proportionate foreign investment in Indian promoters/investment companies including their holding companies, etc., referred as FDI, should not exceed 74%. The 74% investment can be made directly or indirectly in the operating company or through a holding company and the remaining 26 per cent will be owned by resident Indian citizens or an Indian Company. The licencee will be required to disclose the status of such foreign holding and certify that the foreign investment is within the ceiling of 74% on a half yearly basis. The majority Directors on the Board including Chairman, Managing Director and Chief Executive Officer (CEO) shall be resident Indian citizens. The appointment to these positions from among resident Indian citizens shall be made in consultation with serious Indian investors. No single company/legal person, either directly or through its associates, shall have substantial equity holding in more than one licencee Company in the same service area for the Access Services namely; Basic, Cellular and Unified Access Service. Substantial equity herein will mean equity of 10% or more. FEMA guidelines relate to issuance and allotment of shares to foreign entities. RBI has issued detailed guidelines on foreign investment in India vide Foreign Direct Investment Scheme contained in Schedule 1 of said regulation. As per the FDI scheme, investment in telecom sector by foreign investors is permitted under the automatic route within the overall sectoral cap of 74% without RBI approval. FDI scheme prohibits investments by citizen or entities of Pakistan and Bangladesh (regulation 5) primarily on security concerns. In the recent past, DoT has also delayed its approval to an Egyptian company s investment in Hutch India on similar grounds. Tanmay Gupta Page 8

10 SEBI takeover guidelines called Securities and Exchange Board of India (Substantial acquisition of shares and takeover - SAST) Regulations, 1997 are applicable to listed Public companies and hence would be applicable in case of M&A in listed telecom companies like Bharti, Reliance Communication, Shyam Telecom, VSNL, Tata Teleservices (Maharashtra) Limited, etc. These guidelines have been recently amended by SEBI and notified vide SO No. 807(E) dated The highlights of the amendment are as follows: No acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company shall acquire by himself or through persons acting in concert unless he makes a public announcement as per the regulations. Further, if a target company was unlisted, but had obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. Regulation 11(2) If an acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company is desirous of consolidating his holding while ensuring that Public Holding in the target company does not fall below the permitted level of listing agreement he may do so only by making a public announcement as per the regulations. Further, if a target company was unlisted, but had obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. - Regulation 11(2A) The minimum size of public offer to be made under Regulation 11(2A) shall be lesser of a) 20% of the voting capital of the company; or b) such other lesser percentage of voting capital as would enable the acquirer to increase his holding to the maximum possible level, while ensuring the requirement of minimum public shareholding as per listing agreement. Competition Commission of India (CCI), established in 2003, held statutory responsibility for ensuring free and fair competition in all sectors of the economy. The Competition Act, 2002 had provided for a liberal regime for mergers, whereby combinations exceeding the threshold limits fell within the jurisdiction of CCI. Most competition laws in the world require mandatory prior notification of every merger to the competition authority but under Indian law it was voluntary. However, CCI could also take suo motu cognisance of a merger perceived as potentially anti competitive and it could enquire until one year after the merger had taken place. Once CCI had been notified, it must decide within 90 days of publication of details of the merger or else it is deemed approved. The CCI could allow or disallow a merger or can allow it with certain modification. Tanmay Gupta Page 9

11 The Competition Act has not come into force in its entirety. Once enforced in its entirety, it will repeal the MRTP Act and dissolve the MRTP Commission. The Competition Act prohibits anti-competitive agreements and abuse of a dominant position. It also regulates combinations of enterprises and persons. The acquisition of enterprises by persons or the merger or amalgamation of enterprises is considered to be a combination and requires filings with the Competition Commission of India, but only if the thresholds of their assets or turnover exceeds the value stipulated in the Competition Act. The Competition Act seeks to ensure fair competition in India through a body known as the Competition Commission of India (CCI) iv. 2.2 Key Players Telecom Service Providers GSM is the most widely deployed mobile communications technology in India. There are many players offering GSM services in India. The players along with the number of subscribers each player had in September-October 2008 is summarized in the figure below v. Tanmay Gupta Page 10

12 Source: Voice and Data : Vital Statistics on GSM Tanmay Gupta Page 11

13 Some of the major players are summarized below. BSNL: BSNL recorded a revenue of Rs 35,296 crore in the last fiscal, down from Rs 40,135 crore in FY , a decline of 12.1%. The company is looking at new business streams to increase revenue and reduce losses. BSNL is toying with the idea of entering into managed network services and enterprise business, which will add value to mobile as well as landline. Apart from this the company is also looking at adding IPTV and VoIP services in its portfolio. BSNL would also be investing Rs 15,000 crore for the next three years in a bid to return to its profitable position. Like other service providers, BSNL is also planning to focus on the rural segment in the coming years. BSNL leads the broadband segment, as far as subscribers are concerned. Currently, the company has 2 mn out of the 3.9 mn subscribers in the country. Bharti: Bhari Airtel as it crossed the magical figure of 50 mn subscribers in the country. The customer addition has taken its revenue to Rs 26,436 crore in FY , clocking 47.8% increase. The company has also formed an alliance with four global IT majors: Alcatel Lucent owned Mobilitec, Germany-based CoreMedia, US-based Adamind and UK's Apertio for its service delivery platform. Continuing with its strategy of focusing on its core business and outsourcing the rest, Bharti signed a $35 mn three-year outsourcing deal with BPO service provider, Firstsource Solutions. Bharti will be launching operations in Sri Lanka later this year and is investing $200 mn for the same. The company also launched its DTH services. Bharti is focusing on the rural and enterprise segments as its growth areas. Reliance: Reliance Communications recorded an increase of 71% in its net profit. And an increase of 28.8% in its revenue, which is Rs 18,638 crore in fy It received start-up GSM spectrum last year. It has huge expansion plans in rural India. It also expanded globally with acquisition of UK-based Vanco and Uganda-based Anupam Global Soft. In a landmark deal, Reliance partnered with Microsoft to deliver IPTV in India on the latter's mediaroom platform. Reliance Communications will have the exclusive deployment rights for the platform in India. Vodafone: Vodafone Essar achieved 46.5% rise in telecom revenue in India with its income from operations touching Rs 15,477 crore in FY , up from Rs 10,565 crore in the previous financial year. Vodafone entered India through its acquisition of Hutchison Essar stake. Tanmay Gupta Page 12

14 Tata Communications: The Tata-run VSNL created a significant landmark when it announced financial results for the last fiscal-an astounding growth of 85%, to touch Rs 8,857 crore. VSNL's transformation has helped it lead in segments such as wholesale voice, wholesale and enterprise data, and retail broadband; and ensured global infrastructure and global customers. Telecom Equipment Players The top equipment players in the Indian telecom space are Nokia, Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Cisco, Sony Ericsson, Huawei and ZTE. 2.3 Recent trends The world in the last decade has seen a boom in the number of mobile subscribers. Fixed line subscribers on the other hand have remained more or less flat or down with some increase in the developing markets. Figure below shows that the trends of fixed telephone lines in the period Source: International Telecommunications Union : Market Information and Statistics (STAT) vi Tanmay Gupta Page 13

15 Mobile subscribers on the other hand have increased exponentially reaching a penetration of 49 per 100 inhabitants worldover. Mobile penetration in India is currently around 35%. Source: International Telecommunications Union : Market Information and Statistics (STAT) vii Internet has caught on in the developed world with penetration reaching 62 per 100 inhabitants in However, in the developing world internet penetration is still abysmal. In 2007, only 17 per 100 inhabitants had used internet on an average. Tanmay Gupta Page 14

16 Source: International Telecommunications Union : Market Information and Statistics (STAT) viii The following figure ix shows the growth in wireless subscribers in India. The number of subscribers were very small prior to The sector has exploded since then due to a favorable regulatory environment and intense competition. Source: Idea Cellular, Q Investor Presetation Tanmay Gupta Page 15

17 India has one of the lowest average revenue per subscriber (ARPU) rates. The ARPU was Rs. 239 in June 2008 x. As more subscribers are added from the rural areas, which represent a majority of the unpenetrated market, ARPU is expected to go down further. This trend is seen in the figure below. The number of internet subscribers in India is on a steady rise. Many of the wireless service providers are also providing internet services to their subscribers. Source: Voice and Data, Tele-stats, Telecom Surge 2.4 Future opportunities 3G & WiMax Auction of spectrum for 3G services is slated for Jan G offers opportunities for new players to enter the booming Indian telecom market. Better spectral efficiency and high speed data services are some of the advantages that 3G has to offer. However, high license fee, handset costs, and low acceptance rate among consumers may dampen the hype. WiMax offers high speed data connectivity in a radius of upto 50km. It is attractive not only for providing broadband access in urban areas but is also touted as a technology that can bridge the digital divide by providing broadband access in rural areas without the high costs associated with laying cables. Major differences between 3G and WiMax: WiMax offers better spectral efficiency through OFDM and multiple antenna support. It offers higher peak rate It offers variable channel bandwidth on uplink and downlink. It also allows for symmetric uplink and downlink to support T1 services. 3G only supports asymmetric uplink and downlink. 3G has better mobility support. WiMax mobility is an add on feature and is unproven. Tanmay Gupta Page 16

18 Growth and future of VAS Currently, MVAS in India accounts for 10 per cent of the operator's revenue, which is expected to reach 18 per cent by According to a study by Stanford University and consulting firm BDA, the Indian MVAS is poised to touch US$ 2.74 billion by Fortune at the bottom of the pyramid The Indian rural market is going to be the next big thing for wireless telecom providers. With the teledensity in rural areas being still about 10 per cent against the national average of about 21 per cent, there seems to be huge untapped potential for mobile phone penetration in rural India. The government also plans an investment of US$ 2 billion, during 2008 to 2009, for the development of around 100,000 community service centres in rural India to provide broadband connectivity. Additionally, by 2010, the government targets: 80 million rural connections Mobile coverage of 90 per cent geographical area Internet Protocol Television (IPTV) in 600 towns Quadrupling manufacture Two-fold increase in telecom equipment R&D from the current level of 15 per cent. 3 Recent partnerships, mergers and acquisitions 3.1 NTT DoCoMo takes stake in Tata Teleservices NTT DoCoMo paid 2.7 Billion USD for a 26% stake in Tata Teleservices. The deal values Tata Teleservices at $10 bn. 3.2 New GSM license holders In January 2008 the Department of Telecommunications allocated 2G GSM spectrum for 120 circles to nine applicants Unitech, Datacom (Videocon), Loop (BPL), Shyam, Idea, STel, Spice, Swan and Tata Teleservices. This allocation based on a first-come first-serve basis and the subsequent second-hand deals where some global major acquired stake in the new allotee companies valuing them much higher than the license fee sparked major controversy. Currently there is a proposal under discussion to ban dilution of promoter s Tanmay Gupta Page 17

19 equity in a company for 3-5 years xi. The telecom regulator examining a proposal whether to introduce a lock-in period before the promoters of telecom firms can sell their equity. DoT s intention for proposing this policy was to prevent fly-by-night promoters from making huge profits by selling their equity, especially when the Government had given them spectrum at a subsidised price. In my opinion, the market should be allowed to function rather than exerting external controls. The question that needs to be asked is that why should the government be selling spectrum at subsidized prices? Is this not a drain on the exchequer s money? The government should introduce competitive bidding measures so that the spectrum is sold at the right price. Swan Telecom - Etisalat Emirates based Etiasalat paid $900 mn for 45% stake in Swan Telecom. Unitech Wireless - Norway s Telenor Norway-based telecom operator Telenor has bought a 60 per cent stake in Unitech Wireless for US$ 1.23 billion. STel Bahrain Telcom Bahrain Telecommunications Co (Batelco), has signed an agreement to acquire 49% stake in Chennai based S Tel for $225 Million xii. S Tel received Unified Access Services Licences and start-up spectrum in Bihar, Orissa, Jammu & Kashmir, Himachal Pradesh, North East and Assam and a Category A All-India ISP licence. 3.3 Telecom Infrastructure (Tower) consolidation Mobile subscriber base is expected to touch 500 million by 2010 for which at least 3.8 lakh more towers are required. In a bid to tap this opportunity, telecom players have demerged their infrastructure into separate tower business to unlock the value by selling minority stake. Reliance Telecom Infrastructure (RTIL) and Swan Telecom are in advanced talks for a multi-year infrastructure sharing deal. RTIL, which has about 47,000 towers is the third largest telecoms infrastructure company after Indus towers (85,000 towers) and Bharti Infratel. In 2008, the Indian government allowed Indian telecom companies to share their active infrastructure, which includes all key electronic components including antennas, feeder cables, nodes, radio access network, transmission systems and backhaul, with the exception of radio frequencies. Prior to March, 2008, telcos here could only share passive infrastructure such as towers, repeaters, shelters and generators. Swan Tanmay Gupta Page 18

20 had earlier signed a infrastructure sharing deal with BSNL to use the state-owned telco s networks on a national basis. Bharti Infratel, with ownership of 60,000 towers, had sold about 10 per cent stake to a consortium of investors for about $ 1 billion. Indus Towers: Three leading GSM operators, Bharti Airtel, Vodafone-Essar and Idea Cellular, have joined hands to set up an independent tower company called Indus Towers. It owns 70,000 towers after merging their individual infrastructure assets in 16 telecom circles in India. Reliance Communications had sold 5 per cent stake in its tower company for $337 million. It owns 13,000 towers. Tata Teleservices merged its mobile tower company Wireless Tata Tele Info Services Ltd (WTTIL) - with Quippo, a tower firm owned by the SREI Group and Singapore Government. Post merger, Quippo will have 49 per cent stake in WTTIL while Tata Teleservices will hold the balance. Under the terms of the deal, Quippo Telecom will pay Rs 2,400 crore ($ 493 million) to Tata Teleservices and also transfer its existing telecom infrastructure comprising 5,000 towers to WTTIL. Once the merger is completed, the company will have 18,000 towers with an enterprise valuation of $2.6 billion (about Rs 13,000 crore). The merged entity will be managed by Quippo despite being a minority shareholder. Quippo had also bought out 1,000 towers owned by the Spice Group. 3.4 Vodafone acquisition of Hutch xiii In Feburary 2007, British telecom giant Vodafone has bagged the 67% Hutch Telecom International (HTIL) stake in Hutch-Essar at an enterprise value of $19.3 billion (approx Rs 86,000 crore). The acquisition provided Vodafone with access to the lucrative Indian mobile market. The deal has been in the news lately due to the income tax (I-T) department notice to Vodafone-Essar asking why capital gains tax on the $11.1 billion deal should not be levied on the company. The same is being contested in courts. In December 2008 the Bombay High Court dismissed the petition by Vodafone International Holdings against the tax bill relating to the purchase. Vodafone has moved the Supreme Court challenging the Bombay High Court order Tanmay Gupta Page 19

21 upholding a show-cause notice issued by the Income-Tax Department asking the telecom firm to pay $2 billion post its acquisition of Hutchison s stake in Hutchison Essar. The order raises cross-border M&A taxation issues that firms need to be aware of. Vodafone contended that its Netherlands arm had acquired shares in a Cayman Islands company (which in turn held shares in Vodafone Essar) from Hong Kong-based Hutchison Telecom: and that all the companies being overseas ones, Indian revenue department had no jurisdiction in the matter. Vodafone s argument that its international company had merely acquired a Cayman Islands company which in turn held shares in the Indian company was not accepted by the court which said it found this argument too simplistic. It held that Vodafone s basic objective appeared to be acquisition of a business interest in India. Source: The Hindu Business Line 3.5 Tata s Global Foray The Tata Group acquired the Government-owned monopoly service provider for international long distance calling, i.e. Videsh Sanchar Nigam Limited ("VSNL"), in The Tata-owned VSNL has made two key acquisitions over the years, i.e. Tyco Global Network in 2005 and Teleglobe in The Tata Group subsequently re-branded VSNL and other subsidiaries of VSNL (including Teleglobe and Tyco and Tata Indicom Enterprise Business Unit) under one global brand name Tata Communications xiv in early Tata Communications is now the number one global international wholesale voice operator and India's largest provider of international long distance, enterprise data and internet services in India. Tata Communications international growth strategy was based on pursuing growth avenues by geographical Tanmay Gupta Page 20

22 expansion. The primary drivers for this phase of the growth were network and bandwidth capacity building, global market access and most importantly complete global connectivity without any network gaps on any routes. Tata Communications started their path towards globalization by acquiring licenses in Sri Lanka in Continuing on this path, they created a wholly owned subsidiary in the US, VSNL America Inc. This helped them in offering Internet protocol-virtual private network (IP-VPN) solutions, and in adding value to their own operations in the area of Internet services by facilitating end-to-end management of the Internet bandwidth from India all the way to the US. Subsequently, they opened operations in the UK with subsidiaries named VSNL Telecommunications UK and VSNL UK; then they built presence in Europe through offices in France and Germany. They also completed a major project connecting India and Singapore by high bandwidth optical cable with complete ownership. Tyco Acquisition Tata Communications largest acquisition till date came in 2004 when they acquired Tyco Global Network (TGN) for $130 million. This gave the company control over a 60,000 km cable network spread over three continents with a huge bandwidth of terabytes and substantial control over bandwidth prices. They also beat Reliance in this acquisition, an important victory over the rival. Teleglobe acquisition Continuing on their acquisition spree, Tata Communications acquired Teleglobe International Holdings, a leading provider of wholesale voice, data, IP and mobile signaling services, in This acquisition gave them Teleglobe s global network access, agreements with leading global voice carriers and an enhanced utilization of TGN network allowing global scale for voice. The acquisition made VSNL International one of the largest international mobile, data and voice network. With this acquisition Tata Communications became the largest provider of submarine cable bandwidth. Presence in newer developing markets In 2006, Tata Communications acquired a 26% stake in South African telecom operators SNO and Infraco, who together will control significant chunks of the telecom infrastructure in South Africa. In 2008, Tata Communications entered into an agreement with two South African companies Eskom and Transnet to acquire their 30 per cent stake in Neotel, the second telecom network operator in the Southern African nation. After the completion of the acquisition Tata Communication along with Tata Africa would have an effective 56 per cent stake in Neotel. Tanmay Gupta Page 21

23 Recently in 2008, Tata Communications expanded its Global VPN service to China through an NNI (Network to Network Interface) agreement with China Enterprise Netcom Corporation, a value-added telecommunication services and integrated IT solutions provider and subsidiary of CITIC (China International Trust and Investment Corporation), allowing them to serve their many global and India MNC customers who require a single scalable and reliable global VPN with deep reach into both India and China, and broad reach around the world. 4 Idea Cellular takeover of Spice Telecom xv On 25 th June 2008 the country's fifth-largest mobile operator in terms of subscribers, Idea Cellular announced the acquisition of B K Modi-owned Spice group's 40.8 per cent stake in Spice Communications for Rs 2,716 crore. Idea acquired the stake at Rs a share. The Birla group company, Idea Cellular said it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares for every 100 Spice shares held. It will also pay an additional Rs 544-crore as non compete fee. 4.1 Idea Cellular Overview Idea Cellular, the leading GSM mobile services operator has licenses to operate in all 22 service areas of India with commercial operations in 11 service areas. With a customer base of over 26 million, it runs operations in Delhi, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh (East), Uttar Pradesh (West) & Uttaranchal, Madhya Pradesh & Chattisgarh, Gujarat, Maharashtra & Goa, Andhra Pradesh, and Kerala, holds spectrum for Mumbai, Bihar, Orissa, Tamil Nadu (including Chennai), and Karnataka, and licenses for the remaining six service areas. With the planned launch of services in Mumbai, Bihar and Jharkhand in Q3 2008, and Orissa and Tamilnadu (including Chennai) towards the end of the calendar year, Idea s footprint will soon cover approximately 90% of India s telephony potential. Idea is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India. Idea Cellular is a part of the US $ 28 billion Aditya Birla Group. The group has a market cap in excess of US $ 31.5 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities. Refer to Exhibit 8.4 for financial results summary of Idea Cellular. More information on the company is available at: and on the group at: Tanmay Gupta Page 22

24 4.2 Spice Telecom Overview Spice Telecom is the brand name of Spice Communications Limited, a mobile phone service provider in India. Spice Telecom was operating in the states of Punjab (India) and Karnataka i.e., in 2 circles of 23 Telecom Circles of India. Spice Communications Limited was promoted by Dilip Modi of Modi Wellvest Private Limited, which owned 40.80% of the company. Telekom Malaysia Berhad owns 39.20% through TMI India Limited, Mauritius. TMI India Limited is a wholly owned subsidiary of TM's international investment holding company TM International Sdn Bhd (TMI). Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limited company. Spice subsequently became a deemed public company under Section 43(1A) of the Companies Act, 1956 of India with effect from 1 April 1999 and its name was changed to Modicom Network Limited. Spice assumed its present name via a fresh Certificate of Incorporation dated 3 December With the addition of the word Private in Spice s name under Section 43(2A) of the Companies Amendment Act, 2000 of India, Spice s name was changed to Spice Communications Private Limited with effect from 28 October On 28 December 2006, Spice was converted into a public limited company and assumed its present name. Spice currently offers mobile telecommunication services in the Punjab and Karnataka states of India. As of 30 April 2008, Spice had 4.4 million subscribers representing a 1.7% market share in India, and was the second and fifth largest mobile telecommunication service provider within the Punjab and Karnataka circles, respectively. Spice was listed on the Bombay Stock Exchange Limited on 19 July 2007, and on the National Stock Exchange of India Limited on 16 June Refer to Exhibit 8.2 for financial results summary of Idea Cellular. 4.3 TM International Overview TM International ( TMI ) is an emerging leader in Asian telecommunications with significant presence in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia. In addition, the Malaysian-grown holding company has strategic mobile and non-mobile telecommunications operations and investments in India, Singapore, Iran, Pakistan and Thailand. The Group s mobile subsidiaries and associates operate under the brand name Celcom in Malaysia, XL in Indonesia, Dialog in Sri Lanka, AKTEL in Bangladesh, HELLO in Cambodia, Spice in India, M1 in Singapore, and MTCE in Iran (Esfahan). Tanmay Gupta Page 23

25 Listed on Bursa Malaysia, TMI is among the top ten biggest public listed companies in Malaysia by market capitalization, and the first listed pan-asian pure cellular service provider in the region. The Group, including subsidiaries and associates, has over 44 million mobile subscribers in Asia, putting it among the largest mobile telecommunication providers in the region by turnover. The Group has approximately 13,000 people under employment in ten countries. For more information on TMI visit: Synergies Anticipated This deal gave Idea Cellular another 44-lakh subscribers of Spice Communications in Punjab and Karnataka circles in addition to own 2.6-crore subscribers in 11 circles. The acquisition of Spice gives Idea the much needed headway in Punjab and Karnataka states that account for more than 10 per cent of India s wireless subscribers. It will give us incumbent advantage in both these circles, said Mr. Kumar Mangalam Birla, Chairman, Aditya Birla Group. We are now in the big league of telecom players in the county, added Mr. Birla. Idea Cellular would get hold of crucial spectrum of licences recently got by Spice for operations in four more circles including Delhi, Tamil Nadu and Andhra Pradesh. The primary benefits of this transaction are: Idea gains entry in the contiguous wireless markets of Punjab and Karnataka, which account for 11% of India s total wireless subscribers. Spice, a pioneering operator, delivers a strong running start in Punjab and Karnataka. o 4.4 million subscribers as at 30 April 2008, equivalent to a 15.1% market share in the two service areas o #2 wireless operator in Punjab with a 22.3% market share. Idea to consolidate its position with its all-india subscriber market share increasing from 9.5% to 11.1%. Importantly, Idea would be No.1 in 3 service areas, in the top 3 in 5 more service areas, and with a rapidly improving share in all its other operating service areas. Idea s operations in the 900 MHz GSM spectrum band will increase from the current 7 service areas to 9 service areas, driving scale economies and operational synergies resulting in lower operating and capital expenditure. TMI, an emerging leader in Asian telecommunications with over 44 mn subscribers and a presence in 10 countries, will grow its presence in the Indian telecom sector and become a substantial shareholder in Idea. The primary benefits of TMI s investment into Idea are: Tanmay Gupta Page 24

26 Idea is currently rolling out operations in Mumbai, Bihar, Orissa, and Tamil Nadu (incl. Chennai) service areas, and will also roll out in the remaining service areas of Kolkata, West Bengal, Assam, North East and J&K, after receipt of spectrum. This investment will support Idea s aggressive growth plans. Idea and TMI will develop areas for business co-operation to leverage TMI s strong presence in 10 principal Asian markets, including neighboring countries like Sri Lanka & Bangladesh where TMI is a market-leader. TMI s experience of operating 3G in similar markets will be of value to Idea, as also the convergent interests of the 2 companies in areas extending from international traffic to roaming, to mobile value added services etc. Idea and TMI would sign a Business Cooperation Agreement to this effect. Mr. Kumar Mangalam Birla, Chairman, Idea Cellular Limited said: This announcement marks a major step in the Aditya Birla Group s telecom business. Idea has performed strongly, but I believe its best lies ahead. Idea will benefit operationally by leveraging synergies with TMI which will be a significant shareholder in our Company. Further, I look forward to welcoming colleagues from Spice into the Idea family, and indeed the over 100,000 strong Aditya Birla Group. Together we aim to grow a top class organization in the service of our subscribers. Mr. Sanjeev Aga, Managing Director, Idea Cellular Limited said: The strategic import of this move travels beyond Punjab and Karnataka. By the end of the year the Idea yellow will increasingly colour the Indian landscape. In addition, the resulting infusion of funds from TMI will (Rs 7300 crore) will support the capital requirement for Expansion from 11 service areas to PAN India by CY 09. Capex plan of ~Rs. 65bn for FY and ~ Rs 60bn for FY09-10 for existing service areas and new launches (excluding 3G) 4.5 Current Status Idea has launched its brand in Punjab on Dec 19, 2008 and in Karnataka on Dec 29, It has also announced plan to invest 300 Cr in Karnataka to expand its reach and services. Tanmay Gupta Page 25

27 4.6 Deal Structure The takeover deal was a complex one. Idea will acquire the Modis 40.8% stake in Spice (for Rs 2,720 crore) at Rs per share. According to the complex agreement, TM International (TMI), the Malaysian telecommunication giant holding 39.2 per cent stake in Spice, will swap its stake for Idea shares and will be offered 469 million shares by way of a preferential allotment of shares in Idea at a price of Rs a share. This will take TMI's stake in idea to per cent. TMI will invest Rs 7,500 crore for buying this stake in Idea Cellular and a part of these funds will be used to buy Modi's stake. The balance Rs 4,500 crore will be used to retire the debts in Idea's books, Birla said. TMI will get one seat on Idea's board. Spice holding structure before the acquisition was: 40.8% Modi Group (Promoter) 39.2% TMI 20% Other public shareholding Spice holding structure as of today is (Refer to Exhibit 8.1 for details): 49.9% Promoter Group including Idea Cellular 49.0% TMI 1.1% Others (Public) Current Idea holding is as follows (Refer to Exhibit 8.3 for details): 49.13% Promoter and Promoter Group 14.99% TMI 35.88% Other public shareholding including institutions Planned Merger Idea Cellular has said it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares for every 100 Spice shares held. However at the current (Feb 12, 2009) price levels: Spice Communication Stock Price = Rs 77.0 Idea Cellular Stock Price = Rs At current prices, Spice Communications shareholders will lose when the share swap happens. One reason for the high price for Spice could be that only 1.1% of its shares are currently floating and news reports suggest a lot of speculative buying and selling is happening. Tanmay Gupta Page 26

28 % open offer The SEBI Takeover Regulations at the very rudimentary level is all about giving the public shareholders an opportunity to get the same price which a shareholder usually a promoter gets on a negotiated deal. The regulations ordain an acquirer to acquire 20 per cent of the stake from the public after having acquired 15 per cent or more of the same from the promoters. As per the SEBI SAST (Substantial Acquisition of Shares and Takeovers) Regulations, in a listed company s acquisition if existing promoters sell out to a new company, public shareholders are also entitled to the same per share amount. As per the Idea-Spice deal, Idea launched the mandatory 20% open offer for the Spice shareholders, jointly with Telekom Malaysia International (TMI) at Rs The open offer commenced on 17th September 2008 and closed on 6th October Following the successful completion, the above 40.8% stake which was hitherto held in an escrow account pending open offer formalities stands transferred to Idea as of date Non-Compete fee Sometimes, these deals involve a non-compete fee xvi, a sum payable to the promoter for not re-entering the same field for a certain period. That the fee is discretionary is evident from not all deals having a noncompete component. The logic for the non-compete fee is that the promoter has certain unique skills and possesses industry knowledge, and if he were to start the same business again, he could become a formidable competitor. That entitles them to a payment which is not given to minority shareholders, because obviously they do not possess these skills. What this means is that in the above cases, the public shareholders got a lesser amount than the promoter. Regulation 20 (8) of the SEBI SAST says: (8) Any payment made to the persons other than the target company in respect of non-compete agreement in excess of 25% of the offer price arrived at under subregulations (4) or (5) or (6) shall be added to the offer price. Idea will pay approximately Rs 544 Crore as non-compete fee to the Spice Group. This is in addition to the Rs per share that the Idea will pay for acquiring 40.8% stake (Rs 2,720 crore). Hence the total payment to Spice Group is Rs 3,264 crore (Rs 2,720 crore + Rs 544 crore). In the absence of a non-compete fee the Idea group would have to offer a higher per share price to Spice Group and as a result to the other shareholders (for 20% open offer). Tanmay Gupta Page 27

29 4.6.4 Valuation A back-of-the envelope estimate of valuation of Spice can be arrived at based on the (Enterprise Value)/(Number of Subscribers) multiple. Idea has paid Rs.2716 Crore for 40.8% stake in Spice. Hence the total enterprise value (100%) of Spice will be Rs.6657 Crore approximately. With a subscriber base of 44 lakh subscribers, the Enterprise value per subscriber comes out to be approximately Rs.15,129 or approximately $300 (Assuming USD 1 = Rs.50) as per this transaction. This is on the lower side as generally EV per subscriber ranges between $400 to $550. One of the reasons for this low valuation could be that Spice is present in only 2 circles. Spice has also underperformed as compared to other players. It has a lower EV/EBITDA multiple, ROCE and EV/Subscriber. A comparison of these metrics (in January 2008) across players is shown below xvii. 4.7 Summary The drivers for this deal are as follows: TMI o Grow presence in growing Indian Telecom Sector via ownership in a large Indian telecom operator. Idea Cellular o Inorganic expansion in Karnataka and Punjab circles. o Infusion of funds from TMI to support Idea s aggressive growth plans. o Technical expertise from TMI including 3G operations. o Leverage TMI s strong presence in 10 principal Asian markets, including neighboring countries like Sri Lanka & Bangladesh where TMI is a market-leader. Spice Communications o Being a small player in a highly competitive market requiring huge investments and economies of scale is not sustainable. Tanmay Gupta Page 28

30 5 Reliance MTN merger failure 5.1 MTN Group MTN was launched in It has a market value of about $38 billion and more than 68 million customers across 21 countries in Africa and the Middle East. MTN is operating services in Africa, Iran, Afghanistan and Syria. These are high potential markets. Some analysts have estimated that MTN has potential to accumulate up to 240 million subscribers in these markets by Reliance Communications Reliance Communications Limited founded by the late Shri Dhirubhai H Ambani ( ) is the flagship company of the Reliance Anil Dhirubhai Ambani Group. The Reliance Anil Dhirubhai Ambani Group currently has net worth in excess of Rs. 55,000 crore (US$ 14 billion), cash flows of Rs. 11,000 crore (US$ 2.8 billion), net profit of Rs. 7,700 crore (US$ 1.9 billion) and zero net debt. Rated among "Asia's Top 5 Most Valuable Telecom Companies", Reliance Communications is an integrated telecommunications service provider. The company, with a customer base of over 48 million including over 1.5 million individual overseas retail customers, ranks among the Top 10 Asian Telecom companies by number of customers. Reliance Communications corporate clientele includes 1,850 Indian and multinational corporations, and over 250 global carriers. Reliance Communications has established a pan-india, next generation, integrated (wireless and wireline), convergent (voice, data and video) digital network that is capable of supporting best-of-class services spanning the entire infocomm value chain, covering over 15,000 towns and 400,000 villages. Reliance Communications owns and operates the world's largest next generation IP enabled connectivity infrastructure, comprising over 165,000 kilometers of fibre optic cable systems in India, USA, Europe, Middle East and the Asia Pacific region. For more information, visit Reliance Communications (previously Reliance Infocomm) was formed in 2005 when Anil Ambani and Mukesh Ambani carved up the Reliance empire, which included telecom, oil, and financial services, after a rivalry developed between them when their father died in 2002 and left no will. When lacking a will, the sibs developed some ill will toward each other. An agreement was hashed out by their mother, under which Anil Ambani took the telecom, energy, and financial services assets while Mukesh Ambani took the oil and petrochemical business to form Reliance Industries. Tanmay Gupta Page 29

31 Reliance has rapidly become a global wireline and wireless powerhouse, having acquired companies such as U.S.-based Yipes Enterprise Services in recent years 5.3 Bharti in foray for MTN xviii On May 5 th 2008, Bharti Airtel Limited announced xix that it has entered into an exploratory discussion with MTN Group Limited, South Africa. A later statement said The discussions being held are aimed at combining the strengths of the two leading emerging markets players and accordingly veering towards possible structures to achieve this objective. A combination with MTN would have been Bharti Airtel s first major foray outside India. The two companies have roughly the same number of subscribers and market capitalization, so any deal was expected to be more like a merger of equals, bankers and analysts said. At the invitation of MTN board, Bharti entered into exploratory discussions on the possibility of combining the two 'emerging market' telecom giants. A number of structures were discussed and evaluated between the lead bankers on both sides. An in-principle agreement was reached on 16th May and a term sheet was initialled between the two lead bankers. This agreed term sheet was presented to the MTN Board on Wednesday, the 21st of May. Bharti had received confident letters of funding of over USD 60 billion from over a dozen Internationally reputed bankers from the US and Europe. 5.4 Bharti backs out: Predator or Prey? xx On May 24 rd 2008, Bharti called off negotiations after MTN turned Bharti s takeover plan upside down, proposing to take over Bharti instead. After bankers from both sides agreed in principle to a Bharticontrolled structure on May 16, MTN s board met this week and proposed a different transaction, in which Bharti Airtel would become a subsidiary of MTN, Bharti said. This new structure envisages Bharti Airtel becoming a subsidiary of MTN and exchange of majority shares of Bharti Airtel held by the Bharti family and Singtel, in exchange for a controlling stake in MTN. Bharti believes that this convoluted way of getting an indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity. Further and more importantly, Bharti's vision of transforming itself from a home grown Tanmay Gupta Page 30

32 Indian company to a true Indian multinational telecom giant, symbolising the pride of India, would have been severely compromised and this was completely unacceptable to Bharti. 5.5 Reliance in talks with MTN: Exclusive negotiations xxi As soon as Bharti backed out of MTN, on May 26 th Reliance Communications Ltd. (RCom) stepped in, and the two have now entered "exclusive negotiations for a period of up to 45 days with respect to a potential combination of their businesses." Shri Anil Dhirubhai Ambani, Chairman of Reliance Communications, said We are delighted to be engaged in exclusive negotiations with MTN Group to achieve a partnership, which would provide investors, customers and the people of both companies a unique and global platform for exponential growth, creating substantial long term shareholder value. The discussions were around a broad framework, where MTN would take up to 74 percent in Reliance Communications and Reliance Chairman Anil Ambani could swap between 43 and 63 percent of his holding, depending on the success of an open offer, to become the biggest shareholder in MTN. Morgan Stanley had estimated an open offer for Reliance Communications shareholders could be at 613 rupees per share, a 7 percent premium to the stock's closing price on May 23, the last day they traded before the firms said they were in talks. The Reliance-MTN deal is complicated by restrictions on foreign ownership in India and South Africa and political sensitivities in each country about which company would be dominant. Under South African rules, buying 35 per cent of a company obliges the purchaser to make an open offer for the rest. India limits foreign ownership in the telecoms sector to 74 per cent and a purchase of 15 per cent of a company triggers a mandatory open offer for another 20 per cent. Mr Ambani owns 66 per cent of Reliance Communications, valued at about $20 billion, and intends to exchange this under a mechanism, yet to be agreed, for a 34.9 per cent stake in MTN. The deal would represent the biggest foreign direct investment in India to date and Mr Ambani would become the single largest shareholder in the South African company. The deal could involve cash as well as equity to avoid breaching the restrictions - especially on Reliance, which is already 11 per cent foreign-owned. Mr Ambani is reported to be offering to buy MTN's shares at a significant premium in exchange for management control. Tanmay Gupta Page 31

33 Economic Times reported that the two sides were negotiating the ratio for a share swap. Mr Ambani was pushing for 66 MTN shares for 100 Reliance ones, while MTN wanted 51 MTN shares for 100 Reliance shares, it said. Some proposed details of the deal were xxii : Deal expected to be a part-cash and part-equity deal with a west Asia-based sovereign wealth It might commit close to $10 billion to ADAG A special purpose vehicle will be created for this deal with ADAG, which will have the controlling stake Deal needs approval of black empowerment group as a non-south African company will have majority stake Sources said the other equity holders of the SPV are expected to chip in around $4 billion. Given MTN s current valuation of nearly $28 billion, a deal is expected to be done at a valuation of around $35 billion, assuming a 20% premium. This means, the SPV may need to pay around $11-12 billion for a 35% stake. Given the other equity holder s contribution of $4 billion, RCOM will have to chip in around $7 billion to $8 billion. This is likely to be funded by a mixture of internal accruals and debt. The exact amount of debt depends on the amount of equity which RCOM is willing to put in. The acquisition cost will go up if RCOM is allowed to hike its stake further to 40%. Both the parties are yet to arrive at the exact deal size which would depend on the premium, sources said xxiii. Lombard Odier Darier Hentsch & Cie, promoted by Lebanon's former prime minister Najib Mikati, holds 9.82 per cent, Newshelf 664 (Proprietary) Ltd holds per cent and directors and subsidiaries hold 0.03 per cent. The public and financial institutions hold the rest. 5.6 The Failure: Sibling Rivalry On June 12 th 2008, in a mala fide effort to disrupt the talks, Reliance Industries Ltd. (RIL), part of the Mukesh Ambani group, sent a communication to MTN Group, making a claim of an alleged right of first refusal to buy the controlling stake in Reliance Communications Ltd. (RCOM). The letter further said that RIL will take legal action against RCOM and also make exemplary damages against MTN. Reliance communications spokesperson refuted the claim saying RIL's claim is legally and factually untenable, baseless, and misconceived. Tanmay Gupta Page 32

34 RIL based its claim on an agreement of January 12, 2006, which was unilaterally signed only by RIL's officials, when RCOM was under RIL's control, under a procedure which the Hon'ble Bombay High Court, vide its judgement dated 15th October 2006, has held to be "unfair and unjust." In July 2008, Reliance Communications Ltd. (RCom) and African operator Mobile Telephone Networks (MTN) have walked away from M&A talks "owing to certain legal and regulatory issues," namely an ongoing feud between Reliance chairman Anil Ambani and his brother Mukesh Ambani, chairman of Reliance Industries. On July 9 th 2008, RCOM and MTN agreed to continue their negotiations in relation to such potential business combination, and have extended the period of exclusivity until 21st July However, on July 18 th 2008, the two companies mutually decided to allow the Exclusivity Agreement to lapse citing certain legal and regulatory issues. 5.7 Summary The failed attempt by the leading Indian Telecom operators to spread their wings in the growing African market shows their global ambitions. The Reliance-MTN deal would have created a $66-billion emergingmarkets telecoms group with operations in about two dozen countries and about 120-million subscribers. This episode highlighted the following issues: Such cross border deals need to be sensitive to the issue of national pride and control of the companies. Who controls which entity and ultimately who is taking over whom is an important consideration in this kind of merger of equals. Many Indian businesses are owned and controlled by promoter families. The issue of loss of control and the difference of opinion among family members is an important consideration for such deals. This came to fore in the Reliance MTN deal with feud among brothers scuttling the deal. 6 Conclusion and M&A Outlook The Indian Telecom industry is one of the most dynamic in the world with an evolving regulatory environment. It is the second fastest growing telecom market in the world after China. The overall teledensity India has reached % at the end of January 2009 xxiv. Much of the untapped market is in rural India. ARPU has been declining for most mobile operators over the years as more and more rural customers are tapped. On one hand telecom operators are driven towards specialization and consolidation to achieve economies of scale and improve margins, and on the other hand they are looking to forge partnerships to fund their growth and get operational and technical expertise. In this study I have looked into various Tanmay Gupta Page 33

35 Mergers and Acquisitions that have happened in the Indian Telecom Industry. The various drivers for partnerships and M&A in the Indian telecom industry and future outlook is summarized below. Players from Europe, Malaysia, Japan, Middle-East entering India: 2008 was a watershed year as India's subscriber base topped 350 million users to make its network the second largest in the world after China, displacing the US. Many foreign players are looking to enter the growing Indian telecom market via acquiring stake in companies that have won licenses. New Indian players have acquired startup spectrum and are on the lookout to raise money to fund their capacity buildup as well as cash out by selling their sought after licenses. Such deals include Global/European player Vodafone acquiring Hutch stake, Malaysian TMI partnering with Idea, Japan s NTT DoCoMo taking stake in Tata Teleservices, and Middle-East players like Etisalat and Bahrain Telecom acquiring stakes in Swan and STel respectively. More foreign participation is expected in future driven by the upcoming 3G and WiMax auctions. Consolidation and inorganic subscriber growth: In the extremely competitive Indian market, smaller players are finding it extremely challenging to compete with the biggies. The big players too are keen on expanding their footprint and acquiring the customer base of these smaller players. The Idea-Spice deal was driven by this. This consolidation will continue. Smaller players like Aircel and BPL along with new smaller license holders will find it best to merge with the big players as the industry matures and growth slows down. Expand global footprint: Indian players are looking to increase their presence in other growing markets like Africa and Sri Lanka. Attempt by Bharti and Reliance to acquire MTN and introduction of GSM services in Sri Lanka by Bharti are examples of this. Indian telecom players will continue to look towards other growing markets like Africa and South East Asia by the way of acquisitions and joint ventures. Reduce costs: ARPU for Indian Telecom operators is one of the lowest in the world and continues to fall steadily. Although this is offset by increased subscription, profit margins are decreasing. In order to compete in this low cost environment Indian telecom companies are rethinking their organization. They are unbundling their core processes xxv and hiving off the infrastructure management operations into separate entities to achieve economies of scale. Bharti Airtel, Vodafone-Essar and Idea Cellular joining hands to set up an independent tower company called Indus Towers is an example of this. More infrastructure sharing is expected in future. The entry of new players such as Swan, Datacom, Unitech, S Tel, Shyam and Loop Telecom may result in many Tanmay Gupta Page 34

36 such infrastructure sharing deals in the coming months. Unitech is learnt to be in talks with the Tata-Quipo combine to use the latter s infrastructure. Similarly, RCOM s tower company Reliance Telecom Infrastructure (RTIL) and Swan Telecom are in advanced talks for a multi-year infrastructure sharing deal xxvi. Funding for growth: Telecom players are also looking to tap into global funds to finance their aggressive growth plans. As part of the Idea-Spice deal, TMI will infuse Rs 7300 crore into the joint venture. Technical expertise: With the launch of 3G and WiMax operations round the corner, Indian telecom players will look to tap into global expertise, Idea plans to leverage expertise of TMI in running 3G operations. Tanmay Gupta Page 35

37 7 Exhibits xxvii 7.1 Spice Communications Equity Holding Details Spice Communications Ltd. Category Jun 2008 Sep 2008 Dec No of shares % of total No of shares % of total No of shares % of total shares shares shares Promoters holding 28,15,02, ,34,89, ,23,20, Indian 28,15,02, ,34,89, ,42,57, Individuals & HUF 13, Central & State Government Corporate Bodies 28,14,89, ,34,89, ,42,57, Financial Institutions & Banks Others Foreign ,80,63, Individuals(Non-Residents & Frgn.) Corporate Bodies ,80,63, Institutions Others Persons acting in concert Non-promoters holding 40,84,22, ,64,35, ,04, Institutions 6,26,90, ,27,32, Mutual Funds/UTI 1,56,82, ,18,67, Banks, Fi's,Insurance Cos Financial Institutions & Banks Insurance Companies Central & State Government Venture Capital Funds Foreign Institutional Investors 4,70,08, ,08,64, Foreign Venture Capital Investors Others Non-institutions 34,57,31, ,37,02, ,03, Corporate Bodies 2,07,28, ,74,31, ,49, Individuals 2,21,25, ,50, ,79, Individuals holding nominal capital upto Rs 1 lakh Individuals holding nominal capital over Rs 1 lakh 1,29,78, ,65, ,80, ,47, ,84, , Others 30,28,77, ,64,20, ,73, Shares held by Custodians Total equity holding 68,99,25, ,99,25, ,99,25, Tanmay Gupta Page 36

38 Spice Communications Ltd. Type/Name of holder No of shares % of total shares Dec 2008 Locked-In Shares Idea Cellular Ltd 13,79,85, Promoters Tmi India Ltd 33,80,63, Idea Cellular Ltd 28,34,89, Green Acre Agro Services Pvt Ltd 6,07,68, Tanmay Gupta Page 37

39 7.2 Spice Communications Audited Finance Results Summary Spice Communications Ltd. Mar 1997 Dec 1997 Dec 2006 Dec 2007 Rs. Crore (Non-Annualised) 12 mths 9 mths 12 mths 12 mths - Operating income Operating costs PBDIT (NNRT) PBDT (NNRT) PBT (NNRT) PAT (NNRT) Foreign exchange earned Foreign exchange used Gross fixed assets (excl. reval & WIP) Current assets Net worth (net of reval. & DRE) Equity capital Capital employed Long term borrowings Current liabilities & provisions Total assets / liabilities (excl. reval & DRE) Growth (%) Operating income Error Error Error Operating cost Error Error Error Total assets Error Error Error Margins ratios (%) PBDIT (NNRT) / operating income PBDT (NNRT) / operating income PAT (NNRT) / operating income Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBDIT (NNRT) / total assets PBDIT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Error Tanmay Gupta Page 38

40 7.3 Idea Cellular Equity Holding Details Idea Cellular Ltd. Category Jun 2008 Sep 2008 Dec No of shares % of total No of shares % of total No of shares % of total shares shares shares Promoters holding 1,52,04,45, ,52,04,45, ,52,29,37, Indian 1,52,04,45, ,52,04,45, ,52,29,37, Individuals & HUF Central & State Government Corporate Bodies 1,52,04,45, ,52,04,45, ,52,29,37, Financial Institutions & Banks Others Foreign Individuals(Non-Residents & Frgn.) Corporate Bodies Institutions Others Persons acting in concert Non-promoters holding 1,11,49,14, ,57,96,49, ,57,71,57, Institutions 43,90,39, ,95,22, ,64,59, Mutual Funds/UTI 4,59,73, ,29,29, ,34,04, Banks, Fi's,Insurance Cos. 9,56,67, ,56,20, ,37,44, Financial Institutions & Banks 7,90,28, ,88,38, ,69,73, Insurance Companies 1,66,39, ,67,81, ,67,71, Central & State Government Venture Capital Funds Foreign Institutional Investors 29,73,94, ,09,69, ,93,06, Foreign Venture Capital Investors 3, , ,266 0 Others Non-institutions 67,58,75, ,11,01,26, ,11,06,98, Corporate Bodies 2,14,07, ,46,29, ,04,91, Individuals 8,06,42, ,51,99, ,77,78, Individuals holding nominal capital upto Rs 1 lakh Individuals holding nominal capital over Rs 1 lakh 6,95,64, ,47,76, ,73,56, ,10,78, ,04,22, ,04,22, Others 57,38,25, ,00,02,98, ,24,28, Shares held by Custodians Total equity holding 2,63,53,60, ,10,00,95, ,10,00,95, Tanmay Gupta Page 39

41 Idea Cellular Ltd. Type/Name of holder No of shares % of total shares Dec 2008 Locked-In Shares Aditya Birla Nuvo Ltd 49,85,97, Tmi Mauritius Ltd 46,47,34, Birla Tmt Holdings Pvt Ltd 2,84,74, Promoters Aditya Birla Nuvo Ltd 83,75,26, Birla Tmt Holdings Pvt Ltd 28,35,65, Hindalco Industries Ltd 22,83,40, Grasim Industries Ltd 17,10,13, Igh Holdings Pvt Ltd 24,91, Public Shareholding Tmi Mauritius Ltd 46,47,34, P5 Asia Investments Maurities Ltd 33,00,00, Monet Ltd 8,95,00, Hsbc Global Invesment Funds A/C Hsbc Global Invesment Funds Mauritius Wagner Ltd 8,42,50, ,15,00, Lic Of India Money Plus 3,93,60, Lic Of India -Market Plus 3,56,45, Tanmay Gupta Page 40

42 7.4 Idea Cellular Audited Finance Results Summary Idea Cellular Ltd. Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008 Rs. Crore (Non-Annualised) 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths - Operating income Operating costs PBDIT (NNRT) PBDT (NNRT) PBT (NNRT) PAT (NNRT) Foreign exchange earned Foreign exchange used Gross fixed assets (excl. reval & WIP) Current assets Net worth (net of reval. & DRE) Equity capital Capital employed Long term borrowings Current liabilities & provisions Total assets / liabilities (excl. reval & DRE) Growth (%) Operating income Operating cost Total assets Margins ratios (%) PBDIT (NNRT) / operating income PBDT (NNRT) / operating income PAT (NNRT) / operating income Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBDIT (NNRT) / total assets PBDIT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Endnotes i IndiaCore. Telecom. Retrieved on January 25, 2009 from IndiaCore: Tanmay Gupta Page 41

43 ii Indian Brand Equity Foundation. Telecommunications Industry. Retrieved on January 25, 2009 from IBEF: iii M&A in Indian Telecom Industry A Study, Sanjoy Banka, Retrieved on March 6, 2009 from iv The Handbook of Competition Enforcement Agencies 2008, Retrieved on March 6, 2009 from v Voice & Data. Telestats. Retrieved on January 20, 2009 from Voice&Data: vi International Telecommunications Union : Market Information and Statistics (STAT). Retrieved on Jan 29, 2009 from ITU : vii International Telecommunications Union : Market Information and Statistics (STAT). Retrieved on Jan 29, 2009 from ITU : viii International Telecommunications Union : Market Information and Statistics (STAT). Retrieved on Jan 29, 2009 from ITU : ix Idea Cellular, Q Investor Presetation. Retrieved on Jan 15, 2009 from from Idea Cellular website: 9.pdf x Voice and Data, Tele-stats, Telecom Surge. Retrieved on Jan 29, 2009 from V&D : xi Business Line. Existing telecom cos against lock-in of promoter s equity. Retrieved on Feb 2, 2009 from Business Line: xii The Hindu. Bahrain-based company acquires stake in S Tel. Retrieved on Feb 2, 2009 from The Hindu: xiii The Hindu Business Line. An episode in Vodafone story. Retirieved on Feb 2, 2009 from The Hindu Business Line: Tanmay Gupta Page 42

44 xiv For the sake of consistency, the company is referred to as Tata Communications across the report as appropriate, although events prior to 2008 are carried out under the name of VSNL. xv Idea Cellular Press Release. 25th June Last retrieved on Feb 10, 2009 from Idea Cellular: xvi Economic Times. SEBI for fair non-compete fee in takeover deals. Retrieved on Feb 2, 2009 from Economic Times: xvii M&A in Indian Telecom Industry A Study, Sanjoy Banka, Retrieved on March 6, 2009 from xviii Media statement from Bharti Airtel Limited. May 13, Last retrieved on Feb 11, 2009 from Bharti: =08f68cef50 xix Media statement from Bharti Airtel Limited. Last retrieved on Feb 11, 2009 from Bharti: =fc050a1d84 xx The New York Times. $50 Billion Bharti-MTN Deal Falls Apart. Retrieved on Feb 9, 2009 from The New York Times: xxi Reliance Communications Media Release. Reliance Communications and MTN GROUP to enter into exclusive negotiations. May 26, Retrieved on Feb 15, 2009 from Reliance: xxii Indian Express. Final call placed for Reliance-MTN deal. July 16, Retrieved on Feb 16, 2009 from Indian Express: xxiii xxiv %20million%20customers%20in%20Jan&ndate=2/21/2009 Tanmay Gupta Page 43

45 xxv Unbundling the Corporation, Harvard Business Review, March-April 2009 xxvi xxvii CMIE Prowess Database Tanmay Gupta Page 44