labels: M&A, Telecom
Spice Communications looking at options news
04 June 2008

Mumbai: BK Modi Group's telecommunications company Spice Communications  says it is willing to buying out its joint venture partner Telekom Malaysia in the event the Malaysian company is unable to come up with a plan to raise its stake in the company.

Chairman BK Modi had said yesterday that Spice Communications was open to Telekom Malaysia raising its stake to 74 per cent from the current 39.2 per cent. He also said that Spice was also open to the UAE-based Etisalat and others buying a stake in the company (See: Spice willing for Telekom Malaysia raising stake to 74 per cent).

Modi had said that talks were in progress with Telekom Malaysia regarding increasing its stake in the company to the stipulated 74 per cent threshold, though he affirmed that Spice Communications or the Modi family is yet to receive a formal proposal. Telekom Malaysia, being a foreign telecom partner, is allowed to increase its stake to 74 per cent according to prevailing foreign direct investment (FDI) norms for the Indian telecom sector.

If Spice were to acquire the Malaysian telecom firm's stake, the Modi Group could buy out its 39.2-per cent stake, in addition to the Modi family's 40.8-per cent stake in Spice Communications, with other public and financial institutions holding a cumulative 20 per cent of the company. Analysts predict that acquiring Telekom Malaysia's stake in Spice Communications would allow Modi to sell-off the company to other partners.

Spice Communications is also said to be looking at the option of a merger with the Aditya Birla Group's Idea Cellular, which would enable Telekom Malaysia would end up having a stake in Idea.

Media reports predict two scenarios, the first where the Modi family would sell its stake in Spice Communications to Idea Cellular before the merger, and Telekom Malaysia would end up with a stake in Idea post the merger. In the other scenario, Telekom Malaysia may choose to buy out the Modis first, and then pursue the merger with Idea independently.

In June 2007, there had been talks about a possible merger between Spice Communications and Idea Cellular, though they ended with differences over the valuation. Sources say that Idea pegged the value of Spice Communications at $700 million, and was considering going up to a maximum of $1 billion, where as Spice wanted to see the value at $1.3 billion.

In case Modi decides to sell his own stake, Telekom Malaysia has the first right of refusal, referring to a second scenario where the Modi family exits the company by selling its own stake.

According to reports Modi would consider selling his stake in Spice Communications at a minimum price of Rs60 per share, which he considers to be ''a fair price''. There have also been reports linking UAE's government telecom company Etisalat to an interest in acquiring the Modi family's stake. Telekom Malaysia is a partner with Etisalat and NTT DoCoMo in some markets.Modi is reported to have confirmed that he was looking at a stake sale, and mentioned Etisalat and Japan's NTT DoCoMo as possible interested parties.

Spice Communications has operations in two of the 23 telecom circles, and need a substantial capital infusion to expand its infrastructure and operations. Modi said the company has received four more licenses, and are optimistic about getting even more. ''We have to expand the company and its services,'' he said.

Idea Cellular would gain access to the Punjab and Karnataka telecom circles if it were to acquire Spice Communications. Idea has been allotted spectrum in the two circles, but rolling out operations would take over six months. Acquiring Spice on the other hand would give it a head start with Spice's customer base in the states, which has a relatively attractive average revenue per user (ARPU).

Also, the merger would peg it as the fifth largest mobile telecom company in the country, with a subscriber base of 28.5 million, trailing only Bharti, RCom, Vodafone and state-owned BSNL. It would overtake Tata Teleservices, which has around 25 million subscribers. Idea Cellular has already been allotted spectrum in 11 telecom circles where it presently does not have operations, and is aiming to become a pan-India telecommunications company by 2009.

The inability of the Modis to be a pan-India player in the telecom space with Spice Communications is cited by sources as the main reason for their interest in selling their stake. A pan-India presence is said to be imperative for profitability in what is now the most competitive telecom market globally.

The department of telecommunications (DoT) had rejected Spice Communications' application for a pan-India licence some time ago, on account of the company's poor net worth. It had allotted only four more circles to the company at the time, including Andhra Pradesh, Haryana, Delhi and Maharashtra. Industry sources say that even in these four allotted circles, Spice is finding itself cash-strapped as Telekom Malaysia has thus far not invested to the required level in the company. Sources say the relationship between the Malaysian telecommunications company and the Modi family is not exactly cordial.

Spice Communications has less than 4.5 million subscribers, in a market of 269 million mobile users, totalling a market share of around 1.6 per cent. It had posted a loss of Rs36.50 crore for the quarter ended March 2008, against a loss of Rs14.66 crore in corresponding quarter in 2007.

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Spice Communications looking at options