TCS,Infy focus on Aussie bank merger for big bucks

INDIA’S top two software exporters TCS and Infosys can gain from the merger between Westpac Banking Corp and St George Bank in Australia, as Westpac is planning to spend nearly $338 million on integrating the information technology systems, and is also evaluating an outsourcing contract worth between $100-200 million (up to Rs 1,000 crore).

“In the past, Westpac did consider offshoring, but it had to be called off after a massive public outcry against outsourcing of local jobs. However, there is a convincing case for offshoring this time around, which is being considered by the bank,” said a consultant who requested anonymity. “The bank had evaluated Infosys’ Finacle before this merger happened,” he added.

The Australian banking industry, with potential customers such as Westpac, National Australia Bank (NAB), Commonwealth Bank of Australia and ANZ, will invest almost $4 billion on technology this year, according to the industry experts.

“Australia has at times been a prominent purchaser of technology and IT Services, they are somewhat linked to China, and in this environment all clients are important,” said James Friedman, analyst with Susquehanna International Group (SIG).

Apart from outsourcing its IT application development and maintenance
activities, Westpac is also seeking to replace its existing core banking system, another expert told ET on conditions of anonymity. While both TCS and Infosys are discussing the Westpac opportunity, none of the companies could offer any comments when contacted by ET.

TCS, which acquired the Sydney-based core banking software company Financial Network Services (FNS) three years ago can gain from the integration because St George Bank already runs FNS system. “Westpac, which uses a two-decade-old core banking system, has been evaluating an upgrade. With St George already running FNS, there is an opportunity for TCS,” the expert said.

Infosys, which works with leading Australian firms such as Rio Tinto and Telstra, is currently exploring the opportunities for its core banking solution Finacle, apart from an outsourcing contract for managing the integration. Infosys could not offer comments. Westpac currently has a ten-year outsourcing contract with IBM, due to expire in 2010, but the bank is seeking to revisit its outsourcing strategy after the merger.

“Westpac is being advised by Booze Allen Hamilton and McKinsey on restructuring of operational and IT systems, and outsourcing of activities such as back-office work, application maintenance and development is a part of the exercise,” the expert added.

Westpac’s had attempted a core banking replacement even during late 1980s, but had to write off almost $400 million after the project failed. “Westpac will be a lot more cautious this time,” another person familiar with the Australian banking system told ET.

In a presentation earlier this month, Westpac’s group chief transformation officer Brad Cooper explained the bank’s strategy for integrating the IT systems. According to him, the IT integration costs alone will be around $338 million, apart from an additional $168 million being earmarked towards outsourcing and restructuring. Mr Cooper also added that an IT strategy will be completed by March next year.

These initiatives are expected to help Australian bank achieve cost synergies of over $400 million by 2011, of which nearly 60% will come from outsourcing and restructuring projects. Westpac officials could not respond to an email query sent by ET on Monday.

Australian enterprises are not as severely impacted by the global economic recession when compared to their rivals in the US and Europe.
BANKING BIG

• Westpac Banking Corp, after the merger with St George Bank is planning to spend nearly $338 million on integrating the information technology systems

• It is also evaluating an outsourcing contract worth between $100-200 million

• Infosys, which works with leading Australian firms such as Rio Tinto and Telstra, is currently exploring the opportunities for its core banking solution Finacle

• With St George already running FNS system of TCS , there is an opportunity for the Tata company

BA eyes Qantas, Iberia tie-ups

BRITISH Airways CEO Willie Walsh isn’t short on ambition. On December 3, Walsh confirmed he was simultaneously negotiating mergers with fellow OneWorld alliance members Australia’s Qantas and Spain’s Iberia while still pursuing a joint venture with yet another OneWorld carrier, American Airlines.

For BA, such a tieup would give it an unrivaled global footprint and improved financial clout, and analysts estimate total cost savings could reach $875 million. Iberia would bring $3 billion in cash and a 20% share of the Europe-Latin America market. BA already has a long-standing revenue-sharing arrangement on flights between Britain and Australia with Qantas, and there is little overlap on existing routes. Together with Qantas, BA would carry 71 million passengers a year on 474 aircraft flying to more than 230 destinations. To get around current rules limiting foreign ownership of Australian airlines, the companies would remain as separate legal entities, with dual listings in Australia and Britain and a single board structure.

GOING GLOBAL

BA and American Airlines are applying for regulatory clearance to cooperate more closely over fares, schedules, and other operational issues in the lucrative transatlantic market. Back in August, American Airlines, BA, and Iberia signed an agreement to cooperate commercially on flights between North America and Europe. They applied for antitrust immunity, noting that their agreement would allow the OneWorld alliance to compete more effectively with rival networks SkyTeam and Star Alliance.

If Walsh succeeds, the combination of the four airlines—three controlled by BA—would create the world’s first truly global carrier, says Doug McVitie, founder of aviation consultancy Arran Aerospace in Dinan, France. “The creation of this kind of super-alliance is the way of the future.”

Tell that to Iberia CEO Fernando Contes. For the past five months, merger discussions between Iberia and BA have stalled over disagreements on the share price exchange ratio and concerns over BA’s large pension deficit. Contes, who was informed of BA’s bid for Qantas only an hour before the British carrier notified the stock market, told aviation executives at a lunch in London on Dec. 3 that it was “more rational” for his company’s merger with BA to precede a deal with Qantas and that pursuing both deals “would be too complex.”

TIME IS RIPE

Walsh’s move is indeed both audacious and complex. There has never been a truly global airline merger before, given that governments worldwide have been loath to cede control of carriers to foreign rivals. And regulators have scuppered previous attempts at tie-ups over competition concerns. But many analysts believe times have changed. “Now is a time of opportunity as aviation shares have fallen dramatically,” says Peter Morris, chief economist at aviation consultancy Ascend Aviation in London. “It’s about buying into future cash flow at a reasonable price.”

Witness the spate of deals recently announced as Europe’s strongest carriers rush to consolidate to cope with weakening demand. On December 1, Europe’s biggest discount airline, Ryanair kicked off the action, launching an all-cash $950 million bid for rival Irish carrier Aer Lingus, in which it already owns a nearly 30% stake. And on Dec. 3, the same day BA confirmed its merger talks with Qantas, Deutsche Lufthansa announced plans to take over Austrian Airlines by acquiring the Austrian government’s 42% stake for a nominal fee of — 0.01 per share and paying around $476 million for the remaining shares. “What we are seeing is a polarization of the industry around the big European carriers,” says McVitie. While the economic logic is compelling, political obstacles remain. Still, analysts reckon the sheer force of the global economic downturn is likely to help overcome them. Already there are signs that some governments and regulators are more open to consolidation. –

British Airways targets Qantas merger

A MOOTED $8 billion Qantas merger with British Airways would be structured to ensure compliance with the Qantas Sale Act, but any deal could be jeopardised by BA choosing to merge first with Spanish airline Iberia.


Federal Transport Minister Anthony Albanese said yesterday that Qantas had to remain Australian-owned for national security reasons.

He cited bilateral aviation agreements -- for example, the arrangement with Japan restricting landing rights to a "51 per cent Australian-based airline" -- as well as the importance of a national carrier during emergencies, such as last week's shutdown of Bangkok's international airport.

"There are national security issues, particularly for an island continent located on the globe where Australia is, for having a national airline," Mr Albanese told the ABC Television's Inside Business program.

The minister noted, as well, that he had been able to pick up the telephone last week and ask Qantas chief executive Alan Joyce for extra flights out of Thailand.

It is understood, however, that any Qantas-BA deal would involve a dual-listed company structure that would comply with the act, which requires Qantas to be based here and have two-thirds of its board seats occupied by Australians, including the chairman's position.

Qantas has yet to start lobbying the Government about the transaction, preferring to wait until the proposed merger terms are finalised, which is unlikely before Christmas.

Share market trading over the past 12 months suggests Qantas would be the senior merger partner by a ratio of 55:45.

The airline's recent 2009 profit downgrade to about $500 million has, however, narrowed the gap to 52:48.

Mr Joyce and his BA counterpart Willie Walsh met in Hong Kong midway through last week.

Instead of making headway with the merger, they spent most of their time responding to an early leak of their merger plans to the media.

Both parties have done due diligence but the process has not been completed, although $US500 million ($771 million) in synergy benefits have been identified. One source said the major unresolved issues were the airlines' relative values, a pound stg. 2 billion ($4.5 billion) deficit in the pound stg. 16 billion BA pension scheme and BA's outlook given its heavy exposure to a downturn in trans-Atlantic flying because of the global financial crisis.

On the upside for BA, the performance of its new Terminal 5 at London's Heathrow Airport had been "encouraging", the source said.

The structure of the deal is understood to be fairly well advanced, and will approximate that of BHP Billiton-DLC.

In the current dislocation of debt markets, both parties are keen to avoid any trigger for a refinancing.

A potential spanner in the works, though, is the fate of BA's scrip merger discussions with Iberia. Last July, the airlines said their boards "unanimously" supported the talks.

In an embarrassing revelation, Iberia chief executive Fernando Conte said last week he had not known that BA had been conducting parallel negotiations with Qantas.

Qantas sources said the involvement of Iberia did not necessarily kill a Qantas-BA deal.

The Spanish airline, though, could only be introduced to a three-way merger after a Qantas-BA deal took off first.

The reason was that a BA-Iberia deal would be a full merger, including board seats for Iberia directors.

A merger of that entity with Qantas would make it hard to comply with the Qantas Sale Act and its board requirements.

HCL RIVALS INFY’S AXON BID

INDIA’S largest tech acquisition bid just got bigger. HCL Technologies, the country’s fifth-largest tech firm, on Friday announced a counter-offer to acquire UKbased SAP consultancy Axon Group for about £441.1 million ($810.8 million) or 650 pence a share. This is an 8.3% premium over Infosys’ 600 pence-ashare bid for Axon announced on August 25.

Responding to HCL’s counter-offer, Infosys in a statement said, “Infosys is considering its position and urges Axon shareholders to take no action at this time. A further announcement will be made in due course.” Infosys’ offer was the largest ever tech acquisition bid by an Indian company so far.

What is it about Axon that has India’s leading IT firms slugging it out with each other?

“We chose Axon because it’s the only pure-play, large SAP consultancy firm in the world. It offers scale and size and has high-end consulting services,” HCL Technologies CEO Vineet Nayar said.

Analysts and investment bankers in the know feel that it is very likely that Infosys would make a counter offer, as HCL’s bid is higher only by about 8.3%. It’s understood that Infosys had factored in the possibility of a 15-20% hike in its offer price. The Bangalore-based IT firm is likely to sweeten the offer with the revised price anywhere between 670-710 pence per share.

HCL has signed an inducement contract with the Axon board on Friday that entitles it to get 1% of the bid amount if it failed to acquire the consultancy. It hopes to close the deal in the first quarter of calendar-year 2009. The timeline, however, does not take into account a counter offer to its own bid. Under the UK takeover laws, a counter bid to HCL’s bid would have to be made within the next 45 days.

“The fact that the Axon board has signed the inducement contract shows that they welcome our offer,” Mr Nayar said. HCL said it identified Axon as an acquisition target in the first quarter of this year and started discussions with the company in July. Merrill Lynch and Standard Chartered are the financial advisors to HCL for the bid. HCL Technologies said it will fund its bid for Axon largely through debt. Mr Nayar said the company already had £400 million worth of debt commitment from Standard Chartered. It also has about $570 million cash in its balance sheet.
£ 407m INFOSYS BID (AUG 25) £ 441m HCL’s COUNTER-BID (SEP 26) £ 29.5m AXON NET PROFIT (2007) £ 204.5m AXON REVENUES (2007) Buyout makes sense for HCL

Analysts said the acquisition would make strategic sense for HCL but stretch its balance sheet. “Axon has good capabilities and it makes sense for HCL whose ERP implementation capabilities are limited compared to its peers,” said Angel Broking analyst Harit Shah.

At the time of going to print, the Axon scrip was trading 6.94% up at 678 pence per share, following the announcement of the counter-offer. For the year-ended December 31, 2007, Axon reported profit before taxation of £29.5 million on revenues of £204.5 million. The 2,000 employee-strong Axon provides process consultancy services to large organisations that have chosen SAP as their strategic enterprise platform. It counts British Petroleum, Cable & Wireless, Xerox and Kraft among its clients. It gets about 61% of its revenue from Europe, Middle East and Asia. For Indian companies looking to diversify and reduce dependence on the US, which is reeling under the financial crisis, Axon’s geographic presence is also a big draw. Infosys, however, kept its cards close to its chest, not immediately revealing if it would pick up the gauntlet thrown down by. When contacted, Infosys CEO S Gopalakrishnan said: “We will look into this and decide.”

The Axon acquisition tale may take more twists as other potential suitors are seen showing interest. ET had reported earlier this month that Japanese majors Fujitsu and NTTSoft may enter the fray, too. Further, there is the possibility of some European IT majors and PE players wooing Axon. It is being speculated that Capgemini may make counter-bid. While there is no official comment from Infosys because its is in its silent period ahead of the announcement of its second-quarter results, sources at top levels in the company said the possibility of a counter-bid had been factored in and that it was reviewing the situation.

Industry observers say Infosys’ bid may succeed because of the irrevocable undertaking it has from the Axon management team, which holds an 18.1% stake.

SUNNY SIDE UP IN TARO WAR

Israeli Court Tells Taro Owners To Sell Out

IN A victorious move for Sun Pharma, the Israeli district court, in a ruling on Tuesday, ordered the promoters of Taro to sell their stake in the company for $7.75 per share. The Tel Aviv Court also rejected Taro’s contention that Sun Pharma should have conducted a special tender offer under Israeli law. Sun Pharma is now in a position to complete the tender offer following which all conditions for the option agreement to acquire the shares held by the controlling shareholders of Taro will be satisfied and the controlling shareholders will have to deliver their shares.

Judge Michal Agmon-Gonen J of the Tel-Aviv district court ruled that it was disingenuous for Taro’s directors to claim now, over a year after they approved the transaction, that a special tender offer was required. The court stated that the directors should have studied the agreements prior to their being signed, and should have confirmed then that they were in the company’s best interest. The court stated that the directors cannot claim now that they suddenly decided a special tender offer is necessary.

In a statement issued by the company, Sun Pharma chairman and managing director Dilip Shanghvi said: “It is clear, based on the ruling, that the lawsuit by Taro’s independent directors was part of a calculated effort by (Taro chairman) Barry Levitt to avoid living up to his obligations under the option agreement. It is time for Mr Levitt and his family to live up to the contract and do what is required of them under the option agreement.”

After the deal goes through, Sun Pharma will raise its stake from 36% to 48% while its voting rights will increase to over 60%. Option to appeal open
TARO founders and Templeton Asset Management have the option to appeal against this decision in the Supreme Court in Israel. Whether they decide to exercise that option is not clear. An official query to Mark Mobius, head of Templeton Asset Management, however, received no reply

The two companies (Taro and Sun Pharma) have been at loggerheads since May this year, after Taro cancelled the merger agreement signed between then a year ago.

Taro’s main bone of contention was that the price offered for Taro’s shares was ‘too low’. Taro had filed a case in the Israeli court to prevent Sun from taking it over at such an under-valued price. In retaliation, Sun filed a case in the Supreme Court of New York against Taro for breaking their agreement. It also commenced a tender offer for all outstanding shares of Taro which expires on September 2.

Earlier, international reports quoted Taro chairman Mr Levitt stating that there are a number of companies that are willing to buy Sun’s share in Taro for $10.25 a share and even more. “Sun has to be willing to sell.” he said. This question, however, does not arise now as Sun will have a majority stake in Taro. The court also stated that the directors, who are also shareholders, benefited from Sun’s investment, which saved Taro from collapse.

Sun has announced that its tender offer will now close a day later on September 3. Sun Pharma’s stock closed at Rs 1,481.65, down 0.53% from its previous day close.

After Tata’s takeover of Corus, Infosys gobbles up UK-based Axon for a staggering Rs 3,300 crore, India’s largest tech buy

INFOSYS, a declared suitor in the market for a long time now, has finally found a match. The company is set to acquire UK-based Axon Group, a SAP consulting services company listed on the London Stock Exchange, for about $753 million (£407.1 million) in an all-cash deal. This will be the biggest overseas buyout by an Indian IT company, eclipsing cross-town rival Wipro’s $600-million acquisition of Infocrossing last year.

Commenting on the Rs 3,237-crore acquisition, Infosys chief executive S Gopalakrishnan said, “We will leverage the capability (Axon), and with our global reach, this will help in large deals participation.”

Axon, with around 2,000 employees, provides consultancy services to MNCs with SAP as their strategic enterprise platform, and has clients such as BP and Xerox. The transaction comes at a time when India’s top five IT majors have been aggressively chasing crossborder M&A deals , as valuations tumble in the wake of a market slowdown.

Infosys has offered £6 per share, which is a 33.1% premium over Axon’s sixmonth average stock price and almost 19.4% over Friday’s closing price.

Interestingly, the deal also left a section of analysts wondering at the possibility of a counter bid for Axon by any of Infosys’ large competitors.

Infosys is making an all-cash offer to acquire Axon’s 100% shareholding, including an 18.1% promoter stake, in a move to take the company private. The Indian software services giant, with close to $1.8 billion in cash reserves, is hoping to complete the formalities by November 2008. The Infosys scrip closed marginally up at Rs 1,703.05 in a flat Mumbai stock market.

Axon reported revenues of £204.5 million for calendar year 2007 with a net profit of £20 million. It gets around 55% of its revenues from the UK with the remaining spread coming from the US and Asia-Pacific. It also has a delivery centre in Malaysia.

Axon has been looking for a possible suitor over the past one year, and Citigroup is believed to have offered the deal to most A-listers in the Indian tech sector with £350 million as sort of a floor price to talk a deal.

Reacting to the valuation of Axon, Infosys chief financial officer V Balakrishnan said the “pricing is fair”. Axon’s operating margin at 15% is nowhere close to that of Infosys’ 28-31%. But analysts and investment bankers pointed out that bagging an international acquisition target with a 15% operating margin is a rarity.

Add to this the fact that Axon has 15-20% share of the SAP services market in the UK, with a robust client base that includes Motorola, Vodafone, GE Capital and Barclays. It is believed that both Mr Murthy and Nandan Nilekani have been working on sealing a big buy for Infosys in the past 18 months. “This deal has their stamp on it,” says a banker who did not wish to be quoted.

SAP is a growing business segment for Infosys, accounting for 24% of its revenues with a CAGR of 65% over the last three years. Mr Balakrishnan said, “This is the space where we have good growth and there is good demand for SAP services.”
Infosys officials said the company would be able to provide the future guidance only when the deal is concluded. However, they felt there are excellent synergies between Infosys and Axon as the latter did not have the financial muscle, reach or scale to expand its business.

BIG-TICKET ACQUISITION

-This is the second acquisition by Infosys after it bought Expert Information Services for $22.9 m in Australia in December 2003

-This will be the largest acquisition by an Indian IT company, surpassing Wipro's $600-million acquisition of Infocrossing

-The deal with Axon is expected to be completed by Nov 2008 Infosys will pay a 33.1% premium to the six-month average stock price of Axon

-Axon reported revenues of £204.5 million in fiscal 2007 with a net profit of £20 million

Axon has around 2,000 employees across the UK and North America
Operating margin of Axon stands at around 15% and is much lower than Infy's 28-30%

16 RULES FOR INVESTMENT SUCCESS

16
RULES FOR
INVESTMENT SUCCESS

B y J o h n M a r k s Te m p l e t o n

• Invest for maximum total real return

• Invest — don’t trade or speculate

• Remain flexible and open-minded about types of investment

• Buy low

• When buying stocks, search for bargains among quality stocks

• Buy value, not market trends or the economic outlook

• Diversify in stocks and bonds, as in much else, there is safety in numbers

• Do your homework or hire wise experts to help you

• Aggressively monitor your investments

• Don't panic

• Learn from your mistakes

• Begin with a prayer

• Outperforming the market is a difficult task

• An investor who has all the answers doesn't even understand all the questions

• There's no free lunch

• Do not be fearful or negative too often

Follow the LEADER

Templeton, Buffett & their tenets have attracted many but the best way to benefit from their teachings lies in discipline to stick to those principles


JOHN Marks Templeton, arguably “the greatest global stock picker of the century,” passed away this month at the age of 95. His investment tenets — simplicity and universality — attracted investors across the globe. Yet he remained an unknown figure among Indian investors. One of the reasons, according to a industry analyst, is that Indian investors don’t believe in role models. For them, investment gurus’ principles work more like “a fitness regime where most know that it is important to be fit and healthy but are not able to work out the discipline for the same.” The basic psyche of an Indian investor still remains to invest in stocks on the advise of friends, colleagues or a local broker. If their portfolio is eroded, the tendency is to immediately shift gears and keep their future possible savings in the form of yellow metal or fixed deposits. SundayET provides you an insight into why you should follow rules of investment gurus such as John Marks Templeton and Warren Edward Buffet to reap success on Dalal Street.

VALUE RATHER THAN INVEST

This is one of the core principles to investing. The success of individuals like Buffett and Templeton shows that how a focused approach to investments can help you post healthy returns from the equity markets over the long-term. Chetan Sehgal, director (equity research) of Franklin Templeton Investments, believes that this is precisely the reason for the basic investment tenets withstanding the test of many decades. “Their advice has always been — focus on fundamentals and value rather than invest based on sentiment and short-term expectations of price movements. Of course for investors, this is the hardest to implement as we are surrounded by lots of information and news which affects sentiment and there is a feeling that in equity markets you can make a quick return,” says Mr Sehgal.

CONTRARIAN APPROACH

Never follow the crowd. Great investors always follow the contrarian approach. In his 16 rules for investment success, Templeton underlines that if you buy the same securities everyone else is buying, you will have the same results as everyone else. “By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced,” he wrote. He quotes an example of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”

UNDERSTAND RISK-REWARD RELATIONSHIP

All investments have a certain amount of risk, and normally, the rewards are commensurate to the risk taken. You should be able to judge an investment with reference to two parameters — risk-reward relationship and cost-benefit analysis. For instance, equity funds do have the ability to provide good returns over the long-term, but the question you should ask is — are you comfortable with the ups and downs of the markets? “There is no point investing all your money in equities and then spending sleepless nights due to short-term volatility. At the same time, you need to ensure that investments provide returns that will be adequate to meet longterm goals,” says Sehgal. The importance of diversification among assets is one of the tenets of Templeton.

KEEP YOUR EMOTIONS AT BAY

According to investment gurus, emotions tend to overwhelm us whenever there is a significant shift in market conditions or when faced with unforeseen circumstances, be it good or bad. Thus, while making decisions during such situations, you should be even more careful. “An objective and deliberate analysis of the situation, taking into consideration the investment objectives and time frame is an absolute must,” feels Sehgal. Anup Bagchi, ED of ICICI Securities, says successful investing is a culmination of view of the future and psychological make up of the investor and thus each individual must do what one is comfortable with. “This is why decisions of even the legendary investors are not the same. It is important to stick to basic principles but not be stuck with any particular paradigm,” he says.

STAY FLEXIBLE, OPEN MINDED AND SCEPTICAL

Volatility is an inherent part of stock market investing and investors need to keep in mind that market gyrations tend to be more pronounced over the short-term. Thus, during times of negative sentiment, often quality asset prices are available at attractive bargains and you can benefit from them. “There is an important lesson in Templeton’s investment tenet — never adopt permanently any type of asset or any selection method. Always try to stay flexible, open minded and sceptical. Long-term top results are achieved only by changing from popular to unpopular types of securities you favour and your methods of selection,” says Bagchi. He says the starting point of investing is to have a point of view of the future of economy and then the sector and then the company, or it can be individual stock picking if there are compelling reasons. “In this changing world the view of the future can change rapidly and the original assumptions of investment may undergo a change. It is critical to have an open mind about being wrong and to do course correction,” he says.

BankAm to merge BPO arm of Countrywide in India

DEAL CORNER


THE ripples of the subprime fiasco are being felt in many ways. The business process outsourcing arm of Countrywide Financial in India, CFC India Services, is merging with Bank of America’s nonbanking subsidiary, Continuum Solutions, as part of BankAm’s $2.5-billion global takeover of the loss-making Countrywide.

While there will be job cuts in India post merger, all Countrywide staff will have switch over to the BoA salary structure, said a source. Some of the top management of Countrywide led by expatriate director Tom Jones may have to go.

While BA Continuum MD Avtar Monga is expected to head the KPO segment of the merged entity, Countrywide’s head of operations (India) Gautam Bahai may be given the charge of mortgages, the source said. A BoA spokesperson from Singapore refused to comment.

As in the United States, the BoA will drop the Countrywide name in India. CFC India Services, with its 3,500 seats in Mumbai and Hyderabad, till now was operating as a subsidiary of Countrywide Financial Corporation and was providing processing and infotech related services to Countrywide in the mortgage and related financial services industry.

" RIL, RCom joust as MTN deadline ends "

THE war of letters between Anil Ambani’s Reliance Communications (RCom) with Mukesh Ambani’s Reliance Industries (RIL) is increasingly assuming ludicrous proportions. The media and public relations war escalated the day before its 45-day exclusive period for merger talks with the South African telco MTN expires on Tuesday. MTN and RCom are expected to update the stock exchanges on the status of their negotiations on Tuesday. The bone of contention this time was an aborted meeting between representatives RCom and RIL on Monday morning.

The blame game has reached its crescendo on Monday with RIL charging RCom with “misleading media.” The RIL spokesperson said late on Monday evening that no RCom representative turned up to meet RIL at a meeting scheduled for Monday morning. This came within a couple of hours of RCom informing the media that it has invited RIL to meet in the week beginning July 14 “to clarify any doubts” on the deal structure being discussed with MTN.

The RIL spokesperson said: “RIL, on July 2 invited RCom to participate in a meeting at 11am today (July 7, 2008) to commence the process of mutual conciliation under the non-competition agreement. No representative of RCom turned up at the meeting. RIL delivered a letter to RCom at 1.49 pm today placing on record the fact that no representative of RCOM turned up at the venue for the meeting at the scheduled time. RIL received a response from RCom at 2.23 p.m. refusing to participate in the meeting.”

RCom sources said they did not attend the meeting with RIL as the meeting was slated to discuss “conciliation”. High-stakes game of brinkmanship
THEY said: “There is no grounds for conciliation as RIL’s so-called claims on right of first refusal (ROFR) is untenable. We are ready to meet them to clarify details of the deal being discussed with MTN.” RCom reiterated these points in a fax sent to RIL 2.23 PM on Monday afternoon.

RIL turned down this offer. In a response to RCom’s afternoon fax, RIL has threatened to take legal action against RCom in view of the latter’s “refusal to participate in conciliation process as envisaged in the agreement.” It has also reiterated that it has already invoked the dispute resolution clause of the non-competition agreement, which was signed between RIL and various Anil Dhirubhai Ambani Group (ADAG) firms in January 2006 in order to implement the demerger of business between the Ambani brothers.

The two sides seem to be engaged in a highstakes game of brinkmanship as the negotiations between RCom and MTN enter the final stretch. With credit markets tightening and capital markets slumping around the world the legal uncertainties would not make matters easier for RCom.

The bone of contention lies in the January 2006 agreement. RIL claims that this agreement provides it a right of first refusal (ROFR) in case RCom is sold to a third party. RCOM denies any such right. These developments come amidst speculations that MTN is wary of legal challenges to the deal. Besides, unconfirmed reports said that MTN would agree to continue talks with RCOM only if had an assurance that Mukesh Ambani would drop his claims of RoFR and not derail the transaction.

Analysts share the view that the South African company would not want to be part of a combined entity whose future is uncertain. RCom shares ended the day down 4.2% at Rs 419.80 rupees, even as the Mumbai market rose 0.5%.

"Kingfisher may buy Spicejet in cash deal"

Mallya in talks to buy out Kansagra family & Istithmar. Open offer for 20% to follow

ANOTHER round of consolidation in the domestic skies looks imminent, with UB Group chairman Vijay Mallya engaging in talks with two major shareholders of SpiceJet to buy out the budget carrier in an allcash deal. According to industry sources, the Bangalorebased tycoon is negotiating with Gulf-based fund Istithmar and UK-based Bhulo Kansagra family, who together hold 26.33% in the low-cost airline. The acquisition of their stake by Mr Mallya would trigger an open offer for another 20% from other shareholders.

The Kingfisher chief followed the same strategy to acquire the country’s largest low-cost airline, Air Deccan, last year. Now, the budget carrier is being merged with Kingfisher. Going by the current share price of SpiceJet on BSE, a 26.33% stake in the company is valued at Rs 158.40 crore. The SpiceJet share closed at Rs 25 on Friday, up 7.76% over the previous day.

The Tatas also hold a minor stake in SpiceJet through two investment companies. There was speculation that they may take a larger role in the airline but the group nixed the buzz by insisting that the holding is purely a financial investment.

“Kingfisher has been in talks with SpiceJet for a possible stake acquisition for a month now. The Kansagra family and Istithmar are likely to exit the company. While Mr Kansagra is keen for an early deal, Istithmar is looking for good value,” an industry source said. Meanwhile, SpiceJet is also talking to a non-aviation investor for infusion of fresh funds, the source added.

Gurgaon-based SpiceJet has cut down its flights to 94 per day from 117 a day last month. The airline is not immune to the impending financial crisis in the aviation industry due to spiralling fuel prices. In a move to reduce losses, the low-cost carrier is reducing capacity in the market and sub-leasing aircraft. It has already sub-leased one aircraft to the Netherlands-based Trasavia Airlines. SpiceJet is planning to sublease two more aircraft shortly.

Kingfisher, along with low-cost arm Deccan, operates about 83 aircraft and operates 440 flights a day across the country. SpiceJet, which has nearly 11% market share, operates 94 flights a day with 15 Boeing aircraft. To expand its fleet and operations, the budget carrier is planning to raise $100 million from the market. While it has been looking for an investor for the past few months, it hasn’t yet got any.

With fuel prices at an all-time high, almost all domestic carriers are reducing capacity. Indian airlines, which lost about $1 billion last fiscal, are expected to double the figure in the current fiscal.

Mr Mallya’s move to acquire SpiceJet is expected to give Kingfisher enough muscle in the domestic market. If the deal goes through, the UB Group will hold a 40% share in the domestic market and set fare levels across key sectors.

"WAR CHEST FOR MTN"

Fund Hunt: RCom to raise $6 b from banks

ANIL Ambani’s Reliance Communications (RCom) is in talks to raise up to $5-6 billion from banks to part finance its planned acquisition of the South African telco, MTN. RCom may pledge the shares of MTN to raise the funds and also provide some sort of guarantee to the lenders.

Sources in the know said Deutsche Bank, HSBC and Barclays, among others, are putting in place short-term financing for RCom to finance the deal. A few Indian banks and a host of European banks have also offered an underlying commitment to lend money for the transaction. RCom will have to repay this debt in a year or so by raising long-term funding.

RCom’s 45-day exclusivity period (during which MTN could not consider any alternative partner) ends on July 7. It is unlikely that the transaction would be completed by then, an industry official said. Instead, the exclusivity period might be extended.

The entire transaction is expected to be routed through a special purpose vehicle (SPV). In addition to RCom, the other partners could also pick up equity in this SPV. RCom is learnt to have been in talks with a Middle East-based sovereign wealth fund and a couple of private equity players to offer stake in the SPV. It is learnt that the private equity funds are not too keen to participate in the SPV while the sovereign fund is very interested in it. RCom will likely hold a majority equity stake in the SPV.

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. RCom will have to chip in $7-8 b

GIVEN the other equityholders’ contribution of $4 b, RCom will have to chip in around $7-8 b. 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. The SPV will directly acquire a shade below 35% in MTN, the maximum permissible limit in South Africa without triggering a tender offer. Then, RCom will look at a ‘whitewash procedure’ under which MTN shareholders will be asked to vote to waive their right to a tender offer. If the shareholders agree, RCom/SPV will scale up its stake to 40%. Otherwise, it will be content with a shade below 35% stake in MTN.

Sources said RCom is also examining the possibility of offering preference shares to investors who will be picking up a stake in the SPV. However, the investors are more interested in having a direct equity in SPV. “Talks between both the parties to sort out the nitty-gritty are going on,” said a source.

This new structure is a sharp departure from the reverse merger route which was earlier discussed by the two companies. Under the reverse merger route, MTN will become the holding company of RCom although Anil Dhirubhai Ambani Group — RCom’s promoters — would have become the single largest shareholder of the Johannesburgbased telco. The deal was designed to be consummated through an open offer by MTN for RCom shareholders and swapping of ADAG’s shares in RCom for MTN shares.

However, the possibility of a prolonged legal dispute may have stymied the reverse merger structure as Mukesh Ambani’s flagship Reliance Industries interprets this as a ‘sale’ of RCom and may claim its right of first refusal in RCom. Citing an agreement which was signed between Reliance Industries and three entities of ADAG, Reliance Industries had written letters to MTN and its investment banks, claiming that it enjoys a right of first refusal in case RCom is sold. ADAG vehemently denies any such right is enjoyed by Reliance Industries.

On Thursday, a second letter from RIL to RCom and MTN sparked off another war of words between RIL and RCom. The new structure ensures RCom would buy controlling stake in MTN directly, which would ensure the right of first refusal cannot be revoked. But RCom cannot leverage the balance-sheet of MTN to finance the transaction as a 35-40% stake in the foreign company would not allow it to do so. MTN will not be part of the consolidated balance-sheet of RCom.

Bankers said funding a big-ticket deal could become a problem in the wake of tight liquidity conditions across the globe. Spreads of Indian papers have moved up by around 28 to 30 basis points in the past couple of weeks. The sixmonth Libor is currently around 3.13%. The credit default swaps for RCom is now around 325 bps. They also said that there are very few debt deals in the market and most of the deals are being done on a bilateral basis. The RCom stock on Thursday slipped 6.91% to close at Rs 389.50, putting the valuation of the company at $18 billion.

"RCom looking to buy direct 40% stake in MTN"

ANIL Ambani’s Reliance Communications (RCom) may be examining alternative structures to bring about its proposed mega combination with MTN. RCom, possibly in partnership with a sovereign wealth fund based in the Middle East, may directly buy a large equity stake in MTN, emerging as the single largest shareholder. This is to avoid legal disputes that may arise from Reliance Industries’ (RIL) claims of right of first refusal (RoFR) if RCom were to enter into a reverse merger with MTN. Under the reverse merger route MTN would have made an open offer for RCom followed by a share swap between Reliance ADAG, promoters of RCom, and MTN. ADAG would then have emerged as the single largest shareholder of MTN while RCom will become subsidiary of MTN.

That plan has not been junked, but sources close to the development said RCom is also examining the option of directly acquiring a 40% stake in MTN. A Middle East-based sovereign wealth fund could join hands with RCom for the acquisition of the controlling stake in MTN. The name of the fund could not be ascertained. Since the South African stock exchange rules require any acquirer to launch a tender offer if its holding crosses 35% stake in a company, RCom intends to acquire a shade lower than the threshold limit. Subsequently, RCom is looking at a “whitewash” procedure under which MTN’s shareholders will be asked to vote to waive their right to a tender offer. If the shareholders agree, RCom will scale up its stake to 40% in MTN.

Otherwise, it will be contend with a stake just under 35%. However, RCom will emerge as the single largest shareholder by far with its 35% stake. Newshelf 664, a trust, is currently the largest shareholder with its 13% stake.

A 35-40% stake would however mean there would be no consolidation of revenues and profits in RCom’s books though there may be other synergies.

Industry officials said MTN could be valued at $35-40 billion against its ruling market capitalisation of nearly $30 billion for the transaction. So, RCom will have to chip in $12-14 billion for the purchase of 35%. Its fund requirement will go up if the MTN shareholders allow it to acquire another 5% stake.

The transaction may be routed through a special purpose vehicle in which RCom will hold majority control with the sovereign fund holding the remaining stake. SPV will raise debt too

In addition to the foreign fund’s equity contribution, the SPV will raise debt to finance the deal. So, the pressure of funding the deal will be substantially reduced from RCom’s balance sheet. An RCom spokesperson declined to comment.

If the deal goes through in this form, it will be one of the largest overseas acquisitions by any Indian company. Tata Steel so far tops the list with its $12.9 billion purchase of the Anglo-Dutch steel maker Corus.

Interestingly, RCom had entered into the discussions with MTN after the foreign telco refused to sell a majority stake to Bharti Airtel. A source close the development said MTN always wanted to combine the strength of the two companies. “The new structure proposes that RCom, instead of ADAG, will be the controlling shareholder of MTN. Both RCom and MTN will enhance their partnership later. More importantly, this is the best option available under the changed circumstances,” he added.

‘Changed circumstances’ refers to RIL’s interpretation of a reverse merger of RCom with MTN as ‘sale’ of RCom leading to RIL possibly attempting to exercise its claimed RoFR in RCom. “It’s certain that Reliance Industries will take legal recourse if RCom reaches a reverse merger with MTN. The new structure, if it goes through, will mean RCom directly buying a controlling stake in MTN. This beyond the so-called RoFR claims,” they added.

Sources said both the parties are expected to extend the 45-day exclusive merger talks (during which the two sides would not talk to anyone else), which is slated to expire on July 8, by a couple of weeks. The due diligence is likely to be over by this week.

Newshelf 664 is the largest shareholder of MTN with a 13.1% stake. The Beirutbased Mikati family holds a 10.2% while PIC has a 9.7% stake. The rest 67.1% is widely held.

Meanwhile, Fitch Ratings upgraded MTN’s national long-term rating to ‘AA-(zaf)’ from ‘A+(zaf)’ with a stable outlook, reflecting MTN’s position as a leading emerging market mobile tele-communications player following considerable operational growth and its proven ability to operate successfully in challenging environments. Fitch said the rating is supported by strong cash flow generation, low leverage and strong liquidity position of MTN which has a subscriber base of over 116 million in 23 countries.

"M and As turn sour for India Inc"

The tide seems to be turning for corporate India on the overseas acquisition front.

After a string of foreign deals in the last few years, including Tata Motors' purchase of Land Rover and Jaguar brands from Ford for $2.3 billion this year, attempts by Indian companies to acquire assets abroad are increasingly hitting roadblocks. At least, the recent attempts by Indian companies suggest so.

Be that of Essar Steel's attempts to buy US steel firm Esmark for $1.2 billion (over Rs 4,500 crore), Sun Pharmaceutical's onging bid for Israeli firm Taro Pharmaceutical or Sterlite Industries' bid for Asarco's mining assets, the overtures by Indian companies have failed to hit the target.

Last week, Taro withdrew from its $454-million merger agreement with Sun, citing differences on pricing and the financial turnaround Taro achieved since last year. In the case of Sterlite, the former parent of Asarco, Grupo Mexico, has submitted a bid for the company's assets after the Indian company was shortlisted as the preferred bidder.

"The deals are being done in mature markets, where firms have to deal with the law of the land, bankruptcy process, unions, or aggressive bidders. It is upsetting when there's a counter-offer at a later stage like Grupo Mexico's bid for Asarco,'' said Sanjeev Kishan, director, PricewaterhouseCoopers.

Unlike in India, where a buyer can deal with a promoter having significant stake, the target companies in the West are widely-held and board-driven companies.

The board of directors have to ensure the best deal for the shareholders, and hence, insist on a "fiduciary out" clause in deals, which says that if the market conditions change (turnaround/if someone offers a higher price), it has the right of the company to back out.

"Until a deal is done and you have paid-off the shareholders, it is not done. Some of these deals have run into this problem," said Raj Balakrishnan, director, Merrill Lynch.

Though Essar's bid had the support of Esmark's management, the US steel company had to back Russian company Severstal's bid, which was higher than Essar's by just 25 cents per share and had the support of the workers' unions.

Essar, which revised its offer for Esmark upwards from $17 to $19 per share after the Russian steel-maker jumped the fray, didn't want to stretch it beyond a price.

"Given the macro-economic situation, it didn't want to go beyond a price. Its room beyond $19 was limited,'' said a banker. "It's a sign of maturity; that companies are not letting their ego drive them into a bidding war,'' said Balakrishnan, which brings us to a key question: are Indian companies being less aggressive on pricing their overseas targets?

"Companies are choosing to maintain liquidity; the aggression has plateaued,'' said Gaurav Khungar, executive director, (corporate finance), KPMG, a consulting firm.

"The cost of funding has gone up, which means a greater value is going to the lenders and lesser to equity,'' added Merrill Lynch's Balakrishnan.

The 39-per cent fall in the stock markets since January 9 this year and the fall in stock values of Indian companies has affected their leverage and ability to fund M&As. Unlike in India, where lending is collateral-based, internationally debt is given on the back of a company's market-capitalisation.

Take an Indian firm, which was trading at 10 times its earnings before interest, taxes, depreciation and amortization (EBITDA) six months back and acquired a company in the US, which was trading at four times its EBITDA. The Indian company, which will consolidate the accounts of the acquired firm into its balance-sheet, will hope that its stock trades at 8-10 times its EBITDA.

"With the fall in stock market and the value of the stock, this arbitrage opportunity is reducing, said KPMG's Khungar, adding "trading multiples have come down, which has taken the aggression out. The capability to finance has come down.''

"Given the overall economic situation, Indian firms will be more selective (with acquisitions abroad). The cost of funding has gone up while the availability of funds has become limited. This impacts their ability to do a transaction,'' said Sudip Rungta, head, M&A (hydrocarbons and technology), Essar Group.

Bankers say that Indian firms are better-off as they are part of large groups. Take the deals that some of the Tata group companies have done. "If the individual companies were to do these deals, it would have been difficult for them. Lenders take comfort from the group,'' said a banker.

Analysts say Indian companies are facing opposition in certain sectors or assets that a country considers strategic. "Deals are still happening in IT; there are no issues. When it comes to a large strategic asset, you may face a challenge,'' said Essar's Rungta.

At the crossroads

Indian companies' acquisition attempts are being opposed by unions, aggressive rivals, former parent or targets
Fall in the stock values of Indian companies has affected their leverage and ability to fund M&As
Experts say fear of Indian companies playing the outsourcing card to produce goods cheaper at home may stall acquisitions
Indian companies will have to be more selective with acquisitions abroad

"SUN PHARMA LOOKS TO POP UP TARO BY FORCE"

UPPING ANTE FILES SUIT IN NY
SUN PHARMA LOOKS TO POP UP TARO BY FORCE

SUN Pharmaceutical Industries, the country’s most valuable drug maker, has decided to launch a hostile bid for Israel’s Taro Pharmaceutical Industries. The is a rare instance of an Indian company making an unsolicited bid for a foreign firm. The move follows Taro’s rejection of a merger agreement with Sun last month. Taro had termed the offer “inadequate.” Sun said on Thursday that it will offer to purchase all outstanding shares of Taro in the next few days at $7.75 a share, the rate that both companies had agreed a year ago. Sun, which already holds a 36% stake in Taro, also said the offer is in line with the 2007 merger agreement between the two companies. Under that accord, Taro’s controlling shareholders, led by chairman Barrie Levitt, granted Sun the option to acquire all its shares if the merger fails. Sun has filed a lawsuit in the supreme court of the state of New York against Taro and its board of directors, requesting the court to order the controlling shareholders to honour the 2007 merger agreement. “We have had enough of the delays, excuses and misrepresentation by the board of Taro and Mr Levitt. Now it is time for Mr Levitt and his family to do what is required of them under the option agreement. We will do everything required to preserve our rights,” said Sun Pharmaceutical chairman Dilip Sanghvi. The successful acquisition of Taro will help Sun expand its marketing reach in the US where demand for generics continues to grow as health-care costs surge and more blockbuster drugs go off patent.

In May 2007, the Indian drugmaker offered to buy Taro for $7.75 per share and an additional $224 million to refinance debt, totalling $230 million in cash.

DEAL GOES BUST

Sun will offer to buy outstanding Taro shares at $7.75 a share. Says offer in line with 2007 merger pact

Indian co has also filed suit in New York against Taro and its board
Taro called off merger in May; said revised $10.25/share offer meagre

MAY 2007

Sun Pharma enters into a merger deal with Taro

MAY 2008
Sun receives Taro’s notice to terminate the agreement on difference of valuations

JUNE 2008

Sun replies to Taro disagreeing the termination

Legal battle kicks off between the two over the sale of Taro’s Irish plant

Sun files case in New York court against Taro Taro sought revised offer

SUN has given Taro $60 million in cash to revive the company and subsequently raised the offer to $10.25 a share. The Taro promoters and financial institutions having a combined 22% stake rejected the merger agreement with Sun Pharmaceutical last month, citing the domestic firm’s revised $10.25 a share offer as inadequate given the improvement in Taro’s operations. It had also filed a lawsuit in Israel on May 28 seeking to force Sun to make a revised offer. Sun refuses to do this.

“My sense of it is that the legal issues make it complex. While the litigation continues it will be difficult for Sun to get the shares from Taro’s promoters. I think that Sun filed the action to abide by the agreement. It exercised its option to be on the right side of the law. I don’t think it is going to be able to acquire the shares anytime soon.” Amod Karanjikar, an analyst with Edelweiss said.

Taro filed an injunction in the Tel-Aviv district court seeking to overrule the options agreement on May 28.

"GMR pays $1.1 bn for 50percent in Dutch power firm"

In the largest acquisition of a global energy utility by an Indian company, GMR Infrastructure has bought 50 per cent in the Netherlands-based power generation company, InterGen NV for $1.1 billion (approximately Rs 4,694 crore).

InterGen, which operates 12 power plants in England, Mexico, the Netherlands and Australia, has 8,086 MW of operational capacity and about 5,000 Mw of assets under development. The company had a turnover of $1.65 billion with profits of $613 million for the year ended December 2007. It employs about 700 people at various locations.

Bangalore-headquartered GMR has interests in airports, energy, highways and urban infrastructure. GMR bought 50 per cent in InterGen from AIG Highstar, a private equity group. Ontario Teachers Pension Plan (Teachers), the largest single-profession pension plan in Canada, holds the balance 50 per cent equity stake in InterGen. The deal will be closed before December.

"We will fund the acquisition through a special purpose vehicle which will get a bridge loan of $1.1 billion with two-year maturity from a consortium of five Indian banks," said Ashutosh Agarwala, chief financial officer, GMR.

The acquisition will help GMR get access to the super-critical technology of InterGen's Australian operations and will help it qualify for the ultra mega power projects coming up in India, said company officials

"ADAG moves court to save MTN deal"

SAFE THAN SORRY

Group Cos File Caveats To Stop RIL From Blocking Transaction


THE war of words between the Ambani brothers over RCom’s proposed reverse merger with MTN may now reach the courts. Two companies of the Anil Dhirubhai Ambani Group (ADAG) have filed caveats in the Bombay High Court, which are intended to ensure that no ex-parte order was issued in case Mukesh Ambani’s flagship Reliance Industries (RIL) attempts to enforce its claimed first right of refusal in case of the MTN deal. Sources close to the development said Reliance Communications (RCom), which is in talks with MTN to create one of the world’s top telecom companies, and another company AAA Communications have filed the caveats in the Bombay High Court last week. ADAG’s investment arm AAA Communications holds 63% stake out of the group’s 66% stake in RCom.

The bone of contention between the Ambani brothers lies in RIL’s claim that it holds the right of first refusal in case RCom is sold to any third party. RCom denies any such right. RIL sources say that ADAG has repeatedly sought to enforce this right in case of various initiatives by RIL and by Mukesh Ambani and his associates.

Although MTN has maintained that the sibling rivalry between the Ambani brothers will not have any impact on its talks with RCom, experts said the deal may face the threat of getting delayed by legal proceedings. “This threat may have an impact on the share-swap ratio,” said a source, adding that MTN is now scrutinising the legal implication of RIL’s claim. However, this could not be independently verified with MTN.

It is learnt
that Anil Ambani is expected to visit London to give final touches to the proposed deal. Ken Kosta, Lazard’s head of Europe, is leading the ADAG effort on this deal from his London office. If the deal goes through, it will create a telecom company with a combined subscribers of 115 millions in Asia, Africa and the Middle East. The broad contours of the deal being discussed between the South African telco MTN and RCom indicate the ADAG will emerge as the largest shareholder of the Johannesburg-based MTN, while RCom will become the subsidiary of MTN. If the deal goes through, ADAG is expected to get nearly one-third stake in MTN by swapping his shareholding in RCom. He may chip in a few billion dollars to top up his offer, depending on the share-swap ratio between the two companies. Ambanis square off yet again

THE exact details of the deal have not yet been finalised. Both the parties have signed an agreement to hold ‘exclusive talks’ till July 8.

The animosity between the Ambani brothers is nothing new. They parted ways in June 2005 after one of the prolonged and most bitter battles in the history of corporate India. Since then, both the brothers have grown their business manifold and have displayed a habit of obstructing each other’s expansion plans. RIL sources claim that this propensity has mostly been exhibited by ADAG which has repeatedly objected to various initiatives.

However, this round of battle was initiated by RIL, which two weeks ago sent a letter to MTN claiming that it enjoys the first right of refusal in case RCom is sold. RIL’s claims are based on a disputed agreement with three entities of ADAG on January 2006. RIL had also sent the same letter to RCom a day later. The January 2006 agreement was to implement the demerger of businesses between the brothers.

RCom immediately come down heavily on RIL. In a communication, which was public within a day after getting the RIL’s letter, RCom had said: “ The tone of the letter clearly indicates that it is part of a mala fide design, with no substance, to simply try and disrupt talks between RCom and MTN, by raising the false bogey of litigation and damages. The use of threatening and coercive language by RIL, India’s largest private company, with MTN, a globally respected telecom major, is very unfortunate.”

RIL had earlier said: “It has in good faith notified both ADAG and MTN of the stipulations contained in an agreement, the validity of which has never been questioned so far by ADAG.”

"Modis to exit, TM to get 15% in merged entity"

IN ONE of the biggest deals in the Indian telecom sector, Aditya Birla group’s Idea Cellular on Wednesday announced that it would acquire BK Modi’s Spice Communications to strengthen its position in the growing telecom market. The deal consists of four related but distinct transactions. Idea will acquire the Modis’ 40.8% stake in Spice to begin with. Subsequently Idea will launch the mandatory 20% open offer for the Spice shareholders jointly with Telekom Malaysia’s investment arm TMI (Telekom Malaysia International).

Later, Idea will merge Spice with itself and offer a 14.99% stake to TMI through a preferential allotment. Idea will earn Rs 7,294 crore ($1.7 billion assuming an exchange rate of Rs 43) by selling this stake to TMI. This would make it one of the largest infusions of FDI into India.

Idea has agreed to buy the Modis’ 28.14 crore shares for Rs 77.30 each, totalling Rs 2,176 crore. In addition, it will also shell out Rs 544 crore, or over Rs 19 a share, to the Modis as non-compete fee. This is under the 25% limit (with reference to the open offer price to non-promoter investors) prescribed by the market regulator Sebi for any such payment. The 14.99% preferential allotment to TMI will ensure that Idea, despite being the purchaser, ends up as a net gainer in the transaction. The net income for Idea, after making payment to the Modis, will be Rs 4,574 crore.

The Idea-TMI combine will launch the open offer at Rs 77.30 jointly with TMI, which now holds 39.2% stake in Spice. It is not clear who will pick up how much at this stage. Idea will earn Rs 7,294 crore by selling 46.47 crore preferential shares to TMI for Rs 156.96 apiece. According to the merger formula, Spice shareholders will get 49 Idea shares for every 100 shares they held. The payment to the Modis is being funded through internal accruals. After the deal, which is expected to be done in the next six months, Idea’s equity base will be expanded due to issue of fresh shares to TMI and the share swap.

ET first reported on June 10 that Spice shares will be acquired by Idea at between Rs 77 and Rs 78 per share. On June 12, we reported that TMI will buy just under 15% stake in Idea through preferential offer and will hold about 20% in the merged entity. On Wednesday, Idea scrip closed at Rs 102.05, up 2.92% while Spice scrip touched an all-time high of Rs 73.40 before closing at Rs 72.35. This is a whopping 33% gain over the previous day’s close.

“Spice will be delisted and TMI’s holding in the new Idea (post-merger) will be a maximum of 20% (depending on the response to the open offer) and one non-executive board seat,” AV Birla group chairman Kumar Mangalam Birla told ET. The management of the merged entity will be with the

Birla group, which will have between 46%-48% in the company post the transaction. The 40.8% stake in Spice Telecom being acquired by Idea from the BK Modi Group will be cancelled post the transaction. The deal makes Idea virtually a debt-free company because of the net gain of around Rs 4,500 crore from the deal. Around Rs 2,700 crore was raised by selling stake in Indus Towers to Providence Partners last month. “With this, we become a debt-free company and Idea takes on a high-growth trajectory,” Mr Birla said.

Idea to enter Karnataka

DSP Merrill Lynch acted as the financial advisor to Idea while Enam Securities worked for Modis. Lazard was the financial advisor to TMI.

Idea Cellular MD Sanjeev Aga told ET the deal will give Idea an entry into Punjab and Karnataka, where Spice is present and which accounts for 11% of India’s total wireless subscribers. Spice has 4.4 million subscribers. With a total of over 31 million subscribers post-merger, Idea will be the fifth largest operator in India, ahead of Tata Teleservices (TTSL) which has nearly 26 million users.

It will also consolidate Idea’s position, with its all-India market share increasing from 9.5% to 11.1%. Idea is close to launching operations in Mumbai, Bihar, Tamil Nadu and Orissa in the next four-five months. With Punjab and Karnataka coming into its kitty through the deal, Idea will have almost a nationwide footprint spanning 17 key circles.

Also, Spice has spectrum in the 900 mhz GSM band, which carries more subscribers than the 1,800 mhz band. Idea already has spectrum in the 900 mhz band in seven circles areas, which will increase to nine, driving scale economies and operational synergies. “This will result in lower operating and capital expenditure,” said Mr Aga.

TMI has 44 million users across 10 Asian markets. “TMI’s experience of operating 3G will be of value to Idea, as also the convergent interests of the two companies in areas extending from international traffic to roaming and mobile value-added services. Idea and TMI would sign a business co-operation agreement to this effect,” Mr Aga said.

Spice group chairman BK Modi said, “This divestment will enable Spice to redeploy resources and strengthen the group’s mobile ecosystem businesses led by mobile VAS, mobile devices, telecom retail and customer support. This transaction makes Spice an operator agnostic services provider, where we will continue to provide services to the Indian mobile telephony market.”

"IDEA ADDS SPICE"

HOW DOES THE DEAL CHANGE THE TELECOM LANDSCAPE?

India will now have 11 telecom operators instead of 12 & the pecking order will change. Idea set to become the fifth-largest operator with over 31 million users. It is now just 5 million subscribers away from BSNL

WHAT DOES IT MEAN FOR IDEA CELLULAR?

AV Birla Group co gets a foothold in Punjab and Karnataka, 4.4 million subscribers, a strategic investor in Telekom Malaysia and a net income of Rs 4,500 crore.

Idea turns a debt-free company WHAT HAVE MODIS AND SPICE SHAREHOLDERS GAINED?

Modis made a cool Rs 2,720 crore by selling stake in the loss-making venture. This includes a non-compete fee of Rs 544 crore. Spice shareholders get 49 shares in Idea for every 100 shares held

HOW DOES TELEKOM MALAYSIA INTERNATIONAL BENEFIT?

It becomes a strategic investor in the 5th-largest operator in the world’s fastest-growing telecom market. TMI has 44 m users across 10 countries; Idea adds 31m to that. TMI will have one member on the new Idea board

DEAL DYNAMICS

STEP 1
Idea to acquire the Modis’ 40.8% stake in Spice

STEP 2
Idea to make 20%open offer for Spice jointly with TM

STEP 3
Idea to merge Spice Comms with itself

STEP 4
TM to buy 14.99% in merged co via preferential issue

"RANBAXY CAN SELL LIPITOR"

Reaches Out-Of-Court Pact With Innovator Pfizer

EXACTLY a week after the promoters of Ranbaxy Laboratories sold their shareholding to Japanese drug maker Daiichi Sankyo, the Indian drug maker and US pharma giant Pfizer on Wednesday announced that they have reached an out-of-court settlement for their global litigation over the world’s largest selling drug Lipitor (Atorvastatin). According to the settlement, Ranbaxy will launch its generic version of Lipitor, the $12.7 billion cholesterol-lowering medicine — and combination drug Caduet — on November 30, 2011, in the US with an exclusive marketing rights for 180 days along with the innovator company.

Industry estimates peg Ranbaxy’s revenue upside from the settlement for Lipitor at $1.5 billion over a four-year period running up to May 2012. At present, Ranbaxy, subject to litigation, was on course to launch its generic version of Lipitor in the US in March 2010, 15 months ahead of its patent expiry in June 2011. This settlement pushes back the launch date by 20 months, even though, it eliminates all uncertainty regarding the launch date. In addition, Ranbaxy will also not receive any upfront payment from the out-of-court settlement. Says Prabhudhas Lilladher’s pharma analyst Ranjit Kapadia, “The settlement brings certainty to Ranbaxy’s launch and will cut down litigation cost for Ranbaxy from tomorrow itself. However, the drug’s launch has been pushed back by 20 months, which means that Pfizer will get additional sales of around $20 billion during the extended period.”

Ranbaxy has described the deal as a winwin situation. “This is the largest and the most comprehensive out-of-court settlement ever in the pharma industry covering a total revenue of over $13 billion. The revenues will start kicking in from this year, as we will be launching generic version of Lipitor in Canada this calendar year,” Ranbaxy Laboratories CEO and MD Malvinder Singh told ET. A senior Pfizer executive, on his part, said the agreement clearly reaffirms the value and importance of intellectual property. GENERIC VERSION OF BLOCKBUSTER DRUG TO DEBUT IN US IN NOV 2011
2003 Ranbaxy files para IV application for Lipitor. Pfizer sues Ranbaxy for patent infringement, automatic 30-month stay AUG 2006 RANBAXY invalidates Pfizer's ‘995 Lipitor US patent

DEC 2006 AUSTRALIAN Federal Court grants decision to Ranbaxy JAN 2007 CANADIAN Federal Court grants favourable decision to Ranbaxy
FEB 2007 RANBAXY launches Atorvastatin in Denmark MAR 2007 PFIZER files re-issue application for Lipitor in the US

MAR 2008 PFIZER sues Ranbaxy for additional patent infringement in US court MAY 2008 RANBAXY gets mixed verdict on Pfizer's Lipitor
JUN 2008 RANBAXY settles Lipitor litigation with Pfizer Can sell Atorvastatin in 6 more countries

While the out-of-court settlement was announced after Indian stock exchanges closed on Wednesday, Ranbaxy shares moved up by 2.9% to Rs 598 during the day. According to industry estimates, Ranbaxy will get a revenue upside of around $1.5 billion from anti-cholesterol medicine Lipitor alone in a four year period running upto May 2012. The bulk of this revenue will be backloaded and is expected to accrue when India’s largest drug maker launches its drugs in the US market in November 2011.

Lipitor generates annual sales of $8 billion in the US alone. In Canada, the drug rakes in about a $1 billion in sales every year. Caduet, a combination drug of Lipitor and hypertension drug Norvasc, has annual global sales of $400 million. In addition to the US and Canada, the Indian drug maker will also have the licence to sell Atorvastatin on varying dates in six more countries — Belgium, Netherlands, Germany, Sweden, Italy and Australia.

Ranbaxy can launch its Atorvastatin 2-4 months ahead of their patent expiry in these respective countries. Ranbaxy and Pfizer have also resolved their disputes regarding Atorvastatin in Malaysia, Brunei, Peru and Vietnam. The patent infringement litigation between Pfizer and Ranbaxy relating to Lipitor will continue in five other European countries — Finland, Spain, Portugal, Denmark and Romania. “There are certain issues that needs to be settled for patents in these countries,” Mr Singh added.

The agreement pertains solely to Ranbaxy and its affiliates and does not cover legal challenges to the Lipitor patents involving other generic manufacturers.
For the last few days, there has been speculation that Pfizer would announce a counter offer for the 65% non-promoter shareholding in Ranbaxy. While theoretically this option exists, it now appears remote. It appears unlikely that Pfizer would have negotiated an out-of-court settlement with Ranbaxy, if it had intentions of launching a hostile bid for the company.

It is learnt that the Ranbaxy promoters’ discussions with Daiichi Sankyo were going parallel with the company’s negotiations with Pfizer. Some experts tracking the pharma sector feel that given the nature of the out-of-court settlement, which will not result in any windfall payment for Ranbaxy, it is possible that the Indian company wanted to first announce the stake sale.

Pfizer president of Worldwide Pharmaceutical Operations, Ian Read said, “The agreement provides patients with access to a generic product much earlier than if Ranbaxy were unsuccessful in obtaining approval for its product and overcoming the relevant patents. It provides substantial certainty regarding the timing of the entry of a generic version of Lipitor. Finally, the agreement clearly reaffirms the value and importance of intellectual property and this country’s (US) well-balanced system of creating incentives to develop innovative medicines, while at the same time, establishing a strong generic drug business.”

Chryscapital MD and pharmaceutical expert Sanjiv Kaul said that other Indian companies should also follow similar amicable settlement routes, “Litigation for Indian pharma companies is a costly proposition. They should always look for a possible collaborative approach rather than a confrontational approach. One should use the Para IV for positioning itself as a global supplier of authorised generics to MNCs.”

An industry source added that Ranbaxy opted for the settlement route as it wanted to cut down on litigation cost, which would quadruple when the cases moves to higher courts. And also, Daiichi Sankyo, which recently bought the Ranbaxy promoter’s 35% stake, would not have been keen on taking the legal fight with Pfizer.

The settlement also resolves additional patent litigation between the companies involving the branded drugs Accupril (in the US) and Viagra (in Ecuador) and all patent litigation with Ranbaxy relating to generic formulation of Quinapril Hydrochloride in the US and Sildenafil in Ecuador.

"Anil Ambani eyes over 40% MTN pie"

Anil Ambani, whose flagship company Reliance Communications is in talks with South Africa-based MTN, is looking to buy more than 40 per cent stake in the telecom major, a media report said on Tuesday.

"Anil Ambani, chairman of India's Reliance Communications, is considering buying more than 40 per cent of MTN, Africa's biggest wireless company," the Financial Times reported in its Asia edition.

The newspaper also pointed out that the talks have been complicated by the threat of legal action by Anil Ambani's elder brother Mukesh Ambani, who is claiming a right of first refusal over any stake sale by RCom.

The report said that Ambani was looking for ways to increase his "in-effect" controlling position in the South African firm.

Quoting people familiar with the situation, the newspaper said, "... Mr Ambani was looking at how he could maximise an in-effect controlling position in MTN by seeking to persuade the South African mobile operator's shareholders to waive their right to a tender offer."

It has been thought that Ambani would limit himself to a 34.9 per cent stake in MTN, because if it went higher, then he would be required as per the South African laws to make an offer to buyout the other shareholders of the telecom major.

"... Mr Ambani was looking at the case for a "whitewash" procedure under which MTN's shareholders would vote on whether to waive their right to a tender offer. If the shareholders agree, Mr Ambani may end up owing 40-45 per cent of MTN," the report said quoting both people familiar to the situation and a person close to the talks.

Last month, RCom and MTN had entered into a 45-day exclusivity talks to explore the possibility of a merger. These talks had begun on May 26.

Even though, several transaction structures have been examined, no conclusion has been reached yet.

According to the newspaper, Ambani is seeking to engineer a de facto takeover of MTN under which he would swap most of his 66 per cent shareholding in RCom for a near-controlling stake in the merged entity.

"The talks are politically sensitive because MTN is one of South Africa's most successful post-apartheid companies. Any deal with Reliance would almost certainly be presented as a merger," the report said.

"MTN's largest shareholders are Newshelf, a company that holds 13 per cent on behalf of the group's staff, and Public Investment Corporation, a South African state-owned pension fund, which also has 13 per cent," the Financial Times said.

The next largest shareholder in the South African firm is M1, a company that holds almost 10 per cent on behalf of Lebanon's Mikati family.
Further, the newspaper said the precise size of Ambani's share in MTN would be influenced by the take up of an expected tender offer by the African firm to RCom's minority shareholders.

"BLOCK DEAL NOT POSSIBLE DUE TO PRICE BAND"

Bulk deal in Ranbaxy likely
Move To Help Promoters Save On Rs 1,000-Cr Capital Gains Tax

RANBAXY promoters are likely to use the ‘bulk deal’ route to sell their shares to Daiichi Sankyo. Through this window, they can sell their shares through the stock exchange without being bound by the price restriction of a ‘block deal’ and without having to pay long-term capital gains tax of around Rs 1,000 crore. The Ranbaxy promoters will gross Rs 9,576.3 crore by selling their 34.82% stake in the country’s biggest drug maker.

As reported first by ET in its edition dated June 14, there is a clause in the deal agreement between Ranbaxy promoters and Daiichi Sankyo, which says that the promoters holding will be sold through a stock exchange transaction. A stock exchange transaction of this kind, can be done either through a ‘block’ deal or a ‘bulk’ deal.

As per the norms, a block deal transaction has to be done at a price which is close to the existing market price.

The Sebi circular dated September 2005, said that a trade with a minimum quantity of 5 lakh shares or having a minimum value of Rs 5 crore executed through a single transaction on the stock exchange will constitute a ‘block deal’. This block deal is subject to conditions like time period of trade, delivery-based trading and more significantly a price range, which is not to exceed more than 1% from the existing market price or the closing price of the stock on the previous day.

However, in the case of Ranbaxy, the scrip is trading at a sharp discount to the negotiated price of Rs 737 per share. Therefore, Ranbaxy promoters can sell their shares to Daiichi Sankyo through a block deal, only if the share price shoots up by 26.7% against the closing price of Rs 581.45 at BSE on Tuesday. Bulk deals a way out
THE bulk deal route offers a way out. As per a circular dated January 2004, which brought disclosure norms for large stock deals, all transactions in a scrip, where the total quantity of shares bought or sold is more than 0.5% of the number of equity shares of the company listed on the exchange, are bulk deals.

This is applicable even when the deal is struck through multiple transactions as long as the cumulative shares under consideration exceeds the 0.5% threshold. Incase of Ranbaxy, the transaction would necessarily come under the scope of bulk deal as the total stake being sold is more than 34%. The bulk deal circular of 2004 does not impose any price range condition.

A stock exchange transaction will save the promoters capital gains tax of around Rs 1,000 crore, which they would have to pay if this was an offmarket transaction. Unlike an off-market transaction which attracts a 10% long-term capital gains tax in addition to 1% surcharge and an additional 3% tax on the surcharge, stock exchange transactions do not attract capital gains tax. A bulk deal through the stock market will mean that Ranbaxy promoters will have to pay a nominal securities transactions tax of 0.125% in addition to broker’ fee and 12.5% service tax (on the broker’s fee), which could run into few crore.

"Dubai co likely to acquire 15% stake in GHCL "

DUBAI-BASED Al Rostamani group is expected to buy 15% stake from the promoters of GHCL as a part of a larger transaction which could result in the Middle East group owning a little more than one third of the flagship company of the Sanjay Dalmia group. The deal, including the mandatory open offer will be triggered as part of the transaction, which is expected to cost anywhere between Rs 550-690 crore.

According to sources, the deal would involve stake sale by the promoters of GHCL which would bring down their direct holding in the firm to around 32%. If the open offer is fully subscribed then Al Rostamani group will own close to 35% in GHCL. However, besides direct holding there are other shareholders associated with the company including an employees trust which if added will allow GHCL promoters to remain the largest shareholder.

A GHCL spokesperson declined to comment on the developments. However, in response to an ET report on June 11 about Al Rostamani group picking up a substantial stake in GHCL, the company had informed the stock exchange: “The company is an expanding organisation and exploring growth opportunities organically and in-organically both. As a sequel to this effort, we keep examining various proposals for funding requirement. Any specific proposal till it is finalised cannot be commented upon.”

According to sources, the promoters are negotiating for a deal value which could be close to the FCCB issue made in September 2005. The price for the FCCB issue was fixed at Rs 197 per share in 2006. If the deal is struck at this price Al Rostamani will have to fork out around Rs 690 crore to get 35% stake in GHCL. The final transaction, could be struck at a price range of Rs 160-200 per share or even lower.

Even at this price range the deal would be at a substantial premium to the current price of GHCL which is hovering around Rs 72, after jumping 50% over the last one week. Insiders say, the promoters are in no mood to cede control of the company and the move is part of a fund raising exercise for other expansion plans which could involve bigger acquisitions.