"Idea and Spice redial merger"

Cos Weighing Two Options
Joji Thomas Philip, Chaitali Chakravarty & Boby Kurian
NEW DELHI/BANGALORE


IDEA Cellular and Spice Communications are again in talks for a merger. ET has learnt from sources that two options are being considered. The first is that Modis will sell their 40% stake in the company directly to Idea before the merger. Telekom Malaysia (TM), which has a 39% stake in Spice, will then get a stake in Idea after the merger. The second option is that Telekom Malaysia will first buy the Modis’ stake in Spice and the company will merge with Idea later. In such a scenario, too, TM will end up being a shareholder in Idea.

Spice Communications chairman BK Modi on Tuesday confirmed ET’s report last week that he was looking at a stake sale. He did not mention Idea’s name but said Etisalat of the UAE and Japan’s NTT DoCoMo could be interested parties, and added that he was open to Telekom Malaysia increasing its stake to 74% in the company. “TM partners Etisalat and NTT DoCoMo in some markets. If they want to bring them in as part of the deal (for taking stake to 74%), we are open to that,” Modi said.

However, a senior Idea source told ET that it is Idea Cellular which may be closest to the deal. Despite repeated attempts, Idea Cellular MD Sanjeev Aga could not be contacted over the issue. But another Idea executive, who did not wish to be identified confirmed that talks have taken place between the two companies. Idea keen on expansion
“It has been happening on and off; talks are being held at the promoter level. There has been no final decision on the issue yet,” the source added.

In June last year, merger talks between the two companies broke down over differences on valuation. According to a source, Idea had put the enterprise value of Spice at $700 million and was willing to go up to $1 billion but Spice wanted the value to be hiked to $1.3 billion.

The AV Birla Group-controlled Idea may be keen on Spice now largely due to the latter’s presence in the Punjab and Karnataka circles, where Idea is not present. While Idea has been allotted spectrum to roll out operations in these two circles, a fullfledged rollout will take more than six months. On the other hand, a merger will give Idea a strong foothold in the two circles, which also boast of high average revenue per user. The merged entity will become the fifth-largest Indian telco in terms of mobile subscribers (28.5 million plus) after Bharti, RCom, Vodafone and BSNL and move ahead of Tata Teleservices, which at present have 25 million subscribers. Idea has been allotted spectrum in the 11 circles where it does not operate at present and is readying plans to roll out mobile services there. It is set to become a pan-India operator by 2009.

The reason why the Modis may want to exit Spice is due to its inability to expand its presence and become a pan-India player, which is crucial for profitability in the world’s most competitive telecom market. The department of telecom had recently rejected Spice’s application for pan-India licences citing the company’s poor net worth, and instead awarded its licences for just four more circles-Andhra Pradesh, Haryana, Delhi and Maharashtra. However, even in these four circles, Spice’s expansion plans are yet to be finalised as TM has refused to pump in the requisite resources. The Malaysian telco is known to share a frosty relationship with the Modis, sources added.

Spice has just under 4.5 million of India’s over 269 million mobile users — a market share of a mere 1.6% — and is 39.2% owned by Malaysia’s state-controlled Telekom Malaysia. The BK Modi family has a 40.8% stake through Modi Wellvest while the remaining 20% is held by the public and financial institutions.