"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.”