Dial Mnc For Money

Mergers and acquisitions in the Indian telecom markets could not be more hectic. After a lull in the last six to eight months, the beginning of the much-hyped shake-out in the telecom services industry seems to have started. Says the chief executive of a Delhi-headquartered cellular company with licences in North India: What we are seeing now is just the start. With operations in the circles not doing as well as expected, cash flows are under strain. Although these initial hiccups are small, very few promoters have the commitment or deep pockets to sustain them. Therefore, the scramble for buyers.

 

Even so, the premia yes, it may seems surprising, but some of the negotiations in oak-panelled boardrooms actually discuss prices about 50 to 100 per cent more than the face value being bandied around make little sense. SBC Warburg valued the cellular licences of the Essar group (in Delhi, Uttar Pradesh (East), Haryana and Rajasthan) at a stupendous Rs 1,300 a share. The valuation of a fledgling telecom services company represents the price a buyer would be willing to pay for the business and is arrived at by discounting future cash flows. The present value of future cash flows divided by equity capital gives the price per share. This price minus the face value of the share is the premium an investor would be willing to pay.

On the other extreme, valuations by some investment bankers peg other companies holding cellular licences in circles at below par. For instance, a study by a leading UK investment banker has put the value of the Gujarat, Punjab, Karnataka, Kerala and Himachal Pradesh circles at a substantial discount to the face value of share capital. This may raise some eyebrows, but the equity value of the Gujarat cellular licence is projected at a negative $100 million (Rs 360 crore).

Despite the dismal picture and projections, strategic and financial investors are not deterred. Cellular and basic telecom companies are engaged in hectic parleys with prospective buyers after their valuations have gone up almost one-fifth in the last few months. The interested investors are mainly Indian corporates, foreign financial investors (FIIs) like country- and sector-specific equity funds and telecom companies.

Companies in which promoters are looking for buyers include the Ruias-controlled Sterling Cellular and Aircell-Digilink; BPL Cellular Holdings, the holding company of BPL Mobile and BPL-US West; Bangalore-based JT Mobile; HHS Communications, one of the cellular licensees in Tamil Nadu; Koshika Telecom; and Skycell Communications. Apart from some loose stock percentages floating around, the promoters are also scouring options like outright sale in holding companies.

Some cellular companies are also finalising issues in the American depository receipts (ADR) market and interest from investment bankers has suddenly increased. Bharti Televentures, the holding company for Bharti Cellular and Bharti Telenet, expects to approach the ADR market early next year and so does Sterling Computers, the holding company of Delhis Sterling Cellular and Aircell Digilink (the licensee in Uttar Pradesh (East), Haryana and Rajasthan). Another cellular company, the RPG-led Cellular Communications Ltd is also planning an ADR issue soon.

A recent pick-up in the cellular market has improved valuations. For the month ended July 31, the number of cellphone subscribers stood at some half-a-million. The number in the last three months is expected to have grown by another 50,000. While this number of new subscribers itself may not seem very impressive, the fact that operators are disconnecting delinquent subscribers, who run up huge bills, is increasing the average per subscriber revenue.

The main driver of the sudden investor-interest in the great Indian cellular sale was the Telecom Regulatory Authority of India (TRAI) judgement in April quashing the department of telecommunicationss (DoT) fixed-to-cellular tariff and allowing the companies multiple points of interconnect in the circles they operate. DoTs Rs 10-per-minute fixed-to-cellular tariff had more than halved cellular companies valuation. As a direct fallout of allowing multiple points of interconnect, the operators expect to rake in substantial revenue by offering long distance calls (within the circle they hold a licence) at cheap rates. This, again, boosts valuations.

The virtual scramble to divest equity in cellular companies is spurred by investment commitments that promoters have made. Most of them have pumped in equity to fund the first phase of roll-out of networks. But, as the projects soak in more funds, promoters find themselves hard-pressed to abide by their commitments. Fascel, for instance, was reportedly talking to BPL promoters, the Nambiar family, before the Hindujas decided to sell to Sumitomo.

The basic telecom companies, which have just signed the licence and interconnect agreements and are beginning to roll out networks, are also in talks with several potential investors. The Tatas plan to reduce their stake in Tata Teleservices Ltd a consortium with Bell Canada and AIG to 30 per cent from the current 51 per cent by adopting the holding company route. Bombay House intends to dilute its holding in the holding company in favour of funds like GE Capital.

Essar Commvision, a 90:10 joint venture between the Essar group and Bell Atlantic, is set to sign an operations contract with Dallas-based GTE Corp. The deal reportedly involves a 10 to 15 per cent equity sale to the US company. The Ruias of the Essar group are also in talks with WorldTel, an International Telecommunication Union promoted telecom investment fund. Others like Bharti Telenet are open to equity sales at the right price, of course to existing partners like British Telecom and STET of Italy.

Interestingly, however, the Indian market has taught investors invaluable lessons. For instance, the initial enthusiasm shown by US companies seems to be on the wane. US West wound up its Indian office last year and is happy with existing investments. There is little love lost between the Indian promoters of the BPL group and the Baby Bell. The same story rings true for Bell Canada, which intends to reduce exposure to the Andhra Pradesh basic telecom project. The only exception to this trend seems to be AT&T, the 49 per cent equity holder in Birla-AT&T, the licensee in Maharashtra and Gujarat.

With the exception of British Telecom, most others dont seem excited by the prospect of increasing stakes in India. Although Swiss Telecom, France Telecom and STET of Italy have substantial stakes in Indian cellular operations, they have not actively scouted around for new acquisitions. Says the India head of a European telecom major, With deregulation in our home countries just around the corner (January 1, 1998), we just dont have resources to commit elsewhere.

Still, he admits, having a toehold in India is likely to pay rich dividends in the long run as domestic and international long distance services are opened up. It is this long term potential that prompts some of us to pay more than others.

What about Indian investors? What value does a B K Modi of Modicorp or a Prakash Nanda of Escorts perceive in the licences. The answer, says a Delhi-based telecom consultant, is simple. Their other ventures are in such a mess that they are hoping to pull through riding on the shoulders of the telecom business, he avers. The strategy seems to be to develop enough value in the businesses and then hawk it to private investors or the public. Vijay Rao, executive director and CEO of Escotel Cellular, the Escorts-First Pacific joint venture, strongly denies this: On the contrary, we are looking for acquisitions.

Another class of investors in the market are of the financial ilk. Most companies in the Indian telecom secondary market are reportedly talking to FIIs primarily telecom and infrastructure funds. BPL Cellular Holdings placed shares worth some $100 million with American International Group (AIG). The price at which the BPL company placed its shares was around $6 to $7 (Rs 216 to Rs 252). JT Mobile, the licensee in Punjab, Karnataka and Andhra Pradesh, is also looking for buyers and is talking to yet-to-be named investors. The Tamil Nadu cellular licence, which has fallen into the laps of Sivasankaran-promoted Srinivas Cellcom, is also reportedly hunting for partners before its December deadline with DoT to sign the licence agreements.

The $130-billion AIG and Peregrines Asian Infrastructure Fund (AIF) have by far been the biggest investors in the Indian telecom markets. AIG has a presence in four cellular projects (Modicom Networks, Tata Cellular, Modi Telstra and BPL Cellular Holdings), while AIF has a holding in JT Mobiles and Usha Martin Telekom Ltd. AIG further has a commitment of 10 per cent in Tata Teleservices. International Finance Corporation (IFC) of the World Bank group of institutions also has a five per cent exposure in RPGs apex telecom holding company. It is also scouting around the market for more deals, which it prefers to be in cellular and basic telecom.

The value perceived by financial investors in such ventures are obviously different from that evaluated by strategic telecom investors. Our strategy is to make a reasonably good return on our investments some 30 per cent and get out. Traditionally, the buyers of our stakes have been strategic investors or investing public, says a Singapore-based adviser to AIGs India funds.

Meanwhile, the market continues to lumber along. The motto seems to be: keep in the business, try to create value and as a Ponzi Fool (one who buys everything you have to sell) comes along, palm of stake at a premium.

With strained cash flows, Indian companies are gradually offloading equity to foreign players.

The main driver of the sudden investor-interest in the great Indian cellular sale was the TRAI judgement in April quashing DoTs fixed-to-cellular tariff and allowing the companies multiple points of interconnect in the circles.