Business Standard

Takeovers In Disguise

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Indian promoters of cellular telecom ventures, like other shrewd businessfolk, rarely let a good business opportunity go past. So, when the BJP-led government was sworn in, they adopted the in creed and heightened the demand for incentives to the cellular industry. If the package was delayed, there would be no option but to sell to foreign partners, they argued.

Recording a whopping Rs 400 crore negative cash flow (profits before depreciation, but after interest and tax) a month, the cellular industry has been clamouring for sops for the past six to eight months. Primary among them are: a two-year moratorium on licence fees (more than Rs 2,000 crore a year) and an extension of the licence period from ten to 15 years.

 

Both decisions, if cleared by the government, have a phenomenal impact on the internal rates of return of the projects. Returns shoot up from the current 25-30 per cent to over 40-45 per cent, say bankers valuing the businesses. The Cellular Operators Association of India, a fledgling but powerful association, feels otherwise. It believes that in some of the states with huge licence fees, returns will not be over 5-10 per cent.

But the moot point is who the sops are for. "If the sops are not given, bankruptcy is the way to go," says a cellular executive. "Worse," he adds, "we will have the sector passing into the hands of foreigners. That has not happened even in advanced economies. Telecom is as critical to a country as its defence sector. It has to be in our hands."

Politically correct talk in these swadeshi times. However, as the chart Foreign connections shows, the ground reality couldn't be further from this. At least three Indian promoters -- the Ruias of the Essar group, Analjit Singh of Max India and reportedly BK Modi of Modicorp -- have already given up majority equity control in their cellular ventures. Others have offloaded equity (at a premium) to finance their ventures and some cash-strapped promoters have been arm-twisted into transferring management control to foreign partners. Reveals the head of mergers and acquisitions of a consulting firm, "Every cellular promoter is getting his equity valued with the intention to sell."

The exit route is simple. Despite the foreign equity cap of 49 per cent prescribed by licence guidelines, the promoter floats a holding company to finance his 51 per cent equity contribution to the business and then sells 49 per cent in this holding company. Modicom Networks, the cellular licensee in Punjab and Karnataka, is a case in point: BK Modi floated a holding company -- Modi Welvest -- to finance his 51 per cent in the business. He then sold 49 per cent in Welvest to American International Group at a reported premium of 40 per cent.

Similarly, Hutchison Whampoa aquired control of Mumbai cellular operator, HutchMax Telecom by effectively raising its stake to 69.09 per cent in the company. The investment route of the Hong Kong telecom operator was: 49 per cent directly in HutchMax and 49 per cent in Telecom Investment India which holds 40 per cent in HutchMax. Telecom Investment is 51 per cent owned by Kotak Mahindra.The remaining 11 per cent in HutchMax is owned by Max India and its promoter Analjit Singh.

The $12-billion Swisscom has also gained majority share and management control in Sterling Cellular, which controls the cellular licences in Delhi, Uttar Pradesh (East), Haryana and Rajasthan. Structured similar to the HutchMax deal, the deal is estimated at $100 million. Berne-based Swisscom raised its stake from 33 to 49 per cent directly in Sterling Cellular and has also picked up 49 per cent in a nominee Indian company that holds 3 per cent in the company.

Now, reportedly, the promoters of JT Mobiles and Koshika Telecom are looking for buyers of their stake. Also on the auction block are stakes in cellular companies from the BPL and B K Modi stables, Skycell Communications and Fascel.The promoters are also scouring options of approaching the American depository receipts market. Two companies with such plans are Bharti Televentures the holding company for Bharti Cellular and Bharti Telenet and RPG-led Cellular Communications.

The scramble to divest equity in cellular companies is spurred by investment commitments that promoters have made. Most Indian promoters had budgeted for cash losses in three or four years. They now find that the losses in the first 18-20 months have overtaken that estimate. And, since most of them -- barring those in the metros and three in the circles -- have not achieved financial closure, promoters have to fund losses by pumping in equity.

Analysts predict there will not be more than six or seven Indian promoters in place of the current 17 before 2000. Timmy Kandhari, associate director, Coopers & Lybrand says: "Strong players -- like, maybe, Birla-AT&T, Bharti-BT and others -- will remain; weaker ones will shift out. We think that the timing will start October-November this year."

To be fair, there is little choice. In this business, there is a pressing need for long-term (six-seven years) equity of some Rs 400-500 crore. Not surprisingly, potential foreign buyers are the only ones with funds of such tenor. As the chief of a northern cellular company grudgingly admits: "All the sops that the industry is asking for it to improve the selling price and fatten the operating profits of the buyer." But the customer stands to gain little.

Company Circle Transaction Size of deal Sterling Delhi, UP (East),

Original promoter, Sivasankaran sold 80% in 370

Cellular & Haryana & the two companies to Essar group late in 1995

Aircell Rajasthan Essar unloaded 33% to Swisscom in 1996 250 Digilink Swisscom hikes stake to 49%, gains indirect 293 control by buying

into a nominee Indian company and gets management control

BPL Mobile Mumbai BPL wanted France Telecom to subscribe to 24 its 26%

stake at a 40% premium, which the latter agreed to in early 1996

BPL Cellular (Holding After a disastrous ADR attempt, settled for a 420 Holdings company for private placement with American Investment

Gp

BPL Mobile & & Asian Infrastructure Fund Also, placed preference BPL-US West) shares with Commonwealth Development Corporation. FIIs together own more than 30 per cent of BPL Cellular Holdings

Modicom Punjab, Vanguard and Telecom Asia, Thailand 225 Networks Karnataka withdrew from consortium making way for Distacom of Hong Kong and Motorola Indian promoter B K Modi sold 49% of holding company (Modi Welvest) to AIG

Modi Telstra Calcutta BK Modi again sold 49% of holding company.

80 (Modi Soft) to Distacom of Hong Kong

Company Circle Transaction Size of deal JT Mobiles* Punjab, Spun off

the Punjab circle into Evergrowth 133 Karnataka Telecom Ltd and

transferred 76% stake to & Andhra Essar Telecom* Pradesh l One

promoter Raghu K Kataria sold his disputed 55 20% stake to Jasmine's

Rajamohan Rao taking the latter's stake to 31% Rao is reported to have sold 40% of United N.A Telecom (his holding company) to Jasmine

Telecom, Thailand Sanmara 20% stake-holder in JT Mobiles, sold 60 49

per cent of its holding to Asian Infrastructure Fund

Fascel Gujarat l HFCL sold 30% to Hindujas in a swap deal 60 Hindujas

reported to have sold about 15% to 40 Sumitomo, Japan

Hutchison Mumbai l Of its 49%, Hutchison Telecom transferred 20% N.A

Max to Distacom in a deal between Li Ka Shing and the latter's promoter Rick Siemens Hutchison upped stake to 69% taking the 640 holding

company route

Usha Martin Calcutta Promoters Jhawars placed 49 per cent of their

N.A holding company. with Peregrine's AIF. And an unspecified stake with Telekom Malaysia

* = This deal, however, met with regulatory problems and has been challenged by Parasrampuria Credit & Investments Ltd (PCIL) , which is claiming ownership of a 20 per cent stake in JT Mobiles. Essar has since picked up Rs 98 crore worth convertible debentures floated by Evergrowth Telecom. Note: The value of deals have not been confirmed by the companies involved in all cases. It has been cross -checked with valuers and investment bankers. In some cases, it includes the equity commitment of buyers. Source: Industry sources and Business Standard compilations

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First Published: Apr 13 1998 | 12:00 AM IST

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