After being denied permission to list on the National Stock Exchange (NSE), Spice Communications –­ the eighth largest GSM operator in India with a subscriber base of 3 million users –­ launched its initial public offering (IPO) on the Bombay Stock Exchange (BSE). The issue, consisting of 113.1 million equity shares, with a face value of Rs 10 each, constitutes 16.39 per cent of the fully diluted post-issue equity share capital of the company.

The issue, which was listed from June 25 to June 27, 2007, raised Rs 5.2 billion, with each share priced at Rs 46.

On the first day of subscription, the company received bids for only 215,595 shares, which comprised 0.2 per cent of the total shares offered. But from the second day onwards, the issue gained momentum with Spice receiving bids for 4.25 billion shares in total –­ 38 times the number of shares offered, according to the BSE.

While at least 60 per cent of the net issue to the public had to be allotted on a proportionate basis to qualified institutional buyers and 10 per cent had to be made available to non-institutional bidders, 30 per cent was made available for allocation on a proportionate basis to retail bidders.

Enam Financial Consultants and UBS Securities were the lead managers, while Karvy Computershare was the registrar to the issue.

Spice also concluded a pre-IPO placement of 24 million shares at Rs 45 per share, raising about Rs 1.12 billion.Lehman Brothers and Spinnaker Capital bought $10.1 million worth of stake each.

Of the IPO and the preIPO placement proceeds, half will be utilised towards partrepayment of debt, which stands at about Rs 12 billion. The remaining funds will be used to pay licence fees for starting national long distance (NLD) and international long distance (ILD) services, as well as for the repayment of vendor dues. The licence fees amount to Rs 636 million and the vendor dues stand at Rs 1.7 billion. Spice has already received a non-exclusive letter of intent for providing NLD and ILD services.

In March 2006, Telekom Malaysia had bought 49 per cent stake in Spice for $178.85 million. But following the IPO, Telekom Malaysia's stake has come down to 39 per cent. Meanwhile, Modi Wellvest's 51 per cent stake has come down to 41 per cent.

Even though Spice has been operating since 1997, the company is yet to break even. It has been profitable at the operating level, but not at the net level.Moreover, the company's interest cover (operating profit/interest cost) has been steadily declining. The interest cover was 3.28 times in financial year 2002-03, 2.83 times in financial year 2004-05 and just 1.46 times during the period July to December 2006.

Spice was denied permission to list on the NSE because its accumulated losses exceeded its net worth. According to Spice's draft red herring prospectus, the company had accumulated losses of Rs 6.42 billion as on June 30, 2006.

Spice had been in a similar situation earlier. It had defaulted on repayments on equipment financing arrangements in 2001, as well as on dues to its debenture holders. It was finally able to settle its dues in 2006, after the entry of Telekom Malaysia as a 49 per cent stakeholder.Telekom Malaysia arranged for refinancing of the debt worth $265 million. With the refinancing in place, Spice was able to pay its equipment vendors –­ Siemens and Motorola –­ and settle other dues.

Spice currently operates in two circles –­ Punjab and Karnataka. It ranks second in Punjab with about 23 per cent market share, next to Bharti; and sixth in Karnataka with nearly 7 per cent market share. The company operates in the 900 MHz spectrum in the two states. It has installed 1,358 cell sites throughout Punjab and 1,019 cell sites throughout Karnataka, as of March 2007. At the national level, Spice's market share in the GSM arena was only 1.72 per cent, as of May 2007.

According to Romal Shetty, director, risk advisory services, KPMG, "Spice has not managed to increase its footprint in India; it is still a regional player. Unless it takes some major steps like tying up with other regional players like Idea, or Telekom Malaysia picks up more stake in the company, I don't think Spice subscribers will get any benefit."

Realising the need to increase its footprint, Spice has applied for licences to provide GSM services in the remaining 21 circles. Moreover, it intends to increase its coverage in Punjab circle from the current 537 towns to 937, and in Karnataka circle from 232 towns to 932.

The company also plans to leverage the synergies from its alliance with Telekom Malaysia. For instance, Spice plans to use Telekom Malaysia's vast array of submarine cables spread across Southeast Asia for its ILD services.

Spice was recently in talks with Idea Cellular over a potential merger. But this was cancelled due to disagreements over pricing. Given the prospects of consolidation in the industry, Spice could well become a potential target in the future, once it reduces its debt and moves towards profitability.