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The telecom sector is on a major acquisition drive. Since November 2005 alone, when the FDI hike was announced, the industry has clinched as many as seven deals.

The last time the sector saw this kind of activity was when the unified access licence regime received the go-ahead. Then, all the major operators started looking for easy game among the smaller regional players in order to gain a pan-Indian presence.

The first big-ticket deal was clinched in November 2005, when UK-based Vodafone picked up 10 per cent stake in the Bharti Group for a whopping Rs 67 billion. Before that, the only other significant buyout was that of Hutchison Essar acquiring 100 per cent stake in BPL Communications for Rs 44 billion.

Some of the top deals in the last six months have been VSNL's takeover of Teleglobe International Holdings for $239 million; Indian Rayon's purchase of a 16 per cent stake in Idea Cellular for $150 million; and the Essar Group's purchase of a 3 per cent stake in Hutchison Essar Telecom for $146 million.

A significant trend noticeable in the period November 2005 to March 2006 is the increasing interest of international telecom majors in the Indian telecom sector, which has been adding more than 4 million mobile subscribers a month.

The interest is particularly strong from –ºAsian countries like Malaysia, Singapore, South Korea and Japan. As analysts had predicted in 2005, Asian countries, faced with near-saturation of mobile growth in their domestic markets, would be looking at China and India as the next lucrative growth option.

In end 2005, Maxis of Malaysia, a country that has a mobile penetration rate of about 75 per cent, acquired Aircel for $1.08 billion. Close on its heels, Singapore Telecom acquired 5.85 per cent stake in Bharti Tele Ventures for $252 million.

The latest in this buying binge has been Telekom Malaysia, a leading operator in the region, which acquired a 49 per cent stake in the B.K. Modi-promoted Spice Communications for $178.8 million (Rs 8.05 billion) in March. The stake was bought from financial investors Deutsche Bank and Ashmore Investments.

Analysts believe that the increased interest in India has to do with the fact that this is one of the fastest growing telecom markets in the world after China. Two, with a mobile penetration rate of 8-9 per cent only, in a country with a population of over 1 billion, the potential is huge. Three, there is a large rural population waiting to be tapped. And finally, the government has been relaxing entry barriers in various telecom segments in a bid to push growth further. This makes the regulatory environment more conducive for foreign investment.

According to a study by global deal advisory firm Grant Thornton, India recorded 343 merger and acquisition (M&A) deals in 2005, totalling $18.2 billion, of which the telecom industry tops with 14 M&A deals, valued at $5.4 billion.

We take a look at some of most recent deals in which Indian telecom service providers have offloaded stake.

The Malaysian connection
Spice Communications: MidMarch 2006, Telekom Malaysia acquired 49 per cent stake in Spice Communications for $178.8 million from financial investors Deutsche Bank and Ashmore Investments. Spice provides cellular services in Punjab and Karnataka.

Under the terms of the agreement, the Modi Group will continue to hold 51 per cent controlling stake in the company. The Malaysian carrier would, in addition to the purchase price, provide Spice with $40 million as working capital.

Spice has a strong presence in the circles it operates in, with a total subscriber base of 1.82 million as of February 28, 2006. This works out to roughly 2.2 per cent share of the country's mobile market.

Considered a good buy, it will give Telekom Malaysia a foothold in a highgrowth telecom market. It also gives it the option of introducing services through the mobile virtual network operator (MVNO) route, in which it has substantial expertise. Though at the moment MVNO service is not permitted in India, it is expected to increase the company's bottomline as and when it is introduced.

But before exploring the MVNO option, Spice, in its first phase of expansion, plans to launch mobile services in six telecom circles for which it is awaiting regulatory clearances. It also expects to apply for licences to enter both the national and international long distance segments. Subsequently, Telekom Malaysia expects to use the MVNO option to enter other telecom circles through Spice Communications.

For Telekom Malaysia, this is not the first time that it has entered the Indian market. After selling its stake in Usha Martin Telekom in Kolkata to Hutchison Telecom in the late 1990s, it recently attempted a comeback along with Singapore Technologies Telemedia to pick up Cingular Wireless's stake in Idea Cellular. However, the deal did not materialise due to certain telecom regulations.

Aircel: Telekom Malaysia's acquisition follows a larger takeover deal by rival operator Maxis Communications in December 2005. Maxis along with its Indian joint venture company acquired 100 per cent of Aircel Limited, India's fifth largest GSM operator, for $1.08 billion (Rs 48.6 billion).

The Tata story
Around the same time as Telekom Malaysia was tying up its deal with Spice, another South Asian company, the Singapore-based investment firm Temasek Holdings picked up a 9.9 per cent stake in Tata Teleservices Limited (TTSL) for an undisclosed amount. TTSL is a CDMabased service provider with a pan-Indian presence.

TTSL, wholly owned by the Tatas so far, had been scouting for a buyer for quite some time and was in talks with some of them. However, no deal materialised due to disagreements over the stake value. Meanwhile, the wrangling between the Tatas (holding 48 per cent stake) and the Birlas (50.15 per cent stake) over control of Idea Cellular started heating up, with each side threatening to buy out the other citing non-adherence to licence conditions and severing of competition rules as justification. In such a scenario, the Tatas were under increasing pressure to offload some of their stake in one of the companies promoted by it: TTSL or Idea.

Finally, it was Temasek that won the round to purchase TTSL's stake through its wholly owned subsidiary, Aranda Investments, in Mauritius. The deal size is estimated to be Rs 15-Rs 20 billion. The conclusion of the deal will give Temasek a seat on TTSL's board.

A day later, TTSL offloaded another 7 per cent stake, this time to Chennai-based entrepreneur C. Sivasankaran. It is reported that Sivasankaran paid an estimated Rs 11-Rs 12 billion for the stake. In all, TTSL has offloaded around 17 per cent for about Rs 27 billion. While the cumulative stake held by Sivasankaran and Temasek is well under 20 per cent, there are speculations that TTSL may be willing to divest up to 26 per cent stake to investors. According to company officials, the proceeds of the stake sale will be used for the Rs 220 billion planned large-scale expansion of the company over the next two years.

Hutch follows...
Hutchison Essar Limited (HEL) too has been in the midst of a major stake shakeup. Prior to its upcoming listing on the bourses, HEL's equity structure has been undergoing massive changes in an effort to bring down the total foreign shareholding in the company to the permitted 74 per cent.

Early March, Telecom Investments India (TII), a joint venture company of Hutchison Whampoa, Analjit Singh (founder and former chairman of Hutchison Max) and Asim Ghosh (managing director of Hutchison Essar) purchased the 8.33 per cent stake held by the Kotak Mahindra joint venture in the company for Rs 10.19 billion. This took the total holding of the TII Group in HEL to 19.53 per cent. Of this, Hutchison Whampoa has 7.23 per cent, Singh 7.6 per cent and Ghosh 4.7 per cent.

The sale consideration is on the basis of an underlying value of about $6 billion for HEL, adjusted for debt and preference share liabilities in the companies which hold shares of HEL.

According to information made avai able by Hutchison Telecom International Limited (HTIL), the parent company, HTIL and its subsidiaries together extended loans totalling nearly $324.5 million to two firms, one owned by Singh, the other by Ghosh, for acquiring the 12.26 per cent stake in Hutchison Essar through TII. Of the total amount borrowed, the companies utilised $288.8 million to buy the stake.

In another internal buyout that will further reduce HEL's foreign shareholding, the Hinduja Group is in the process of purchasing the 1.23 per cent beneficial stake of Japanese company Sumitomo in Hutchison Essar through a joint venture with the Hindujas' IndusInd Telecom Network Limited (ITNL) for an undisclosed amount.

Sumitomo currently holds 24.15 per cent in ITNL through a wholly owned arm, Pacific Horizon. ITNL, in turn, holds 5.11 per cent in Hutchison Essar, which gives Sumitomo a beneficial stake of 1.23 per cent in the telecom operator. The Hindujas have recently entered a deal to acquire Pacific Horizon, following which Hinduja TMT (HTMT) will acquire Sumitomo's holding company.

The transaction will be split into two stages wherein the Hindujas will acquire 50 per cent of the shares of Pacific upfront and the remaining 50 per cent would be acquired at a later stage. On completion of the transaction, the Hindujas would own 5.11 per cent in Hutchison Essar.

In a separate development, Egyptian telecom company Orascom recently acquired a 19.3 per cent stake in HTIL –­ the single largest shareholder of Hutchison Essar. Orascom's investment in HTIL translates into a 10 per cent indirect stake and board membership in Hutchison Essar. The Egyptian company also has a conditional right to purchase a further 3.7 per cent direct interest in HTIL within the next 12 months. This would increase its indirect interest in Hutchison Essar to roughly 13 per cent from the present 9.5 per cent.

As Orascom has a large exposure in the telecom markets in Pakistan and Bangladesh, this has raised security concerns. However, HEL's Indian partner Essar has sought clarification on foreign investment in the company and its implications in light of the new FDI norms. The Department of Telecommunications too is in consultation with the finance ministry and is expected to take a view on the legality of Orascom's 10 per cent indirect shareholding interest in Hutchison Essar. The Foreign Investment Promotion Board is also examining the direct and indirect foreign holdings in Hutchison Essar.

And more to come...
It is now the turn of Bharti Hexacom, the largest cellular mobile operator in Rajasthan, to offload a 30 per cent stake held in it by Telecommunications Consultants of India Limited (TCIL). TCIL, which had reportedly invited expressions of interest to sell its entire 30 per cent stake in the company, has zeroed in on two potential buyers. Bharti Teletech, a Bharti group company, has quoted a price of Rs 1.25 billion for the TCIL stake, while Shyam, the original promoter of Hexacom, has quoted Rs 1.5 billion. Although Shyam's quotation came in after the bidding process was over, it will be difficult for TCIL to ignore Shyam's bid as it is higher than Bharti Teletech's offer. As per the terms of the agreement, Bharti Tele Ventures has the right of first refusal; therefore the decision on this is still awaited.

Conclusion
At the moment, it seems that the wave of M&As will continue as carriers look for fresh funds to implement their mega expansion plans, which they have to undertake in order to beat competition. Given the government's target of achieving 250 million subscribers by 2007, it is in its interest to woo foreign investors. But to do so, it needs to address the FDI concerns voiced by global carriers soon.