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Even as ripple effects of the global financial meltdown touch the Indian economy, its telecom sector seems to be holding out, at least for the moment. Recently, Norwegian telecom company Telenor, despite the rising risk aversion among foreign investors, invested in the Indian telecom sector through a $1.07 billion (Rs 61.2 billion) acquisition of 60 per cent stake in realty firm Unitech's telecom business.

According to the terms of the deal, Unitech's eight subsidiaries that together hold 22 mobile licences, operating under the banner Unitech Wireless, will issue fresh equity to Telenor. The Rs 12 billion debt that Unitech took to buy the licences will be transferred to the telecom venture. The proceeds of the stake sale will, however, be used entirely for funding the company's telecom operations. It will not go to the parent company (Unitech), which has been in the news recently for a near 20 per cent crash in its share prices on account of alleged default in payments.

The plan is to invest a total of Rs 150 billion over the next three years to roll out services in 22 circles. The first phase, under which services will be offered in 13 circles by mid-2009, is being set in motion.

According to the understanding, Unitech will have three members on the board, including the board's chairman, while Telenor will have four members, including the managing director. Telenor, which is the world's seventh largest mobile operator with 159 million subscribers and operations in Bangladesh (where it is the largest mobile operator), Pakistan, Malaysia and Thailand, will carry out the investment in India in phases. The first tranche of 25 per cent is likely to come in before the end of the year. The total funding for the buyout will be secured through a rights issue worth about $1.74 billion in the first quarter of 2009.

The company expects to close the deal by the end of 2009 and break even on earnings before interest, tax, depreciation and amortisation (EBITDA) within three years. This is despite Telenor's sliding third quarter performance where profits have fallen by 33 per cent to stand at 3 billion kroner.

Commenting on the Unitech purchase, Jon Fredrik Baksaas, chief executive officer of Telenor, said: "Gaining access to the world's second largest mobile market is a major achievement for Telenor."

However, many international analysts think otherwise. They say that though the acquisition will give Telenor a strategic position, the price it paid is too high. "They are buying a company that does not have anything. It is madness," says analyst Martin Hoff of Arctic Securities. Others feel that the company needs to be cautious as it has to raise money under very unfavourable conditions.

Telenor's officials, however, do not appear to be a worried lot. "The Indian market presents a large attractive opportunity to telecom operators," the company release stated, adding that mobile phone penetration among India's 1.2 billion population is only about 26 per cent.

Unitech, which received a pan-India licence to offer mobile telephony early this year, has been wooed by international telecom giants including Italy's Telecom Italia, Etisalat and Telenor ever since. Foreign players see an opportunity despite the Indian telecom market getting crowded.

"The interest in picking up stakes in Indian telecom firms lies in cashing in on the more than 9 million mobile subscriber additions a month that makes the country the world's fastest growing market for wireless services and the second largest such market after China," says Mahesh Uppal, telecom analyst and director, ComFirst.

Besides, as Sigve Brekke, executive vice-president and head of Telenor, Asia operations, points out, "We are longterm investors and experts at greenfield operations. So, though the market is crowded, there is still large scope for penetration in India."

For Unitech, it is, of course, a very good deal. It has found a partner under vulnerable market conditions. Unitech Limited currently has a debt of over Rs 67 billion and can now look to convert debt into equity, after Telenor infuses its committed amount.

The deal also puts the enterprise value of Unitech Wireless at Rs 116.2 billion, which analysts claim is too high for a compny with no infrastructure or subscribers. However, according to company officials, the valuation is "fair" considering the value of the licences. Analysts, nevertheless, concede that the price at which the deal has been concluded is lower than a similar deal finalised by Etisalat last month, when it acquired a 45 per cent stake in the new licence holder Swan Telecom, for Rs 40.5 billion for 13 circles. It gave Swan an enterprise valuation of Rs 103.5 billion. Also, in June, the AV Birla Group's Idea Cellular bought B.K. Modi's 40.8 per cent stake in Spice Communications for Rs 27 billion, for just two circles with over 4.5 million subscribers.

Overall, Unitech has landed a good deal that will help it finance its telecom ambitions. It has also been lucky to have avoided the Telecom Commission's recent directive that has clamped down a 3-year lock-in period on the sale of promoter's equity in start-up companies. The Unitech Telenor and Swan Etisalat deals have been spared as fresh equity inflow into new ventures is allowed.