M&A Trends in the Indian Telecom Sector · M&A Trends in Indian Telecom Sector Tanmay Gupta Page 3...

PGPX-2009

Individual Research Project (IRP)

M&A Trends in the Indian Telecom Sector

Report by Tanmay Gupta (PGPX 2009)

IRP Guide: Prof. Rekha Jain

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Table of Contents

EXECUTIVE SUMMARY ....................................................................................................................................................... 3

1 INTRODUCTION ......................................................................................................................................................... 4

2 SECTOR OVERVIEW ................................................................................................................................................... 4

2.1 REGULATORY ENVIRONMENT .................................................................................................................................... 4

2.2 KEY PLAYERS ....................................................................................................................................................... 10

2.3 RECENT TRENDS ................................................................................................................................................... 13

2.4 FUTURE OPPORTUNITIES ........................................................................................................................................ 16

3 RECENT PARTNERSHIPS, MERGERS AND ACQUISITIONS ....................................................................................... 17

3.1 NTT DOCOMO TAKES STAKE IN TATA TELESERVICES ................................................................................................... 17

3.2 NEW GSM LICENSE HOLDERS ................................................................................................................................. 17

3.3 TELECOM INFRASTRUCTURE (TOWER) CONSOLIDATION ................................................................................................ 18

3.4 VODAFONE ACQUISITION OF HUTCH ........................................................................................................................ 19

3.5 TATA’S GLOBAL FORAY .......................................................................................................................................... 20

Tyco Acquisition ....................................................................................................................................................... 21

Teleglobe acquisition ............................................................................................................................................... 21

Presence in newer developing markets .................................................................................................................... 21

4 IDEA CELLULAR TAKEOVER OF SPICE TELECOM...................................................................................................... 22

4.1 IDEA CELLULAR OVERVIEW ..................................................................................................................................... 22

4.2 SPICE TELECOM OVERVIEW .................................................................................................................................... 23

4.3 TM INTERNATIONAL OVERVIEW .............................................................................................................................. 23

4.4 SYNERGIES ANTICIPATED........................................................................................................................................ 24

4.5 CURRENT STATUS ................................................................................................................................................. 25

4.6 DEAL STRUCTURE ................................................................................................................................................. 26

4.6.1 Planned Merger .......................................................................................................................................... 26

4.6.2 20% open offer ............................................................................................................................................ 27

4.6.3 Non-Compete fee ........................................................................................................................................ 27

4.6.4 Valuation..................................................................................................................................................... 28

4.7 SUMMARY .......................................................................................................................................................... 28

5 RELIANCE MTN MERGER FAILURE .......................................................................................................................... 29

5.1 MTN GROUP ...................................................................................................................................................... 29

5.2 RELIANCE COMMUNICATIONS ................................................................................................................................. 29

M&A Trends in Indian Telecom Sector

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5.3 BHARTI IN FORAY FOR MTN ................................................................................................................................... 30

5.4 BHARTI BACKS OUT: PREDATOR OR PREY? ................................................................................................................. 30

5.5 RELIANCE IN TALKS WITH MTN: EXCLUSIVE NEGOTIATIONS .......................................................................................... 31

5.6 THE FAILURE: SIBLING RIVALRY ............................................................................................................................... 32

5.7 SUMMARY .......................................................................................................................................................... 33

6 CONCLUSION AND M&A OUTLOOK ........................................................................................................................ 33

7 EXHIBITS .................................................................................................................................................................. 36

7.1 SPICE COMMUNICATIONS EQUITY HOLDING DETAILS ..................................................................................... 36

7.2 SPICE COMMUNICATIONS AUDITED FINANCE RESULTS SUMMARY ................................................................. 38

7.3 IDEA CELLULAR EQUITY HOLDING DETAILS ................................................................................................... 39

7.4 IDEA CELLULAR AUDITED FINANCE RESULTS SUMMARY................................................................................ 41

8 ENDNOTES ............................................................................................................................................................... 41


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Executive Summary

Indian telecom industry is the second fastest growing telecom market in the world after China. The overall

tele-density India has reached 34.50 % at the end of January 2009. The growth has been fueled by

progressive policies of TRAI and deregulation. The telecom industry is changing at a rapid pace with

constantly changing policies, new players, alliances and partnerships being announced on a daily basis.

In this study, I have looked at various M&A transactions that have taken place in the recent past. After

doing a broad review, I have focused on two specific events, namely, Idea Cellular takeover of Spice

Telecom and Reliance MTN merger failure. I have identified the following trends and drivers in the industry:

• Global ambitions of Indian Telecom giants will see acquisitions and joint ventures in growing African

and South East Asian markets.

• Telecom players are also looking to tap into global funds to finance their aggressive growth plans.

This will result in partnerships joint ventures and equity sellout to foreign players.

• New license holders will continue to look to sell their stake at a premium. New policies will seek to

curb this license arbitrage.

• Smaller players with operations in only a few circles will find in difficult to compete with the

nationwide players. The industry may see consolidation with these smaller operators being

acquired by the larger ones.

• “Unbundling of the corporation” will continue as companies will seek for economies of scale and

lower startup cost by infrastructure sharing.

• 3G and WiMax license auctions will spur M&A and partnership activity.


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1 Introduction

The objective of my project is to study the Telecom industry in India and understand how the recent trends

are driving Mergers, Acquisitions and Partnerships in this industry. I will study recent partnerships, merger

and acquisitions that have taken place in this industry. I will focus on the following the following two deals

in the industry to gain deeper understanding of the M&A nuances in this industry:

• Idea Cellular takeover of Spice Telecom: I have selected this as it is one of the biggest deals that

happened in Telecom this year. It is a deal that will throw light on the consolidation trends in the

Indian Telecom industry.

• Reliance MTN merger failure: Reliance MTN merger saga is an externally focused merger deal and

involves two major Indian telecom operators Bharti and Reliance at different points of time.

Studying the drivers in this deal will help me understand the global expansion trends in the Indian

Telecom industry.

The above two deals will provide me with deeper understanding of both consolidation and global expansion

trends in this industry.

2 Sector Overview

2.1 Regulatory environment

Telecommunications is one of the few sectors in India, which has witnessed the most fundamental

structural and institutional reforms since 1991. Considering the great potential for the growth of telephone

demand with the accelerated growth of economic activities, the Government of India announced the

National Telecom Policy in 1994 and the New Telecom Policy in 1999. The National Telecom Policy provides

for private sector participation to supplement the efforts of DoT in basic telephone services. The opening

up of the basic services provided a big opportunity for private & foreign investors. More policy initiatives

included Addendum to NTP -1999, Broadband Policy 2004, Amendment to Broadband Policy 2004 etci.

The opening of the sector has not only lead to rapid growth but also helped a great deal towards

maximization of consumer benefits. The tariffs have been falling continuously across the board as result of

healthy and unrestricted competition.


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The Telecom Commission and the Department of Telecommunications are responsible for policy

formulation, licensing, wireless spectrum management, administrative monitoring of PSUs, research and

development and standardization/validation of equipment etc.

Telecom Regulatory Authority of India (TRAI), is an independent regulatory Authority under the Telecom

Regulatory Authority of India Act, 1997 (as amended in January 2000). Under the TRAI Act, TRAI carries out

various functions. It is empowered to make recommendations, either suo-moto or on a request from the

Licensor on a wide range of matters. These include:

• the need and time for introduction of a new service provider;

• terms and conditions of a telecommunications license;

• revocation of licences;

• measures to facilitate competition and promote efficiency in the operation of telecommunication

services;

• technological improvements in services;

• specifications as to the type of equipment to be used by the service providers;

• measures for the development of telecommunication technology and “any other matter[s]

relatable to [the] telecommunication industry in general;”

• efficient management of spectrum.

It is mandatory for the Licensor to seek recommendations from TRAI on the need and timing for

introduction of a Service Provider and terms and conditions of License. TRAI's recommendations are not

binding on the Central Government.

Some other functions of TRAI include:

• ensuring compliance with terms and conditions of telecom licenses;

• fixing terms and conditions for inter-connectivity between service providers;

• ensuring technical compatibility and effective inter-connection among different service providers;

• regulating arrangements among service providers for sharing revenues;

• laying-down standards for quality of services;

• prescribing and regulating periods within which local and long distance telecommunication circuits

are to be provided by service providers;

• maintaining a register of inter-connect agreements;


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• ensuring effective compliance with universal service obligations.

• fixation of tariffs

TRAI is empowered to issue directions to the service providers for discharge of these functions. The main

objective of TRAI is to provide the affordable telecom services by creating competition in the telecom

sector. But at the same time also ensuring that the competition is fair and not determinant to the interest

of any section of society or service providers.

The process of deregulation of Indian Telecom sector is summarized in the figure belowii.

Source: IBEF

M&A in Telecom sector is guided by many different regulatory bodies. These are summarized in the figure

below.

Pre-reform Partial Deregulation Further Deregulation

Pre-1994 1994-1999 1999 - 2002

• MTNL - Mumbai and Delhi; DTS elsewhere

• No mobile service

• NLD - DoT per/ BSNL ILD -

• 4 private fixed service providers with less than 1% market share

• 2 GSM mobile players in each circle

• 13 players start

• Licenses converted to revenue sharing

• Private sector share less than 5% in revenue terms

• Competition in NLD and ILD

• Licenses on Revenue share

• 4 mobile operators / circle • NTP 1999 • BSNL formed 2001

• Internet Telephony 2002 • FDI - 49 %

• National Telecom Policy (NTP) 1994

• TRAI constituted 1997

• Calling Party Pays

• CDMA launch

• 3-6 operators in each circle

• Intra-circle merger guidelines

• Unified Licensing

Take-off

2002 onwards

• Broadband policy 2004

• FDI - 74% 2005 National Telecom

Policy, 1994

New Telecom

Policy, 1999

Unified Licensing


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Regulations for M&A in the Telecom Sector are covered belowiii:

DoT guidelines on merger of licenses in Feb 2004 are based on TRAI recommendations. These include

• Prior approval of the Department of Telecommunications will be necessary for merger of the

license.

• There should be minimum 3 operators in a service area for that service, consequent upon such

merger.

• Any merger, acquisition or restructuring, leading to a monopoly market situation in the given

service area, shall not be permitted. Monopoly market situation is defined as market share of 67%

or above of total subscriber base within a given service area, as on the last day of previous month.

For this purpose, the market will be classified as fixed and mobile separately. The category of fixed

subscribers shall include wire-line subscribers and fixed wireless subscribers.

• Consequent upon the merger of licences, the merged entity shall be entitled to the total amount of

spectrum held by the merging entities, subject to the condition that after merger, the amount of

spectrum shall not exceed 15 MHz per operator per service area for Metros and category ‘A’ service

areas, and 12.4 MHz per operator per service area in category ‘B’ and category ‘C’ service areas.

• In case the merged entity becomes a “Significant Market Power” (SMP) post merger, then the

extant rules & regulations applicable to SMPs would also apply to the merged entity. TRAI has


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already classified SMP as an operator having market share greater or equal to 30% of the relevant

market.

DoT has also issued guidelines on foreign equity participations and management control of telecom

companies. These have been revised from time to time. The current guidelines are

• The total composite foreign holding including but not limited to investments by Foreign

Institutional nvestors (FIIs), Nonresident Indians (NRIs), Foreign Currency Convertible Bonds

(FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs), convertible

preference shares, proportionate foreign investment in Indian promoters/investment companies

including their holding companies, etc., referred as FDI, should not exceed 74%. The 74%

investment can be made directly or indirectly in the operating company or through a holding

company and the remaining 26 per cent will be owned by resident Indian citizens or an Indian

Company.

• The licencee will be required to disclose the status of such foreign holding and certify that the

foreign investment is within the ceiling of 74% on a half yearly basis.

• The majority Directors on the Board including Chairman, Managing Director and Chief Executive

Officer (CEO) shall be resident Indian citizens. The appointment to these positions from among

resident Indian citizens shall be made in consultation with serious Indian investors.

• No single company/legal person, either directly or through its associates, shall have substantial

equity holding in more than one licencee Company in the same service area for the Access Services

namely; Basic, Cellular and Unified Access Service. ‘Substantial equity’ herein will mean equity of

10% or more’.

FEMA guidelines relate to issuance and allotment of shares to foreign entities. RBI has issued detailed

guidelines on foreign investment in India vide “Foreign Direct Investment Scheme” contained in Schedule 1

of said regulation.

• As per the FDI scheme, investment in telecom sector by foreign investors is permitted under the

automatic route within the overall sectoral cap of 74% without RBI approval.

• FDI scheme prohibits investments by citizen or entities of Pakistan and Bangladesh (regulation 5)

primarily on security concerns. In the recent past, DoT has also delayed its approval to an Egyptian

company’s investment in Hutch India on similar grounds.


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SEBI takeover guidelines called Securities and Exchange Board of India (Substantial acquisition of shares and

takeover - SAST) Regulations, 1997 are applicable to listed Public companies and hence would be applicable

in case of M&A in listed telecom companies like Bharti, Reliance Communication, Shyam Telecom, VSNL,

Tata Teleservices (Maharashtra) Limited, etc. These guidelines have been recently amended by SEBI and

notified vide SO No. 807(E) dated 26.05.2006. The highlights of the amendment are as follows:

• No acquirer who together with persons acting in concert with him, who holds 55% or more but less

than 75% of the shares or voting rights of the target company shall acquire by himself or through

persons acting in concert unless he makes a public announcement as per the regulations. Further, if

a target company was unlisted, but had obtained listing of 10% of issue size, then the limit of 75%

will be increased to 90%. Regulation 11(2)

• If an acquirer who together with persons acting in concert with him, who holds 55% or more but

less than 75% of the shares or voting rights of the target company is desirous of consolidating his

holding while ensuring that Public Holding in the target company does not fall below the permitted

level of listing agreement he may do so only by making a public announcement as per the

regulations. Further, if a target company was unlisted, but had obtained listing of 10% of issue size,

then the limit of 75% will be increased to 90%. - Regulation 11(2A)

• The minimum size of public offer to be made under Regulation 11(2A) shall be lesser of a) 20% of

the voting capital of the company; or b) such other lesser percentage of voting capital as would

enable the acquirer to increase his holding to the maximum possible level, while ensuring the

requirement of minimum public shareholding as per listing agreement.

Competition Commission of India (CCI), established in 2003, held statutory responsibility for ensuring

free and fair competition in all sectors of the economy. The Competition Act, 2002 had provided for a liberal

regime for mergers, whereby combinations exceeding the threshold limits fell within the jurisdiction of CCI.

Most competition laws in the world require mandatory prior notification of every merger to the competition

authority but under Indian law it was voluntary. However, CCI could also take suo motu cognisance of a

merger perceived as potentially anti competitive and it could enquire until one year after the merger had

taken place. Once CCI had been notified, it must decide within 90 days of publication of details of the

merger or else it is deemed approved. The CCI could allow or disallow a merger or can allow it with certain

modification.


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The Competition Act has not come into force in its entirety. Once enforced in its entirety, it will repeal the

MRTP Act and dissolve the MRTP Commission. The Competition Act prohibits anti-competitive agreements

and abuse of a dominant position. It also regulates combinations of enterprises and persons. The acquisition

of enterprises by persons or the merger or amalgamation of enterprises is considered to be a combination and

requires filings with the Competition Commission of India, but only if the thresholds of their assets or

turnover exceeds the value stipulated in the Competition Act. The Competition Act seeks to ensure fair

competition in India through a body known as the Competition Commission of India (CCI)iv.

2.2 Key Players

Telecom Service Providers

GSM is the most widely deployed mobile communications technology in India. There are many players

offering GSM services in India. The players along with the number of subscribers each player had in

September-October 2008 is summarized in the figure belowv.



Source: Voice and Data : Vital Statistics on GSM



Some of the major players are summarized below.

BSNL: BSNL recorded a revenue of Rs 35,296 crore in the last fiscal, down from Rs 40,135 crore in FY 2006-

07, a decline of 12.1%. The company is looking at new business streams to increase revenue and reduce

losses. BSNL is toying with the idea of entering into managed network services and enterprise business,

which will add value to mobile as well as landline. Apart from this the company is also looking at adding

IPTV and VoIP services in its portfolio. BSNL would also be investing Rs 15,000 crore for the next three years

in a bid to return to its profitable position. Like other service providers, BSNL is also planning to focus on

the rural segment in the coming years. BSNL leads the broadband segment, as far as subscribers are

concerned. Currently, the company has 2 mn out of the 3.9 mn subscribers in the country.

Bharti: Bhari Airtel as it crossed the magical figure of 50 mn subscribers in the country. The customer

addition has taken its revenue to Rs 26,436 crore in FY 2007-08, clocking 47.8% increase. The company has

also formed an alliance with four global IT majors: Alcatel Lucent owned Mobilitec, Germany-based

CoreMedia, US-based Adamind and UK's Apertio for its service delivery platform. Continuing with its

strategy of focusing on its core business and outsourcing the rest, Bharti signed a $35 mn three-year

outsourcing deal with BPO service provider, Firstsource Solutions. Bharti will be launching operations in Sri

Lanka later this year and is investing $200 mn for the same. The company also launched its DTH services.

Bharti is focusing on the rural and enterprise segments as its growth areas.

Reliance: Reliance Communications recorded an increase of 71% in its net profit. And an increase of 28.8%

in its revenue, which is Rs 18,638 crore in fy 2007-08. It received start-up GSM spectrum last year. It has

huge expansion plans in rural India. It also expanded globally with acquisition of UK-based Vanco and

Uganda-based Anupam Global Soft. In a landmark deal, Reliance partnered with Microsoft to deliver IPTV in

India on the latter's mediaroom platform. Reliance Communications will have the exclusive deployment

rights for the platform in India.

Vodafone: Vodafone Essar achieved 46.5% rise in telecom revenue in India with its income from operations

touching Rs 15,477 crore in FY 2007-08, up from Rs 10,565 crore in the previous financial year. Vodafone

entered India through its acquisition of Hutchison Essar stake.



Tata Communications: The Tata-run VSNL created a significant landmark when it announced financial

results for the last fiscal-an astounding growth of 85%, to touch Rs 8,857 crore. VSNL's transformation has

helped it lead in segments such as wholesale voice, wholesale and enterprise data, and retail broadband;

and ensured global infrastructure and global customers.

Telecom Equipment Players

The top equipment players in the Indian telecom space are Nokia, Ericsson, Nokia Siemens Networks,

Alcatel-Lucent, Cisco, Sony Ericsson, Huawei and ZTE.

2.3 Recent trends

The world in the last decade has seen a boom in the number of mobile subscribers. Fixed line subscribers on

the other hand have remained more or less flat or down with some increase in the developing markets. Figure

below shows that the trends of fixed telephone lines in the period 1997-2007.

Source: International Telecommunications Union : Market Information and Statistics (STAT)vi



Mobile subscribers on the other hand have increased exponentially reaching a penetration of 49 per 100

inhabitants worldover. Mobile penetration in India is currently around 35%.

Source: International Telecommunications Union : Market Information and Statistics (STAT)vii

Internet has caught on in the developed world with penetration reaching 62 per 100 inhabitants in 2007.

However, in the developing world internet penetration is still abysmal. In 2007, only 17 per 100 inhabitants

had used internet on an average.



Source: International Telecommunications Union : Market Information and Statistics (STAT)viii

The following figureix shows the growth in wireless subscribers in India. The number of subscribers were

very small prior to 1998. The sector has exploded since then due to a favorable regulatory environment and

intense competition.

Source: Idea Cellular, Q3 2009 Investor Presetation



India has one of the lowest average revenue per subscriber (ARPU) rates. The ARPU was Rs. 239 in June

2008x. As more subscribers are added from the rural areas, which represent a majority of the unpenetrated

market, ARPU is expected to go down further. This trend is seen in the figure below. The number of

internet subscribers in India is on a steady rise. Many of the wireless service providers are also providing

internet services to their subscribers.

Source: Voice and Data, Tele-stats, Telecom Surge

2.4 Future opportunities

3G & WiMax

Auction of spectrum for 3G services is slated for Jan 2009. 3G offers opportunities for new players to enter

the booming Indian telecom market. Better spectral efficiency and high speed data services are some of the

advantages that 3G has to offer. However, high license fee, handset costs, and low acceptance rate among

consumers may dampen the hype.

WiMax offers high speed data connectivity in a radius of upto 50km. It is attractive not only for providing

broadband access in urban areas but is also touted as a technology that can bridge the digital divide by

providing broadband access in rural areas without the high costs associated with laying cables.

Major differences between 3G and WiMax:

• WiMax offers better spectral efficiency through OFDM and multiple antenna support.

• It offers higher peak rate

• It offers variable channel bandwidth on uplink and downlink. It also allows for symmetric uplink and

downlink to support T1 services. 3G only supports asymmetric uplink and downlink.

• 3G has better mobility support. WiMax mobility is an add on feature and is unproven.



Growth and future of VAS

Currently, MVAS in India accounts for 10 per cent of the operator's revenue, which is expected to reach 18

per cent by 2010. According to a study by Stanford University and consulting firm BDA, the Indian MVAS is

poised to touch US$ 2.74 billion by 2010.

Fortune at the bottom of the pyramid

The Indian rural market is going to be the next big thing for wireless telecom providers. With the tele-

density in rural areas being still about 10 per cent against the national average of about 21 per cent, there

seems to be huge untapped potential for mobile phone penetration in rural India. The government also

plans an investment of US$ 2 billion, during 2008 to 2009, for the development of around 100,000

community service centres in rural India to provide broadband connectivity.

Additionally, by 2010, the government targets:

• 80 million rural connections

• Mobile coverage of 90 per cent geographical area

• Internet Protocol Television (IPTV) in 600 towns

• Quadrupling manufacture

• Two-fold increase in telecom equipment R&D from the current level of 15 per cent.

3 Recent partnerships, mergers and acquisitions

3.1 NTT DoCoMo takes stake in Tata Teleservices

NTT DoCoMo paid 2.7 Billion USD for a 26% stake in Tata Teleservices. The deal values Tata Teleservices at

$10 bn.

3.2 New GSM license holders

In January 2008 the Department of Telecommunications allocated 2G GSM spectrum for 120 circles to nine

applicants—Unitech, Datacom (Videocon), Loop (BPL), Shyam, Idea, STel, Spice, Swan and Tata Teleservices.

This allocation based on a first-come first-serve basis and the subsequent second-hand deals where some

global major acquired stake in the new allotee companies valuing them much higher than the license fee

sparked major controversy. Currently there is a proposal under discussion to ban dilution of promoter’s



equity in a company for 3-5 yearsxi. The telecom regulator examining a proposal whether to introduce a

lock-in period before the promoters of telecom firms can sell their equity. DoT’s intention for proposing this

policy was to prevent fly-by-night promoters from making huge profits by selling their equity, especially

when the Government had given them spectrum at a subsidised price. In my opinion, the market should be

allowed to function rather than exerting external controls. The question that needs to be asked is that why

should the government be selling spectrum at subsidized prices? Is this not a drain on the exchequer’s

money? The government should introduce competitive bidding measures so that the spectrum is sold at

the right price.

Swan Telecom - Etisalat

Emirates based Etiasalat paid $900 mn for 45% stake in Swan Telecom.

Unitech Wireless - Norway’s Telenor

Norway-based telecom operator Telenor has bought a 60 per cent stake in Unitech Wireless for US$ 1.23

billion.

STel – Bahrain Telcom

Bahrain Telecommunications Co (Batelco), has signed an agreement to acquire 49% stake in Chennai based

S Tel for $225 Millionxii. S Tel received Unified Access Services Licences and start-up spectrum in Bihar,

Orissa, Jammu & Kashmir, Himachal Pradesh, North East and Assam and a ‘Category A’ All-India ISP licence.

3.3 Telecom Infrastructure (Tower) consolidation

Mobile subscriber base is expected to touch 500 million by 2010 for which at least 3.8 lakh more towers are

required. In a bid to tap this opportunity, telecom players have demerged their infrastructure into separate

tower business to unlock the value by selling minority stake. Reliance Telecom Infrastructure (RTIL) and

Swan Telecom are in advanced talks for a multi-year infrastructure sharing deal. RTIL, which has about

47,000 towers is the third largest telecoms infrastructure company after Indus towers (85,000 towers) and

Bharti Infratel.

In 2008, the Indian government allowed Indian telecom companies to share their active infrastructure,

which includes all key electronic components including antennas, feeder cables, nodes, radio access

network, transmission systems and backhaul, with the exception of radio frequencies. Prior to March, 2008,

telcos here could only share passive infrastructure such as towers, repeaters, shelters and generators. Swan



had earlier signed a infrastructure sharing deal with BSNL to use the state-owned telco’s networks on a

national basis.

Bharti Infratel, with ownership of 60,000 towers, had sold about 10 per cent stake to a consortium of

investors for about $ 1 billion.

Indus Towers: Three leading GSM operators, Bharti Airtel, Vodafone-Essar and Idea Cellular, have joined

hands to set up an independent tower company called Indus Towers. It owns 70,000 towers after merging

their individual infrastructure assets in 16 telecom circles in India.

Reliance Communications had sold 5 per cent stake in its tower company for $337 million. It owns 13,000

towers.

Tata Teleservices merged its mobile tower company – Wireless Tata Tele Info Services Ltd (WTTIL) - with

Quippo, a tower firm owned by the SREI Group and Singapore Government. Post merger, Quippo will have

49 per cent stake in WTTIL while Tata Teleservices will hold the balance. Under the terms of the deal,

Quippo Telecom will pay Rs 2,400 crore ($ 493 million) to Tata Teleservices and also transfer its existing

telecom infrastructure comprising 5,000 towers to WTTIL. Once the merger is completed, the company will

have 18,000 towers with an enterprise valuation of $2.6 billion (about Rs 13,000 crore). The merged entity

will be managed by Quippo despite being a minority shareholder. Quippo had also bought out 1,000 towers

owned by the Spice Group.

3.4 Vodafone acquisition of Hutchxiii

In Feburary 2007, British telecom giant Vodafone has bagged the 67% Hutch Telecom International (HTIL)

stake in Hutch-Essar at an enterprise value of $19.3 billion (approx Rs 86,000 crore). The acquisition

provided Vodafone with access to the lucrative Indian mobile market. The deal has been in the news lately

due to the income tax (I-T) department notice to Vodafone-Essar asking why capital gains tax on the $11.1

billion deal should not be levied on the company. The same is being contested in courts. In December 2008

the Bombay High Court dismissed the petition by Vodafone International Holdings against the tax bill

relating to the purchase. Vodafone has moved the Supreme Court challenging the Bombay High Court order



upholding a show-cause notice issued by the Income-Tax Department asking the telecom firm to pay $2

billion post its acquisition of Hutchison’s stake in Hutchison Essar.

The order raises cross-border M&A taxation issues that firms need to be aware of. Vodafone contended

that its Netherlands arm had acquired shares in a Cayman Islands company (which in turn held shares in

Vodafone Essar) from Hong Kong-based Hutchison Telecom: and that all the companies being overseas

ones, Indian revenue department had no jurisdiction in the matter. Vodafone ‘s argument that its

international company had merely acquired a Cayman Islands company which in turn held shares in the

Indian company was not accepted by the court which said it found this argument too simplistic. It held that

Vodafone’s basic objective appeared to be acquisition of a business interest in India.

Source: The Hindu Business Line

3.5 Tata’s Global Foray

The Tata Group acquired the Government-owned monopoly service provider for international long distance

calling, i.e. Videsh Sanchar Nigam Limited ("VSNL"), in 2002. The Tata-owned VSNL has made two key

acquisitions over the years, i.e. Tyco Global Network in 2005 and Teleglobe in 2006. The Tata Group

subsequently re-branded VSNL and other subsidiaries of VSNL (including Teleglobe and Tyco and Tata

Indicom Enterprise Business Unit) under one global brand name – Tata Communicationsxiv in early 2008.

Tata Communications is now the number one global international wholesale voice operator and India's

largest provider of international long distance, enterprise data and internet services in India. Tata

Communications’ international growth strategy was based on pursuing growth avenues by geographical



expansion. The primary drivers for this phase of the growth were network and bandwidth capacity building,

global market access and most importantly complete global connectivity without any network gaps on any

routes.

Tata Communications started their path towards globalization by acquiring licenses in Sri Lanka in 2003.

Continuing on this path, they created a wholly owned subsidiary in the US, VSNL America Inc. This helped

them in offering Internet protocol-virtual private network (IP-VPN) solutions, and in adding value to their

own operations in the area of Internet services by facilitating end-to-end management of the Internet

bandwidth from India all the way to the US. Subsequently, they opened operations in the UK with

subsidiaries named VSNL Telecommunications UK and VSNL UK; then they built presence in Europe through

offices in France and Germany. They also completed a major project connecting India and Singapore by high

bandwidth optical cable with complete ownership.

Tyco Acquisition

Tata Communications’ largest acquisition till date came in 2004 when they acquired Tyco Global Network

(TGN) for $130 million. This gave the company control over a 60,000 km cable network spread over three

continents with a huge bandwidth of 10-15 terabytes and substantial control over bandwidth prices. They

also beat Reliance in this acquisition, an important victory over the rival.

Teleglobe acquisition

Continuing on their acquisition spree, Tata Communications acquired Teleglobe International Holdings, a

leading provider of wholesale voice, data, IP and mobile signaling services, in 2005. This acquisition gave

them Teleglobe’s global network access, agreements with leading global voice carriers and an enhanced

utilization of TGN network allowing global scale for voice. The acquisition made VSNL International one of

the largest international mobile, data and voice network. With this acquisition Tata Communications

became the largest provider of submarine cable bandwidth.

Presence in newer developing markets

In 2006, Tata Communications acquired a 26% stake in South African telecom operators SNO and Infraco,

who together will control significant chunks of the telecom infrastructure in South Africa.

In 2008, Tata Communications entered into an agreement with two South African companies — Eskom and

Transnet — to acquire their 30 per cent stake in Neotel, the second telecom network operator in the

Southern African nation. After the completion of the acquisition Tata Communication along with Tata Africa

would have an effective 56 per cent stake in Neotel.



Recently in 2008, Tata Communications expanded its Global VPN service to China through an NNI (Network

to Network Interface) agreement with China Enterprise Netcom Corporation, a value-added

telecommunication services and integrated IT solutions provider and subsidiary of CITIC (China

International Trust and Investment Corporation), allowing them to serve their many global and India MNC

customers who require a single scalable and reliable global VPN with deep reach into both India and China,

and broad reach around the world.

4 Idea Cellular takeover of Spice Telecomxv

On 25th June 2008 the country's fifth-largest mobile operator in terms of subscribers, Idea Cellular

announced the acquisition of B K Modi-owned Spice group's 40.8 per cent stake in Spice Communications

for Rs 2,716 crore. Idea acquired the stake at Rs 77.30 a share. The Birla group company, Idea Cellular said

it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares

for every 100 Spice shares held. It will also pay an additional Rs 544-crore as non compete fee.

4.1 Idea Cellular Overview

Idea Cellular, the leading GSM mobile services operator has licenses to operate in all 22 service areas of

India with commercial operations in 11 service areas. With a customer base of over 26 million, it runs

operations in Delhi, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh (East), Uttar Pradesh (West) &

Uttaranchal, Madhya Pradesh & Chattisgarh, Gujarat, Maharashtra & Goa, Andhra Pradesh, and Kerala,

holds spectrum for Mumbai, Bihar, Orissa, Tamil Nadu (including Chennai), and Karnataka, and licenses for

the remaining six service areas.

With the planned launch of services in Mumbai, Bihar and Jharkhand in Q3 2008, and Orissa and Tamilnadu

(including Chennai) towards the end of the calendar year, Idea’s footprint will soon cover approximately

90% of India’s telephony potential. Idea is listed on the National Stock Exchange (NSE) and the Bombay

Stock Exchange (BSE) in India.

Idea Cellular is a part of the US $ 28 billion Aditya Birla Group. The group has a market cap in excess of US $

31.5 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities.

Refer to Exhibit 8.4 for financial results summary of Idea Cellular. More information on the company is

available at: www.ideacellular.com and on the group at: www.adityabirla.com.



4.2 Spice Telecom Overview

Spice Telecom is the brand name of Spice Communications Limited, a mobile phone service provider in

India. Spice Telecom was operating in the states of Punjab (India) and Karnataka i.e., in 2 circles of 23

Telecom Circles of India. Spice Communications Limited was promoted by Dilip Modi of Modi Wellvest

Private Limited, which owned 40.80% of the company. Telekom Malaysia Berhad owns 39.20% through TMI

India Limited, Mauritius. TMI India Limited is a wholly owned subsidiary of TM's international investment

holding company TM International Sdn Bhd (TMI).

Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limited

company. Spice subsequently became a deemed public company under Section 43(1A) of the Companies

Act, 1956 of India with effect from 1 April 1999 and its name was changed to Modicom Network Limited.

Spice assumed its present name via a fresh Certificate of Incorporation dated 3 December 1999. With the

addition of the word ‘Private’ in Spice’s name under Section 43(2A) of the Companies Amendment Act,

2000 of India, Spice’s name was changed to Spice Communications Private Limited with effect from 28

October 2003. On 28 December 2006, Spice was converted into a public limited company and assumed its

present name.

Spice currently offers mobile telecommunication services in the Punjab and Karnataka states of India. As of

30 April 2008, Spice had 4.4 million subscribers representing a 1.7% market share in India, and was the

second and fifth largest mobile telecommunication service provider within the Punjab and Karnataka

circles, respectively.

Spice was listed on the Bombay Stock Exchange Limited on 19 July 2007, and on the National Stock

Exchange of India Limited on 16 June 2008. Refer to Exhibit 8.2 for financial results summary of Idea

Cellular.

4.3 TM International Overview

TM International (‘TMI’) is an emerging leader in Asian telecommunications with significant presence in

Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia. In addition, the Malaysian-grown holding

company has strategic mobile and non-mobile telecommunications operations and investments in India,

Singapore, Iran, Pakistan and Thailand.

The Group’s mobile subsidiaries and associates operate under the brand name ‘Celcom’ in Malaysia, ‘XL’ in

Indonesia, ‘Dialog’ in Sri Lanka, ‘AKTEL’ in Bangladesh, ‘HELLO’ in Cambodia, ‘Spice’ in India, ‘M1’ in

Singapore, and ‘MTCE’ in Iran (Esfahan).



Listed on Bursa Malaysia, TMI is among the top ten biggest public listed companies in Malaysia by market

capitalization, and the first listed pan-Asian pure cellular service provider in the region.

The Group, including subsidiaries and associates, has over 44 million mobile subscribers in Asia, putting it

among the largest mobile telecommunication providers in the region by turnover. The Group has

approximately 13,000 people under employment in ten countries.

For more information on TMI visit: www.tmigroup.com

4.4 Synergies Anticipated

This deal gave Idea Cellular another 44-lakh subscribers of Spice Communications in Punjab and Karnataka

circles in addition to own 2.6-crore subscribers in 11 circles. The acquisition of Spice gives Idea the much

needed headway in Punjab and Karnataka — states that account for more than 10 per cent of India’s

wireless subscribers. “It will give us incumbent advantage in both these circles,” said Mr. Kumar Mangalam

Birla, Chairman, Aditya Birla Group. “We are now in the big league of telecom players in the county,” added

Mr. Birla. Idea Cellular would get hold of crucial spectrum of licences recently got by Spice for operations in

four more circles including Delhi, Tamil Nadu and Andhra Pradesh.

The primary benefits of this transaction are:

• Idea gains entry in the contiguous wireless markets of Punjab and Karnataka, which account for

11% of India’s total wireless subscribers.

• Spice, a pioneering operator, delivers a strong running start in Punjab and Karnataka.

o 4.4 million subscribers as at 30 April 2008, equivalent to a 15.1% market share in the two

service areas

o #2 wireless operator in Punjab with a 22.3% market share.

• Idea to consolidate its position with its all-India subscriber market share increasing from 9.5% to

11.1%. Importantly, Idea would be No.1 in 3 service areas, in the top 3 in 5 more service areas, and

with a rapidly improving share in all its other operating service areas.

• Idea’s operations in the 900 MHz GSM spectrum band will increase from the current 7 service areas

to 9 service areas, driving scale economies and operational synergies resulting in lower operating

and capital expenditure.

TMI, an emerging leader in Asian telecommunications with over 44 mn subscribers and a presence in 10

countries, will grow its presence in the Indian telecom sector and become a substantial shareholder in Idea.

The primary benefits of TMI’s investment into Idea are:



• Idea is currently rolling out operations in Mumbai, Bihar, Orissa, and Tamil Nadu (incl. Chennai)

service areas, and will also roll out in the remaining service areas of Kolkata, West Bengal, Assam,

North East and J&K, after receipt of spectrum. This investment will support Idea’s aggressive

growth plans.

• Idea and TMI will develop areas for business co-operation to leverage TMI’s strong presence in 10

principal Asian markets, including neighboring countries like Sri Lanka & Bangladesh where TMI is a

market-leader. TMI’s experience of operating 3G in similar markets will be of value to Idea, as also

the convergent interests of the 2 companies in areas extending from international traffic to

roaming, to mobile value added services etc. Idea and TMI would sign a Business Cooperation

Agreement to this effect.

Mr. Kumar Mangalam Birla, Chairman, Idea Cellular Limited said: “This announcement marks a major step

in the Aditya Birla Group ’s telecom business. Idea has performed strongly, but I believe its best lies ahead.

Idea will benefit operationally by leveraging synergies with TMI which will be a significant shareholder in

our Company. Further, I look forward to welcoming colleagues from Spice into the Idea family, and indeed

the over 100,000 strong Aditya Birla Group. Together we aim to grow a top class organization in the service

of our subscribers”.

Mr. Sanjeev Aga, Managing Director, Idea Cellular Limited said: “The strategic import of this move travels

beyond Punjab and Karnataka. By the end of the year the Idea yellow will increasingly colour the Indian

landscape.”

In addition, the resulting infusion of funds from TMI will (Rs 7300 crore) will support the capital

requirement for

• Expansion from 11 service areas to PAN India by CY 09.

• Capex plan of ~Rs. 65bn for FY 08-09 and ~ Rs 60bn for FY09-10 for existing service areas and new

launches (excluding 3G)

4.5 Current Status

Idea has launched its brand in Punjab on Dec 19, 2008 and in Karnataka on Dec 29, 2008. It has also

announced plan to invest 300 Cr in Karnataka to expand its reach and services.



4.6 Deal Structure

The takeover deal was a complex one. Idea will acquire the Modis’ 40.8% stake in Spice (for Rs 2,720 crore)

at Rs 77.30 per share. According to the complex agreement, TM International (TMI), the Malaysian

telecommunication giant holding 39.2 per cent stake in Spice, will swap its stake for Idea shares and will be

offered 469 million shares by way of a preferential allotment of shares in Idea at a price of Rs 156.96 a

share. This will take TMI's stake in idea to 14.99 per cent. TMI will invest Rs 7,500 crore for buying this stake

in Idea Cellular and a part of these funds will be used to buy Modi's stake. The balance Rs 4,500 crore will

be used to retire the debts in Idea's books, Birla said. TMI will get one seat on Idea's board.

Spice holding structure before the acquisition was:

• 40.8% Modi Group (Promoter)

• 39.2% TMI

• 20% Other public shareholding

Spice holding structure as of today is (Refer to Exhibit 8.1 for details):

• 49.9% Promoter Group including Idea Cellular

• 49.0% TMI

• 1.1% Others (Public)

Current Idea holding is as follows (Refer to Exhibit 8.3 for details):

• 49.13% Promoter and Promoter Group

• 14.99% TMI

• 35.88% Other public shareholding including institutions

4.6.1 Planned Merger

Idea Cellular has said it would merge Spice with itself through a share swap where Spice shareholders

would get 49 Idea shares for every 100 Spice shares held. However at the current (Feb 12, 2009) price

levels:

Spice Communication Stock Price = Rs 77.0

Idea Cellular Stock Price = Rs 49.15

At current prices, Spice Communications shareholders will lose when the share swap happens. One reason

for the high price for Spice could be that only 1.1% of its shares are currently floating and news reports

suggest a lot of speculative buying and selling is happening.



4.6.2 20% open offer

The SEBI Takeover Regulations at the very rudimentary level is all about giving the public shareholders an

opportunity to get the same price which a shareholder — usually a promoter —gets on a negotiated deal.

The regulations ordain an acquirer to acquire 20 per cent of the stake from the public after having acquired

15 per cent or more of the same from the promoters. As per the SEBI SAST (Substantial Acquisition of

Shares and Takeovers) Regulations, in a listed company’s acquisition if existing promoters sell out to a new

company, public shareholders are also entitled to the same per share amount.

As per the Idea-Spice deal, Idea launched the mandatory 20% open offer for the Spice shareholders, jointly

with Telekom Malaysia International (TMI) at Rs 77.30. The open offer commenced on 17th September

2008 and closed on 6th October 2008. Following the successful completion, the above 40.8% stake which

was hitherto held in an escrow account pending open offer formalities stands transferred to Idea as of date.

4.6.3 Non-Compete fee

Sometimes, these deals involve a non-compete feexvi, a sum payable to the promoter for not re-entering

the same field for a certain period. That the fee is discretionary is evident from not all deals having a non-

compete component. The logic for the non-compete fee is that the promoter has certain unique skills and

possesses industry knowledge, and if he were to start the same business again, he could become a

formidable competitor. That entitles them to a payment which is not given to minority shareholders,

because obviously they do not possess these skills. What this means is that in the above cases, the public

shareholders got a lesser amount than the promoter.

Regulation 20 (8) of the SEBI SAST says: “(8) Any payment made to the persons other than the target

company in respect of non-compete agreement in excess of 25% of the offer price arrived at under sub-

regulations (4) or (5) or (6) shall be added to the offer price.”

Idea will pay approximately Rs 544 Crore as non-compete fee to the Spice Group. This is in addition to the

Rs. 77.30 per share that the Idea will pay for acquiring 40.8% stake (Rs 2,720 crore). Hence the total

payment to Spice Group is Rs 3,264 crore (Rs 2,720 crore + Rs 544 crore). In the absence of a non-compete

fee the Idea group would have to offer a higher per share price to Spice Group and as a result to the other

shareholders (for 20% open offer).



4.6.4 Valuation

A back-of-the envelope estimate of valuation of Spice can be arrived at based on the (Enterprise

Value)/(Number of Subscribers) multiple.

Idea has paid Rs.2716 Crore for 40.8% stake in Spice. Hence the total enterprise value (100%) of Spice will

be Rs.6657 Crore approximately. With a subscriber base of 44 lakh subscribers, the Enterprise value per

subscriber comes out to be approximately Rs.15,129 or approximately $300 (Assuming USD 1 = Rs.50) as

per this transaction. This is on the lower side as generally EV per subscriber ranges between $400 to $550.

One of the reasons for this low valuation could be that Spice is present in only 2 circles. Spice has also

underperformed as compared to other players. It has a lower EV/EBITDA multiple, ROCE and EV/Subscriber.

A comparison of these metrics (in January 2008) across players is shown belowxvii.

4.7 Summary

The drivers for this deal are as follows:

• TMI

o Grow presence in growing Indian Telecom Sector via ownership in a large Indian telecom

operator.

• Idea Cellular

o Inorganic expansion in Karnataka and Punjab circles.

o Infusion of funds from TMI to support Idea’s aggressive growth plans.

o Technical expertise from TMI including 3G operations.

o Leverage TMI’s strong presence in 10 principal Asian markets, including neighboring

countries like Sri Lanka & Bangladesh where TMI is a market-leader.

• Spice Communications

o Being a small player in a highly competitive market requiring huge investments and

economies of scale is not sustainable.



5 Reliance MTN merger failure

5.1 MTN Group

MTN was launched in 1994. It has a market value of about $38 billion and more than 68 million customers

across 21 countries in Africa and the Middle East. MTN is operating services in Africa, Iran, Afghanistan and

Syria. These are high potential markets. Some analysts have estimated that MTN has potential to

accumulate up to 240 million subscribers in these markets by 2012.

5.2 Reliance Communications

Reliance Communications Limited founded by the late Shri Dhirubhai H Ambani (1932-2002) is the flagship

company of the Reliance Anil Dhirubhai Ambani Group. The Reliance Anil Dhirubhai Ambani Group

currently has net worth in excess of Rs. 55,000 crore (US$ 14 billion), cash flows of Rs. 11,000 crore (US$ 2.8

billion), net profit of Rs. 7,700 crore (US$ 1.9 billion) and zero net debt. Rated among "Asia's Top 5 Most

Valuable Telecom Companies", Reliance Communications is an integrated telecommunications service

provider. The company, with a customer base of over 48 million including over 1.5 million individual

overseas retail customers, ranks among the Top 10 Asian Telecom companies by number of customers.

Reliance Communications corporate clientele includes 1,850 Indian and multinational corporations, and

over 250 global carriers.

Reliance Communications has established a pan-India, next generation, integrated (wireless and wireline),

convergent (voice, data and video) digital network that is capable of supporting best-of-class services

spanning the entire infocomm value chain, covering over 15,000 towns and 400,000 villages. Reliance

Communications owns and operates the world's largest next generation IP enabled connectivity

infrastructure, comprising over 165,000 kilometers of fibre optic cable systems in India, USA, Europe,

Middle East and the Asia Pacific region. For more information, visit www.reliancecommunications.co.in

Reliance Communications (previously Reliance Infocomm) was formed in 2005 when Anil Ambani and

Mukesh Ambani carved up the Reliance empire, which included telecom, oil, and financial services, after a

rivalry developed between them when their father died in 2002 and left no will. When lacking a will, the

sibs developed some ill will toward each other. An agreement was hashed out by their mother, under which

Anil Ambani took the telecom, energy, and financial services assets while Mukesh Ambani took the oil and

petrochemical business to form Reliance Industries.



Reliance has rapidly become a global wireline and wireless powerhouse, having acquired companies such as

U.S.-based Yipes Enterprise Services in recent years

5.3 Bharti in foray for MTNxviii

On May 5th 2008, Bharti Airtel Limited announcedxix that it has entered into an exploratory discussion with

MTN Group Limited, South Africa. A later statement said “The discussions being held are aimed at

combining the strengths of the two leading ‘emerging markets’ players and accordingly veering towards

possible structures to achieve this objective.”

A combination with MTN would have been Bharti Airtel’s first major foray outside India. The two companies

have roughly the same number of subscribers and market capitalization, so any deal was expected to be

more like a merger of equals, bankers and analysts said.

At the invitation of MTN board, Bharti entered into exploratory discussions on the possibility of combining

the two 'emerging market' telecom giants. A number of structures were discussed and evaluated between

the lead bankers on both sides. An in-principle agreement was reached on 16th May and a term sheet was

initialled between the two lead bankers. This agreed term sheet was presented to the MTN Board on

Wednesday, the 21st of May.

Bharti had received confident letters of funding of over USD 60 billion from over a dozen Internationally

reputed bankers from the US and Europe.

5.4 Bharti backs out: Predator or Prey?xx

On May 24rd 2008, Bharti called off negotiations after MTN turned Bharti’s takeover plan upside down,

proposing to take over Bharti instead. After bankers from both sides agreed in principle to a Bharti-

controlled structure on May 16, MTN’s board met this week and proposed a different transaction, in which

Bharti Airtel would become a subsidiary of MTN, Bharti said.

This new structure envisages Bharti Airtel becoming a subsidiary of MTN and exchange of majority shares of

Bharti Airtel held by the Bharti family and Singtel, in exchange for a controlling stake in MTN. Bharti

believes that this convoluted way of getting an indirect control of the combined entity would have

compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a

combined entity. Further and more importantly, Bharti's vision of transforming itself from a home grown



Indian company to a true Indian multinational telecom giant, symbolising the pride of India, would have

been severely compromised and this was completely unacceptable to Bharti.

5.5 Reliance in talks with MTN: Exclusive negotiationsxxi

As soon as Bharti backed out of MTN, on May 26th Reliance Communications Ltd. (RCom) stepped in, and

the two have now entered "exclusive negotiations for a period of up to 45 days with respect to a potential

combination of their businesses." Shri Anil Dhirubhai Ambani, Chairman of Reliance Communications, said

“We are delighted to be engaged in exclusive negotiations with MTN Group to achieve a partnership, which

would provide investors, customers and the people of both companies a unique and global platform for

exponential growth, creating substantial long term shareholder value.”

The discussions were around a broad framework, where MTN would take up to 74 percent in Reliance

Communications and Reliance Chairman Anil Ambani could swap between 43 and 63 percent of his holding,

depending on the success of an open offer, to become the biggest shareholder in MTN.

Morgan Stanley had estimated an open offer for Reliance Communications shareholders could be at 613

rupees per share, a 7 percent premium to the stock's closing price on May 23, the last day they traded

before the firms said they were in talks.

The Reliance-MTN deal is complicated by restrictions on foreign ownership in India and South Africa and

political sensitivities in each country about which company would be dominant. Under South African rules,

buying 35 per cent of a company obliges the purchaser to make an open offer for the rest. India limits

foreign ownership in the telecoms sector to 74 per cent and a purchase of 15 per cent of a company

triggers a mandatory open offer for another 20 per cent. Mr Ambani owns 66 per cent of Reliance

Communications, valued at about $20 billion, and intends to exchange this under a mechanism, yet to be

agreed, for a 34.9 per cent stake in MTN. The deal would represent the biggest foreign direct investment in

India to date and Mr Ambani would become the single largest shareholder in the South African company.

The deal could involve cash as well as equity to avoid breaching the restrictions - especially on Reliance,

which is already 11 per cent foreign-owned. Mr Ambani is reported to be offering to buy MTN's shares at a

significant premium in exchange for management control.



Economic Times reported that the two sides were negotiating the ratio for a share swap. Mr Ambani was

pushing for 66 MTN shares for 100 Reliance ones, while MTN wanted 51 MTN shares for 100 Reliance

shares, it said.

Some proposed details of the deal werexxii:

• Deal expected to be a part-cash and part-equity deal with a west Asia-based sovereign wealth

• It might commit close to $10 billion to ADAG

• A special purpose vehicle will be created for this deal with ADAG, which will have the controlling

stake

• Deal needs approval of black empowerment group as a non-South African company will have

majority stake

Sources said the other equity holders of the SPV are expected to chip in around $4 billion. Given MTN’s

current valuation of nearly $28 billion, a deal is expected to be done at a valuation of around $35 billion,

assuming a 20% premium. This means, the SPV may need to pay around $11-12 billion for a 35% stake.

Given the other equity holder’s contribution of $4 billion, RCOM will have to chip in around $7 billion to $8

billion. This is likely to be funded by a mixture of internal accruals and debt. The exact amount of debt

depends on the amount of equity which RCOM is willing to put in. The acquisition cost will go up if RCOM is

allowed to hike its stake further to 40%. Both the parties are yet to arrive at the exact deal size which would

depend on the premium, sources saidxxiii.

Lombard Odier Darier Hentsch & Cie, promoted by Lebanon's former prime minister Najib Mikati, holds

9.82 per cent, Newshelf 664 (Proprietary) Ltd holds 13.06 per cent and directors and subsidiaries hold 0.03

per cent. The public and financial institutions hold the rest.

5.6 The Failure: Sibling Rivalry

On June 12th 2008, in a mala fide effort to disrupt the talks, Reliance Industries Ltd. (RIL), part of the

Mukesh Ambani group, sent a communication to MTN Group, making a claim of an alleged right of first

refusal to buy the controlling stake in Reliance Communications Ltd. (RCOM). The letter further said that RIL

will take legal action against RCOM and also make exemplary damages against MTN. Reliance

communications spokesperson refuted the claim saying “RIL's claim is legally and factually untenable,

baseless, and misconceived.”



RIL based its claim on an agreement of January 12, 2006, which was unilaterally signed only by RIL's

officials, when RCOM was under RIL's control, under a procedure which the Hon'ble Bombay High Court,

vide its judgement dated 15th October 2006, has held to be "unfair and unjust."

In July 2008, Reliance Communications Ltd. (RCom) and African operator Mobile Telephone Networks

(MTN) have walked away from M&A talks "owing to certain legal and regulatory issues," namely an ongoing

feud between Reliance chairman Anil Ambani and his brother Mukesh Ambani, chairman of Reliance

Industries.

On July 9th 2008, RCOM and MTN agreed to continue their negotiations in relation to such potential

business combination, and have extended the period of exclusivity until 21st July 2008.

However, on July 18th 2008, the two companies mutually decided to allow the Exclusivity Agreement to

lapse citing certain legal and regulatory issues.

5.7 Summary

The failed attempt by the leading Indian Telecom operators to spread their wings in the growing African

market shows their global ambitions. The Reliance-MTN deal would have created a $66-billion emerging-

markets telecoms group with operations in about two dozen countries and about 120-million subscribers.

This episode highlighted the following issues:

• Such cross border deals need to be sensitive to the issue of national pride and control of the

companies. Who controls which entity and ultimately who is taking over whom is an important

consideration in this kind of merger of equals.

• Many Indian businesses are owned and controlled by promoter families. The issue of loss of control

and the difference of opinion among family members is an important consideration for such deals.

This came to fore in the Reliance MTN deal with feud among brothers scuttling the deal.

6 Conclusion and M&A Outlook

The Indian Telecom industry is one of the most dynamic in the world with an evolving regulatory

environment. It is the second fastest growing telecom market in the world after China. The overall tele-

density India has reached 34.50 % at the end of January 2009xxiv. Much of the untapped market is in rural

India. ARPU has been declining for most mobile operators over the years as more and more rural customers

are tapped. On one hand telecom operators are driven towards specialization and consolidation to achieve

economies of scale and improve margins, and on the other hand they are looking to forge partnerships to

fund their growth and get operational and technical expertise. In this study I have looked into various



Mergers and Acquisitions that have happened in the Indian Telecom Industry. The various drivers for

partnerships and M&A in the Indian telecom industry and future outlook is summarized below.

• Players from Europe, Malaysia, Japan, Middle-East entering India: 2008 was a watershed year as

India's subscriber base topped 350 million users to make its network the second largest in the

world after China, displacing the US. Many foreign players are looking to enter the growing Indian

telecom market via acquiring stake in companies that have won licenses. New Indian players have

acquired startup spectrum and are on the lookout to raise money to fund their capacity buildup as

well as cash out by selling their sought after licenses. Such deals include Global/European player

Vodafone acquiring Hutch stake, Malaysian TMI partnering with Idea, Japan’s NTT DoCoMo taking

stake in Tata Teleservices, and Middle-East players like Etisalat and Bahrain Telecom acquiring

stakes in Swan and STel respectively. More foreign participation is expected in future driven by the

upcoming 3G and WiMax auctions.

• Consolidation and inorganic subscriber growth: In the extremely competitive Indian market,

smaller players are finding it extremely challenging to compete with the biggies. The big players too

are keen on expanding their footprint and acquiring the customer base of these smaller players.

The Idea-Spice deal was driven by this. This consolidation will continue. Smaller players like Aircel

and BPL along with new smaller license holders will find it best to merge with the big players as the

industry matures and growth slows down.

• Expand global footprint: Indian players are looking to increase their presence in other growing

markets like Africa and Sri Lanka. Attempt by Bharti and Reliance to acquire MTN and introduction

of GSM services in Sri Lanka by Bharti are examples of this. Indian telecom players will continue to

look towards other growing markets like Africa and South East Asia by the way of acquisitions and

joint ventures.

• Reduce costs: ARPU for Indian Telecom operators is one of the lowest in the world and continues

to fall steadily. Although this is offset by increased subscription, profit margins are decreasing. In

order to compete in this low cost environment Indian telecom companies are rethinking their

organization. They are unbundling their core processesxxv and hiving off the infrastructure

management operations into separate entities to achieve economies of scale. Bharti Airtel,

Vodafone-Essar and Idea Cellular joining hands to set up an independent tower company called

Indus Towers is an example of this. More infrastructure sharing is expected in future. The entry of

new players such as Swan, Datacom, Unitech, S Tel, Shyam and Loop Telecom may result in many



such infrastructure sharing deals in the coming months. Unitech is learnt to be in talks with the

Tata-Quipo combine to use the latter’s infrastructure. Similarly, RCOM’s tower company Reliance

Telecom Infrastructure (RTIL) and Swan Telecom are in advanced talks for a multi-year

infrastructure sharing dealxxvi.

• Funding for growth: Telecom players are also looking to tap into global funds to finance their

aggressive growth plans. As part of the Idea-Spice deal, TMI will infuse Rs 7300 crore into the joint

venture.

• Technical expertise: With the launch of 3G and WiMax operations round the corner, Indian telecom

players will look to tap into global expertise, Idea plans to leverage expertise of TMI in running 3G

operations.



7 Exhibitsxxvii

7.1 Spice Communications Equity Holding Details

Category

- No of shares % of total No of shares % of total No of shares % of total

shares shares shares

Promoters holding 28,15,02,370 40.8 28,34,89,370 41.09 68,23,20,643 98.9

Indian 28,15,02,370 40.8 28,34,89,370 41.09 34,42,57,393 49.9

Individuals & HUF 13,020 0 20 0 0 0

Central & State Government 0 0 0 0 0 0

Corporate Bodies 28,14,89,350 40.8 28,34,89,350 41.09 34,42,57,393 49.9

Financial Institutions & Banks 0 0 0 0 0 0

Others 0 0 0 0 0 0

Foreign 0 0 0 0 33,80,63,250 49

Individuals(Non-Residents & Frgn.) 0 0 0 0 0 0

Corporate Bodies 0 0 0 0 33,80,63,250 49

Institutions 0 0 0 0 0 0

Others 0 0 0 0 0 0

Persons acting in concert 0 0 0 0 0 0

Institutions 6,26,90,940 9.09 6,27,32,778 9.09 814 0

Mutual Funds/UTI 1,56,82,035 2.27 1,18,67,824 1.72 0 0

Banks, Fi's,Insurance Cos. 0 0 0 0 0 0


Insurance Companies 0 0 0 0 0 0


Venture Capital Funds 0 0 0 0 0 0

Foreign Institutional Investors 4,70,08,905 6.81 5,08,64,954 7.37 814 0

Foreign Venture Capital Investors 0 0 0 0 0 0

Others 0 0 0 0 0 0

Non-institutions 34,57,31,690 50.11 34,37,02,852 49.82 76,03,543 1.1

Corporate Bodies 2,07,28,561 3 5,74,31,982 8.32 8,49,889 0.12

Individuals 2,21,25,606 3.21 98,50,256 1.42 65,79,769 0.95

Individuals holding nominal capital

upto Rs 1 lakh


over Rs 1 lakh

Others 30,28,77,523 43.89 27,64,20,614 40.06 1,73,885 0.02

68,99,25,000 100

Spice Communications Ltd.

Non-promoters holding

Shares held by Custodians

Total equity holding

Dec 2008

76,04,357 1.1

64,80,216 0.94

0.4 99,553 0.01

0 00 0

68,99,25,000 100

Jun 2008

40,84,22,630 59.2

1,29,78,112 1.88

91,47,494

Sep 2008

40,64,35,630 58.91

70,65,726 1.02

27,84,5301.33

0 0

68,99,25,000 100



13,79,85,000 20

33,80,63,250 49

28,34,89,350 41.09

6,07,68,043 8.8Green Acre Agro Services Pvt Ltd

Spice Communications Ltd.

Type/Name of holder No of shares % of total

shares

Dec 2008

Locked-In Shares

Idea Cellular Ltd

Promoters

Tmi India Ltd

Idea Cellular Ltd



7.2 Spice Communications Audited Finance Results Summary

Spice Communications Ltd. Mar 1997 Dec 1997 Dec 2006 Dec 2007

Rs. Crore (Non-Annualised) 12 mths 9 mths 12 mths 12 mths

-

Operating income 0.02 19.64 387.38 953.03

Operating costs 0.81 38.37 177 429.54

PBDIT (NNRT) 0 -43.34 103.67 307.58

PBDT (NNRT) 0 -71.65 24.46 102.71

PBT (NNRT) 0 -100.23 -45.12 -78.68

PAT (NNRT) 0 -100.23 -45.61 -86.9

-

Foreign exchange earned 0 0 7.51 18.45

Foreign exchange used 42.92 92.89 111.61 43.89

-

Gross fixed assets (excl. reval & WIP) 2.9 492.91 1608.18 2226.02

Current assets -96.73 41.2 260.27 913.76

Net worth (net of reval. & DRE) 159.68 84.18 -180.49 798.34

Equity capital 168.95 332.94 551.94 689.93

Capital employed 217.64 494.41 1027.43 2342.08

Long term borrowings 57.96 410.23 1207.92 1543.74

Current liabilities & provisions 19.48 51.62 264.17 376.25

-

Total assets / liabilities (excl. reval & DRE) 402.85 547.77 1282.3 2693.08

-

Growth (%)

Operating income Error Error Error 146.02

Operating cost Error Error Error 142.68

Total assets Error Error Error 110.02

-

Margins ratios (%)

PBDIT (NNRT) / operating income 0 -220.67 26.76 32.27

PBDT (NNRT) / operating income 0 -364.82 6.31 10.78

PAT (NNRT) / operating income 0 -510.34 -11.77 -9.12

-

Returns ratios (%)

PAT (NNRT) / net worth -28.13

PAT (NNRT) / total assets -4.37

PBDIT (NNRT) / total assets 15.47

PBDIT (NNRT) / capital employed 18.26

-

Liquidity ratios (times)

Long term debt / equity 0.36 4.87 0 1.93

Total debt / equity 0.41 4.92 0 1.93

Current ratio -4.97 0.8 0.99 2.43

Interest cover Error -2.54 0.43 0.62



7.3 Idea Cellular Equity Holding Details

Category

- No of shares % of total No of shares % of total No of shares % of total

shares shares shares

Promoters holding 1,52,04,45,714 57.69 1,52,04,45,714 49.05 1,52,29,37,212 49.13

Indian 1,52,04,45,714 57.69 1,52,04,45,714 49.05 1,52,29,37,212 49.13

Individuals & HUF 0 0 0 0 0 0


Corporate Bodies 1,52,04,45,714 57.69 1,52,04,45,714 49.05 1,52,29,37,212 49.13


Others 0 0 0 0 0 0

Foreign 0 0 0 0 0 0

Individuals(Non-Residents & Frgn.) 0 0 0 0 0 0

Corporate Bodies 0 0 0 0 0 0

Institutions 0 0 0 0 0 0

Others 0 0 0 0 0 0

Persons acting in concert 0 0 0 0 0 0

Institutions 43,90,39,060 16.66 46,95,22,725 15.15 46,64,59,138 15.05

Mutual Funds/UTI 4,59,73,304 1.74 5,29,29,448 1.71 6,34,04,215 2.05

Banks, Fi's,Insurance Cos. 9,56,67,517 3.63 12,56,20,419 4.05 14,37,44,742 4.64

Financial Institutions & Banks 7,90,28,030 3 9,88,38,717 3.19 10,69,73,278 3.45

Insurance Companies 1,66,39,487 0.63 2,67,81,702 0.86 3,67,71,464 1.19


Venture Capital Funds 0 0 0 0 0 0

Foreign Institutional Investors 29,73,94,973 11.28 29,09,69,592 9.39 25,93,06,915 8.36

Foreign Venture Capital Investors 3,266 0 3,266 0 3,266 0

Others 0 0 0 0 0 0

Non-institutions 67,58,75,765 25.65 1,11,01,26,770 35.81 1,11,06,98,859 35.83

Corporate Bodies 2,14,07,793 0.81 2,46,29,245 0.79 3,04,91,012 0.98

Individuals 8,06,42,408 3.06 8,51,99,043 2.75 8,77,78,892 2.84


upto Rs 1 lakh


over Rs 1 lakh

Others 57,38,25,564 21.78 1,00,02,98,482 32.25 99,24,28,955 32

3,10,00,95,209 100

Idea Cellular Ltd.

Non-promoters holding

Shares held by Custodians

Total equity holding

Dec 2008

1,57,71,57,997 50.87

7,73,56,208 2.5

0.34 1,04,22,684 0.34

0 00 0

3,10,00,95,209 100

Jun 2008

1,11,49,14,825 42.31

6,95,64,139 2.64

1,10,78,269

Sep 2008

1,57,96,49,495 50.95

7,47,76,361 2.41

1,04,22,6820.42

0 0

2,63,53,60,539 100



49,85,97,140 16.08

46,47,34,670 14.99

2,84,74,968 0.92

83,75,26,221 27.02

28,35,65,373 9.15

22,83,40,226 7.37

17,10,13,894 5.52

24,91,498 0.08

46,47,34,670 14.99

33,00,00,000 10.64

8,95,00,000 2.89

8,42,50,000 2.72

6,15,00,000 1.98

3,93,60,382 1.27

3,56,45,682 1.15

Aditya Birla Nuvo Ltd

Idea Cellular Ltd.

Type/Name of holder No of shares % of total

shares

Dec 2008

Locked-In Shares

Aditya Birla Nuvo Ltd

Tmi Mauritius Ltd

Birla Tmt Holdings Pvt Ltd

Promoters

Lic Of India -Market Plus

Birla Tmt Holdings Pvt Ltd

Hindalco Industries Ltd

Grasim Industries Ltd

Igh Holdings Pvt Ltd

Public Shareholding

Tmi Mauritius Ltd

P5 Asia Investments Maurities Ltd

Monet Ltd

Hsbc Global Invesment Funds A/C Hsbc Global Invesment

Funds Mauritius

Wagner Ltd

Lic Of India Money Plus



7.4 Idea Cellular Audited Finance Results Summary

8 Endnotes

i IndiaCore. Telecom. Retrieved on January 25, 2009 from IndiaCore: http://www.indiacore.com/telecom.html

Idea Cellular Ltd. Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008

Rs. Crore (Non-Annualised) 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

-

Operating income 851.48 1165.52 1625.43 2007.07 4366.4 6719.99

Operating costs 370.23 518.74 643.75 842.28 1945.87 3203.07

PBDIT (NNRT) 228 336.27 603.45 725 1502.43 2408.97

PBDT (NNRT) 25.71 77.64 348.74 465.91 1157.93 1937.36

PBT (NNRT) -232.61 -205.99 26.47 118.37 483.24 1060.6

PAT (NNRT) -232.61 -205.99 26.47 115.47 476.24 945.57

-

Foreign exchange earned 12.28 39.47 50.73 69.95 72.8 79.03

Foreign exchange used 294.95 227.17 264.88 339.53 949.87 1634.26

-

Gross fixed assets (excl. reval & WIP) 3057.52 3275.63 3577.54 3981.07 8224.88 12658.92

Current assets 123.61 350.72 387.59 1621.99 2473.9 2162.79

Net worth (net of reval. & DRE) 973.53 1016.87 1042.93 1168.53 2179.16 3546.04

Equity capital 2139.53 2259.53 2259.53 2259.53 2592.86 2635.36

Capital employed 1804.91 2535.32 2738.89 2740.28 5894.62 9176.21

Long term borrowings 831.38 1518.45 1695.96 1571.75 3715.46 5630.17

Current liabilities & provisions 1315.34 1194.23 1451.81 2119.95 2695.77 3570.08

-

Total assets / liabilities (excl. reval & DRE) 3231.94 3886.65 4214.51 4906.25 8642.04 12837.43

-

Growth (%)

Operating income 26.86 36.88 39.46 23.48 117.55 53.9

Operating cost 18.66 40.11 24.1 30.84 131.02 64.61

Total assets 13.94 20.26 8.44 16.41 76.14 48.55

-

Margins ratios (%)

PBDIT (NNRT) / operating income 26.78 28.85 37.13 36.12 34.41 35.85

PBDT (NNRT) / operating income 3.02 6.66 21.46 23.21 26.52 28.83

PAT (NNRT) / operating income -27.32 -17.67 1.63 5.75 10.91 14.07

-

Returns ratios (%)

PAT (NNRT) / net worth -29.09 -20.7 2.57 10.44 28.45 33.03

PAT (NNRT) / total assets -7.67 -5.79 0.65 2.53 7.03 8.8

PBDIT (NNRT) / total assets 7.51 9.45 14.9 15.9 22.18 22.43

PBDIT (NNRT) / capital employed 12.58 15.5 22.88 26.46 34.8 31.97

-

Liquidity ratios (times)

Long term debt / equity 0.85 1.49 1.63 1.35 1.7 1.59

Total debt / equity 1.87 2.25 2.59 2.53 1.95 1.84

Current ratio 0.09 0.29 0.27 0.77 0.92 0.61

Interest cover -0.15 0.2 1.1 1.46 2.4 3.25



ii Indian Brand Equity Foundation. Telecommunications Industry. Retrieved on January 25, 2009 from IBEF:

http://www.ibef.org/industry/telecommunications.aspx

iiiM&A in Indian Telecom Industry – A Study, Sanjoy Banka, Retrieved on March 6, 2009 from

http://www.icai.org/resource_file/9846927-941.pdf

iv The Handbook of Competition Enforcement Agencies 2008, Retrieved on March 6, 2009 from

http://www.globalcompetitionreview.com/reviews/7/sections/16/chapters/158/india/

v Voice & Data. Telestats. Retrieved on January 20, 2009 from Voice&Data:

http://voicendata.ciol.com/content/stats/208120402.asp

vi International Telecommunications Union : Market Information and Statistics (STAT). Retrieved on Jan 29, 2009 from

ITU : http://www.itu.int/ITU-D/ict/statistics/ict/

vii International Telecommunications Union : Market Information and Statistics (STAT). Retrieved on Jan 29, 2009 from


viii International Telecommunications Union : Market Information and Statistics (STAT). Retrieved on Jan 29, 2009 from


ix Idea Cellular, Q3 2009 Investor Presetation. Retrieved on Jan 15, 2009 from from Idea Cellular website:

http://www.ideacellular.com/ShowBinary/BEA%20Repository/idea/InvestorPresentation/InvestorPresentationQ3FY0

9.pdf

x Voice and Data, Tele-stats, Telecom Surge. Retrieved on Jan 29, 2009 from V&D :

http://voicendata.ciol.com/content/stats/108120401.asp

xi Business Line. Existing telecom cos against lock-in of promoter’s equity. Retrieved on Feb 2, 2009 from Business Line:

http://www.blonnet.com/2009/02/01/stories/2009020151140100.htm

xii The Hindu. Bahrain-based company acquires stake in S Tel. Retrieved on Feb 2, 2009 from The Hindu:

http://www.hindu.com/2009/01/19/stories/2009011960061100.htm

xiii The Hindu Business Line. An episode in Vodafone story. Retirieved on Feb 2, 2009 from The Hindu Business Line:

http://www.thehindubusinessline.com/2008/12/13/stories/2008121350060900.htm



xiv For the sake of consistency, the company is referred to as Tata Communications across the report as appropriate,

although events prior to 2008 are carried out under the name of VSNL.

xv Idea Cellular Press Release. 25th June 2008. Last retrieved on Feb 10, 2009 from Idea Cellular:

http://www.ideacellular.com/ShowBinary/BEA%20Repository/idea/MajorEvents/SpiceGroup.pdf

xviEconomic Times. SEBI for fair non-compete fee in takeover deals. Retrieved on Feb 2, 2009 from Economic Times:

http://economictimes.indiatimes.com/Stocks_News/For_fair_non-

compete_fee_in_takeover_deals/articleshow/2488171.cms

xvii M&A in Indian Telecom Industry – A Study, Sanjoy Banka, Retrieved on March 6, 2009 from

http://www.icai.org/resource_file/9846927-941.pdf

xviii Media statement from Bharti Airtel Limited. May 13, 2008. Last retrieved on Feb 11, 2009 from Bharti:

http://www.bharti.com/136.html?&tx_ttnews[pointer]=4&tx_ttnews[tt_news]=284&tx_ttnews[backPid]=135&cHash

=08f68cef50

xix Media statement from Bharti Airtel Limited. Last retrieved on Feb 11, 2009 from Bharti:

http://www.bharti.com/136.html?&tx_ttnews[pointer]=4&tx_ttnews[tt_news]=286&tx_ttnews[backPid]=135&cHash

=fc050a1d84

xx The New York Times. $50 Billion Bharti-MTN Deal Falls Apart. Retrieved on Feb 9, 2009 from The New York Times:

http://dealbook.blogs.nytimes.com/2008/05/24/50-billion-bharti-mtn-deal-falls-apart

xxi Reliance Communications Media Release. Reliance Communications and MTN GROUP to enter into exclusive

negotiations. May 26, 2008. Retrieved on Feb 15, 2009 from Reliance:

http://www.rcom.co.in/webapp/Communications/rcom/IR/pdf/Media_Rlease_dated_260508.pdf

xxii Indian Express. Final call placed for Reliance-MTN deal. July 16, 2008. Retrieved on Feb 16, 2009 from Indian

Express: http://www.indianexpress.com/news/final-call-placed-for-reliancemtn-deal/336089/2

xxiii http://www.traderji.com/equities/22723-mtn-reliance-deal.html

xxiv

http://www.infraline.com/showdetailsn.asp?table=telecom&headline=Wireless%20subscriber%20base%20touches%2

015.41%20million%20customers%20in%20Jan&ndate=2/21/2009



xxv Unbundling the Corporation, Harvard Business Review, March-April 2009

xxvi http://ginwireless.wordpress.com/category/datacom/

xxvii CMIE Prowess Database

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