IDEA ADDS SPICE

To Acquire BK Modi's 40.8% For Rs 2,176 Cr Two cos to merge at a later stage; Telekom Malaysia to get 20% in the merged entity

IN ONE of the biggest deals in the Indian telecom sector, Aditya Birla group's Idea Cellular on Wednesday said it would acquire BK Modi's Spice Communications to strengthen its position in the growing telecom market. The deal consists of four related, but distinct transactions. To begin with, Idea will acquire the Modis' 40.8% stake in Spice. Subsequently, Idea will launch the mandatory 20% open offer for the Spice shareholders, jointly with Telekom Malaysia International (TMI). At a later stage, Idea will merge Spice with itself and offer a 14.99% stake to TMI through a preferential allotment. Idea will earn Rs 7,294 crore ($1.7 billion, assuming an exchange rate of Rs 43) by selling this stake to TMI. This would make it one of the largest FDI infusions into India.
    Idea has agreed to buy the Modis' 28.14 crore shares for Rs 77.30 each, totalling Rs 2,176 crore. In addition, it will shell out Rs 544 crore, or over Rs 19 a share, to the Modis as a noncompete fee. This is under the 25% limit (with reference to the open offer price to non-promoter investors) prescribed by the market regulator Sebi for such payments. The 14.99% preferential allotment to TMI will ensure that Idea, despite being the purchaser, ends up as a net gainer in the transaction. The net income for Idea, after making payment to the Modis, will be Rs 4,574 crore.
    The Idea-TMI combine will launch the open offer at Rs 77.30 jointly with TMI, which now holds a 39.2% stake in Spice. At this stage it is not clear who will pick up how much. Idea will earn Rs 7,294 crore by selling 46.47 crore preferential shares to TMI for Rs 156.96 apiece. According to the merger formula, Spice shareholders will get 49 Idea shares for every 100 shares they hold. The payment to the Modis is being funded through internal accruals. After completion of the deal, which is expected to be done in the next six months, Idea's equity base will be expanded due to issue of fresh shares to TMI, and also because of the share swap.
    On Wednesday, Idea scrip closed at Rs 102.05, up 2.9% while Spice scrip touched an all-time high of Rs 73.40, before closing at Rs 72.35, a 33% gain over the previous day's close.
    ETfirst reported on June 10 that Spice shares will be acquired by Idea at between Rs 77 and Rs 78 per share. On June 12, we reported that TMI will buy just under 15% stake in Idea through preferential offer and will hold around 20% in the merged entity. "Spice will be delisted and TMI's holding in the new Idea (post-merger) will be a maximum of 20% (depending on the response to the open offer) and one non-executive board seat," AV Birla group chairman Kumar Mangalam Birla told ET. HOW DOES THE DEAL CHANGE THE TELECOM LANDSCAPE?
India will now have 11 telecom operators instead of 12 and the pecking order will change. Idea will become a stronger No.5 operator with over 31 million users. It is now just 5 million subscribers away from BSNL WHAT DOES IT MEAN FOR IDEA CELLULAR?
AV Birla Group company gets a foothold in Punjab and Karnataka, 4.4 million subscribers, a strategic investor in Telekom Malaysia and a net income of Rs 4,500 crore. Idea turns a debt-free company
WHAT HAVE MODIS AND SPICE SHAREHOLDERS GAINED?
Modis make a cool Rs 2,720 crore by selling stake in the loss-making venture. This includes a non-compete fee of Rs 544 crore. Spice shareholders get 49 shares in Idea for every 100 shares held
HOW DOES TELEKOM MALAYSIA INTERNATIONAL BENEFIT?
It becomes a strategic investor in the 5th-largest operator in India. TM has 44 m users across 10 countries; Idea adds 31m to that. TM will have one member on the new Idea board Idea to be a debt-free company
    THE management of the merged entity will be with the Birla group, which will have between 46% and 48% in the company. The 40.8% Spice Telecom stake being acquired by Idea from the BK Modi Group will be cancelled, post the transaction. DSP Merrill Lynch acted as the financial advisor to Idea, while Enam Securities worked for Modi. Lazard was the financial advisor to TMI.
    The deal makes Idea virtually a debt-free company because of the net gain of around Rs 4,500 crore from the deal. Around Rs 2,700 crore was raised by selling stake in Indus Towers to Providence Partners last month. "With this, we become a debt-free company and Idea takes on a high growth trajectory," said Mr Birla.
    Idea Cellular managing director, Sanjeev Aga, told ET the deal will give Idea an entry into Punjab and Karnataka, where Spice is present and which accounts for 11% of India's total wireless subscribers. Spice has 4.4 million subscribers. With a total of over 31 million subscribers postmerger, Idea will be the fifth largest operator in India, ahead of Tata Teleservices (TTSL) which has nearly 26 million users.
    It will also consolidate Idea's position, with its all-India market share increasing from 9.5% to 11.1%. Idea is close to launching operations in Mumbai, Bihar, Tamil Nadu and Orissa in the next four-five months. With Punjab and Karnataka coming into its kitty through the deal, Idea will have almost a nation-wide footprint spanning 17 key circles.
    Also, Spice has spectrum in the 900 MHz GSM band, which carries more subscribers than the 1,800 Mhz band. Idea already has spectrum in the 900 Mhz band in seven circles areas, which will increase to nine, driving scale economies and operational synergies. "This will result in lower operating and capital expenditure," said Mr Aga.
    TMI has 44 million users across 10 Asian markets. "TMI's experience of operating 3G in similar markets will be of value to Idea, as also the convergent interests of the two companies in areas extending from international traffic to roaming and mobile value added services. Idea and TMI would sign a business co-operation agreement to this effect," Mr Aga added.
    Spice group chairman BK Modi said, "This divestment will enable Spice to redeploy resources and strengthen the group's mobile ecosystem businesses led by mobile VAS, mobile devices, telecom retail and customer support. This transaction makes Spice an operator agnostic services provider, where we will continue to provide services to the Indian mobile telephony market."