The Hindu Business Line : Buyout to Spice up Idea infusion from TMI at huge premium

BL Research Bureau The long speculated sell-out of Spice Communications has finally materialised, with Idea Cellular buying out the company’s promoters and proposing a merger of the latter’s operations with itself.

The deal appears to be a win-win situation for Idea with Spice’s established presence in Punjab, reasonable ARPU levels in Karnataka and Punjab and access to the efficient 900 MHz spectrum band, being key business positives.

Funding the acquisition will also not impose a burden on Idea’s balance sheet. The total cash outflow for Idea towards the Spice buy would be about Rs 3,782 crore — Rs 2,717 crore towards acquisition of the 40.8 per cent promoters’ stake in Spice at Rs 77.3 per share and a non-compete fee of Rs 544 crore. The mandatory 20 per cent open offer to the public shareholders of Spice after this, will see a further outflow of Rs 1,065.3 crore.

However, the Telecom Malaysia group will subscribe to a preferential allotment by Idea, post-merger, picking up a 14.99 per cent in the merged entity at Rs 156.95 per share (at a 53 per cent premium to Idea’s current market price). This will bring in a cash infusion of Rs 7,294.4 crore for Idea, which will more than cover the cost of this buyout. Spice being a loss-making entity, Idea may also acquire some tax shelter post-merger.

Better footprint

The buy appears a win-win for Idea from a business perspective. It stands to gain ready access to 4.5 million subscribers of Spice, in addition to its own subscriber base of over 26 million as of May 2008, adding up to an 11.1 per cent national market share. In Punjab, Spice is the second largest operator, whereas in Karnataka, it is fifth among the six telecom operators. The ARPU levels in both these circles are higher than the national average. Idea, with 11 circles in operation currently, is all set to rollout services in higher ARPU Mumbai and Tamil Nadu (including Chennai). By this year-end, with the addition of Spice’s operations, Idea will have operations in 17 circles.

This apart, Spice’s operations in these two circles are in the 900 MHz frequency band, which is considered more efficient, as more subscribers may be added for a given quantity of spectrum than the 1800 MHz band. In a stiff subscriber-linked spectrum allocation regime, this aspect gains significance.

Investors in Spice Telecom may stand a good chance of being able to tender their shares to the open offer, at Rs 77.3 per share. With Idea’s management indicating that the stake of Telecom Malaysia will be kept at 20 per cent post-merger, the latter may tender only part of its holdings in Spice, which gives other public shareholders a good shot at exiting via the open offer route.

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