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Rush for Funds - 3G and BWA auctions spur the demand for finance

July 15, 2010
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Investor interest in the Indian telecom sector has been steady for several years now. It is expected to only head north in the wake of new service offerings such as 3G and broadband wireless access (BWA) and with Indian players expanding their global footprint.

Over the April-June 2010 quarter, the telecom sector accounted for over 67 per cent of the merger and acquisition (M&A) activities across the country. According to the Associated Chambers of Commerce and Industry of India, the sector witnessed M&A deals worth $22.73 billion during the April-June 2010 quarter compared to $439.4 million during the same quarter in the previous year.

Three major outbound and domestic M&A deals took place in the sector during this period. The biggest deal was the merger of the telecom tower business of the Anil Ambani Group's flagship company Reliance Communications (RCOM) with GTL Infrastructure for $11 billion.
The other recent deals included Bharti Airtel's acquisition of Kuwait-based Zain Telecom's African business for $10.7 billion and Reliance Industries Limited's (RIL) acquisition of Infotel Broadband for $1 billion.

Besides this, financial institutions have also been hands-on while lending big sums to telecom companies to fund their 3G and BWA licence payouts. For 3G alone, loans worth Rs 450 billion have been disbursed by banks. This constitutes 66 per cent of the total 3G payout to the government.

Recent financing moves
The telecom financial scenario has been largely dominated by Reliance in the past couple of months. It started in early June 2010 with RIL's $1 billion acquisition of Infotel Broadband, a day after the BWA spectrum auction closed and Infotel emerged as the single winner of a panIndian licence. Marking Mukesh Ambani's re-entry into the telecom sector, the move is being viewed by industry watchers as an aggressive and ambitious step, typical of RIL, designed to change the dynamics of the broadband space in India. In fact, RIL plans to invest about Rs 233 billion over the next two years to complete its broadband network rollout across India.

Following this, in end-June 2010, RCOM agreed to sell its telecom tower business to GTL Infrastructure. RCOM's tower business is operated under a 95 per cent-owned company, Reliance Infratel.The deal will be executed through a demerger of Reliance Infratel's tower assets to GTL Infrastructure. Post the completion of the merger, GTL will emerge as the world's largest independent tower company with over 80,000 towers and 125,000 tenancies from 10 operators.Further, there is a commitment of close to 75,000 tenancies from both RCOM and Aircel over the next 10-15 years.

The combined enterprise value of Reliance Infratel and GTL Infrastructure, including the debt and equity of both, is about $11 billion. This includes Reliance Infratel's debt of an estimated Rs 180 billion, which will now be transferred to GTL, significantly reducing RCOM's debt burden. RCOM's total debt post the recent payment of the 3G spectrum licence fee stands at Rs 330 billion.Meanwhile, Reliance Infratel will retain its optic fibre cable network, estimated to be valued at close to Rs 65 billion.

In a separate move, RCOM has decided to acquire Digicable, the country's largest cable TV service provider, in an all-stock deal. Under the proposed plan, RCOM will hive off its direct-to-home, internet protocol television and retail broadband operations into a separate entity and merge it with Digicable. The combined entity will be known as Reliance DigiCom. RCOM plans to hold 40 per cent stake in the combined entity while the remaining stake will be held by Digicable's existing owners -­ Ashmore Investments, Jagjit Singh Kohli and Yogesh Shah. According to sources, Reliance DigiCom will be Asia's largest and the world's fifth largest company to offer the full suite of digital TV, high speed broadband and voice services.

Tikona Broadband, which has recently won BWA spectrum in five telecom circles, has raised over Rs 11 billion through a mix of share sale, debt and convertible debentures. The company has offloaded about 4 per cent stake through a fresh issue of shares and has issued compulsory convertible debentures worth Rs 7 billion.The remaining Rs 4 billion has been raised through a long-term bank loan.The company will use these funds to expand its network coverage from the current 30 cities to 150 cities by the end of 2010. This is the company's second round of fund-raising. In February 2010, Tikona had raised Rs 5 billion by offloading 74 per cent stake to four financial investors -­ Goldman Sachs Investment Partners, Indivision India Partners, Oak India Investments and Larsen & Toubro Infrastructure Finance Company Limited.

On the horizon
With ATC taking its tower company acquisition count in India to three, Wireless Tata Tele Info Services (WTTIL) merging with Quippo, GTL acquiring Aircel's tower business and the latest merger of RCOM's tower assets with those of GTL, the telecom tower industry is clearly buzzing with deals. It has been recently reported that an infrastructure fund set up by Macquarie, a Sydney-headquartered financial services company, and the State Bank of India (SBI) is close to buying a stake in the WTTIlQuippo combine. The Macquarie SBI Infrastructure Fund is likely to pay $310 million for around 10 per cent in the WTTIL-Quippo combine, though the final agreement is yet to be signed. At this price, WTTIL-Quippo will be valued at about $3 billion. According to sources, the valuations are still under discussion.

Qualcomm, another BWA spectrum auction winner, is also looking for a strategic stake sale in its BWA venture. Tulip Tele and the Global Group (the holding company of GTL Infrastructure) are reportedly in talks to acquire 13 per cent each.According to sources, the 26 per cent stake is likely to fetch $100 million-$200 million.

Saddled with loans worth Rs 75 billion for buying 3G and broadband spectrum, state-owned Mahanagar Telephone Nigam Limited (MTNL) has decided to repay most of the debt within six months to one year and then go for long-term debt management. "There are various options for long-term debt management. First of all, we are opting for credit rating of the PSU shortly," said Kuldeep Singh, chairman and managing director, MTNL, in a media report.

In order to finance its recent deal with RCOM, GTL will be raising the necessary funds through a combination of equity and debt. It is in discussions with potential private equity investors including Blackstone for the equity component, while debt will be organised by Standard Chartered Bank and SBI Capital Markets.

With several new players entering the market and the existing ones consolidating, the Indian telecom space is clearly undergoing a transformation. To a large extent, this alteration has been ushered in by the conclusion of the 3G and BWA spectrum auctions. With telecom stakeholders gearing up to provide new-generation services, the demand for funds is only expected to grow, be it through debt or equity.

 Upcoming deals

  •  Macquarie SBI Infrastructure Fund to buy 10 per cent stake in WTTIlQuippo combine for $310 million
  •  Qualcomm to divest 26 per cent stake in its BWA venture
  •  MTNL to opt for credit rating
  •  GTL to raise funds to finance its RCOM deal Over the April-June 2010 quarter, the telecom sector accounted for over 67 per cent of the merger and acquisition (M&A) activities across the country.

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