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Wrong number
After selling 49% to Telekom Malaysia, Spice Communications is set to hit the market with a Rs 1,500 IPO

In India's booming telecom industry, big investment plans don't come as a surprise

Not spicy

Not so hot: Analysts feel the Spice IPO may not get a good response

these days. Yet, when on September 4, Dilip Modi, the Vice-Chairman and President of MCorp Global, announced a $2.5-billion plan for the company's flagship firm Spice Communications to go all India with its mobile services, it stunned quite a few. It's easy to see why.

Let's go back to an October morning in 2005. The company brass—B K Modi, Chairman of MCorp Global, his son Dilip Modi, Vice-Chairman and President, Umang Das, the Managing Director and three others—was huddled in the conference room of Spice's office at Bangalore's trendy Embassy Square. The men were mostly silent as they waited nervously for a meeting with the officials of Deutsche Bank and Ashmore Investment Management consortium. Spice was in all sorts of trouble then—it had already lost the leadership position in Karnataka and Punjab; it had accumulated losses of over Rs 600 crore; it was fighting losing court cases against equipment suppliers Siemens and Motorola; one of its promoters, Distacom Communications India, was desperate to exit; and, to top it all, there was a hostile take-over bid by the Essar group. If MCorp had to keep control of Spice, it had to strike a deal at this meeting.

It did. At the two-hour meeting, the Deutsche Bank-Ashmore consortium agreed to pick up a 49% stake of Spice (42% from Distacom and the rest from other stakeholders, including Darby Asia Investors). The deal was done with an understanding that Spice would restructure its management and scout for a strategic foreign partner who would take over the 49% stake held by new investors.

Since then, Spice has settled the cases with Motorola and Siemens out of court, roped in Telekom Malaysia to pick up 49% stake from Deutsche Bank-Ashmore consortium in March 2006 and, now, has drawn up an ambitious growth plan.

Big plans, many questions

"We will be investing $2 billion in the new circles (Spice plans to acquire licences for all the remaining 21 circles in the country) and another $500 million in Punjab and Karnataka over the next 2-3 years," says Dilip Modi. Spice is planning to raise Rs 1,500 crore through an initial public offering (IPO) later this year. It may raise another $350 million from the capital market in December 2008. "Spice's growth strategy is based on its commitment to the partnership model," says the junior Modi.

But not all are impressed. The plan looks far too ambitious for a company with revenues of around Rs 545 crore (based on annual GSM revenues ending June 2006), estimated valuation of about $363 million, and a subscriber base of 2.14 million (2.3% of the country's total as in August), point out analysts. "Telekom Malaysia has picked up a stake of 49% for $178 million. This means the valuation of the company is $363 million. A company with this kind of valuation is unlikely to invest $2 billion in expansion plans," says Prithvi Haldea, Director, Prime Database, a primary markets database company.

Some analysts doubt if the Spice IPO will succeed despite the bullish sentiment in the market. "The Modis never had a good track record in the primary markets. The IPO of SpiceNet (a struggling supplier of IT hardware and software solutions) did not perform well," says Haldea. Interestingly, our investigations reveal that none of the BK Modi group businesses has fared well so far, be it in IT, telecom, paper or rubber.

Poor history

This time, however, the Modis look to be on a firmer surface. They have a strong partner in Telekom Malaysia. Also, Spice is working on its brand. Mid last year, it roped in Bollywood actress Priyanka Chopra as brand ambassador to promote Spice handsets, a product category that helped it to reach to subscribers beyond Punjab and Karnataka. But still, the company's performance is far from satisfactory. After five years of posting losses, Spice finally made its first profits in the year ended June 2005 with Rs 2 crore. It was followed up by Rs 5 crore profits in 2005-06. But with cumulative losses in the range of Rs 600 crore, Spice looks years away wiping out its losses.

And the company is not doing too well in the market either. While the telecom story of India remains a best seller what with millions going mobile every month, Spice is struggling to keep pace with the rest of the industry (see It's Ringing Elsewhere).

Modis had a tough time with equity partners too. Darby Asia Investors, which invested $60 million in Spice during its initial days in the late 1990s (much before Warburg Pincus picked up its 18% stake in Bharti Airtel for $300 million), exited Spice in 2005 in a deal termed "distress sale" by industry sources.

Distacom and AIG too were glad to exit Spice. "We are happy to be out of the partnership. This has been distressed sale for us," says one of the key lawyers of Distacom involved in cracking the exit deal. "Shareholders of the company (Spice) were never a part of key decision making," he adds.

Modi denies the charge. According to him, the Hong Kong investor exited Spice for other reasons. "Distacom wanted to exit the telecom business in India despite having the control of a lucrative circle like Karnataka," he adds.

So what's ahead? Why has Telekom Malaysia bought into Spice despite its poor

Dilip Modi

"We will invest $2 billion in the new circles and $500 million in Karnataka and Punjab in 2 years" Dilip Modi, Vice-Chairman and President, MCorp Global

record? Well, according to analysts, all global telecom giants who have no presence in India want to get into the country's red-hot telecom market. In fact, Malaysian telecom operator Maxis Communications too was in the race for Spice.

Industry analysts expect Telekom Malaysia to take control of Spice. They point out that the Malaysian company holds a majority stake in most of its overseas ventures. "Modis are looking to offload almost 20% of their stake through two issues, while there is a high possibility of Telekom Malaysia taking over Spice," says a top investment banker on condition of anonymity. In fact, according to some, the possibility of Modis exiting Spice cannot be ruled out.

Dilip Modi, however, denies any such move. He says MCorp and Telekom Malaysia will both offload equal number of shares in Spice, which means after the two issues, Modis will continue to remain the largest shareholders.

Future tense

Whatever be the shareholding pattern, Spice's move to go national is widely seen as a big risk. Although the Indian telecom industry is booming, experts feel that the odds are pitted against the entry of a sixth national player (after Bharti, Reliance Communications, Hutch Essar, Idea and BSNL). Most analysts we talked to opined that there is little space for a sixth operator. Getting more spectrum is an issue, especially in the metro markets where the average revenue per user (ARPU) is higher, they point out. This means the company will have to focus on non-metro markets where the returns are lower and, therefore, to be competitive a new player has to go for a very low-cost structure.

With spectrum being a scarce commodity, some feel that the regulators may not entertain a new national player. Dilip Modi is, however, confident of securing the licence. And in case it fails, Spice has alternative plans. "If we are unable to secure new licences, the money raised through the IPO will be invested to start services like MVNO (mobile virtual network operation)," he says. An MVN operator is a telecom service provider that does not have own spectrum and, usually, infrastructure. Instead, it buys minutes of use from traditional telcos to sell to its customers. Not an exciting prospect really, or is it?

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