Modi set to sell stake in Spice Communications to Idea Cellular

According to sources close to the development, Idea has offered to buy 40.8 percent stake from the Modi Group, promoters of Spice Communications. While Telekom Malaysia holds 39.2 percent stake in the company, the remaining stake is in the hands of the retail and institutional investors.

Earlier, Spice Communications chairman B.K. Modi said it was considering a stake sale and had been approached by UAE-based Etisalat and others, including NTT DoCoMo and AT&T. Stakeholder Telekom Malaysia had also expressed interest in buying the stake.

The reason for selling the stake, Modi said, was to raise funds for business expansion. Spice Communications operates in only 2 of the 23 circles – Karnataka and Punjab - and has licenses to operate in four more.

According to market analysts, Modi could opt for either of the two routes – [1] sell 34.8 percent of his stake to Telekom Malaysia (as Indian laws permit a maximum of 74 percent foreign holding in Indian telecom companies) and the remaining 6 percent to Idea, or [2] sell 10 percent stake to Idea (as Indian laws do not permit more than 10 percent cross-holding in telecom companies) and the remaining stake (30.8 percent) to Telekom Malaysia (which, after the deal, would hold 70 percent in Spice Communications).

Hence, Modi said he would not take any final decision before hearing from Telekom Malaysia and receiving its proposal.

In any case, analysts feel the final aim is to merge Spice Communications with Idea and bring in Telekom Malaysia as a strategic partner.

Meanwhile, Etisalat has reportedly backed out from the bidding war as it found the asking price per share way too high. A source close to the development said the telecom company was ready to pay Rs.60 per share but decided to back out when Rs.70 per share was quoted as the asking price. The final asking price might hover near Rs.90 per share, the source said.

Idea Cellular is the fourth largest GSM operator in India, after Bharti Airtel, Vodafone-Essar and state-run Bharat Sanchar Nigam Ltd (BSNL). It has a subscriber base of over 26 million while Spice Communications has a subscriber base of more than 3 million.

According to market analysts, acquisition of Spice Communications would help Idea foray into Karnataka and Punjab where it has no operations. Idea currently operates in 11 circles - Andhra Pradesh, Delhi, Gujarat, Haryana, Himachal Pradesh, Madhya Pradesh, Chhatisgarh, Maharashtra, Goa, Rajasthan and UP.

Thanks to call rates of as low as one US cent a minute, availability of cheaper handsets and expansion of networks to smaller towns and rural areas, the Indian mobile market has leapfrogged the US to become the second largest (after China) and the world's fastest growing mobile market in the world. With Indian operators adding 8-9 million subscribers a month, at the end of April, total number of mobile users stood at 269.30 million, data from the telecom regulator Telecom Regulatory Authority of India (TRAI) showed.

According to market analysts, mobile users in India have jumped 25 times between 2002 and 2007, but the potential for growth remains huge as just 23 percent of the billion-plus population has a mobile phone.

Though India's mobile revolution is mainly confined to the cities, the real prize for phone companies is the vast rural market, where nearly 70 percent of India's 1.1 billion population live.

Idea's acquisition of Spice is the latest in the line of takeover talks taking place in the telecom industry worldwide. While Reliance Communications, India's largest CDMA operator, has advanced in talks with South Africa's MTN Group to takeover its telecom business, France Telecom said that it has made a $41 billion takeover bid on Nordic group TeliaSonera.

In another deal, Verizon Wireless said it would buy US rural mobile phone service provider Alltel Corp for $5.9 billion and take on an estimated $22.2 billion in debt. The deal will catapult Verizon Wireless ahead of US No.1 mobile services provider AT&T.

ABOUT TELECOM MALAYSIA OR TM

Telekom Malaysia Berhad or TM is the largest telecommunication company in Malaysia and also Southeast Asia's second-largest telecommunication company after SingTel. It has a monopoly on the fixed line network and has a considerable market share of the mobile communications market after its acquisition of Celcom and merging with its mobile operation arm, TMTouch.

TM has operations across Asia, with a presence in Indonesia, Singapore, Cambodia, Thailand, Bangladesh, Pakistan, India, Sri Lanka and Iran besides Malaysia with 39.8 million customers at the end of 2007.