When Telecom Stood For Pass To Windfall Gains, And Not Financial Stress

Telecom may be only about financial stress and investors’ nightmare in the current narrative, but look back a few years to capture the mega deals and windfall gains that defined the industry. Billions made headlines then too, but mostly to announce marquee M&As (mergers and acquisitions), not record losses. And, when the biggest telcos and funds from across the world queued up with top dollar, many in the Indian telecom business rose up the rich list, and how.

While Vodafone’s write-offs forced CEO Nick Read to point out recently that the company is getting closer to liquidation in its joint venture with Idea Cellular, the UK telco’s past tie-up (after it acquired Hutchison’s stake in Hutch Essar) allowed smart investors to make a killing. The Indian businesses either turned financial investors or sold outright when the going was good.

The smart boys to hit the jackpot included the Ruias of Essar, Ajay Piramal of Piramal Enterprises, Analjit Singh of Max group, Rajeev Chandrasekhar of BPL Mobile, the Hindujas and the Nandas of Escorts and even professionals like the former CEO of Vodafone India Asim Ghosh.

Among others to have bet right, not from deals with foreigners but by selling to Indian telcos, was the B K Modi group. An industry insider recalled how Idea Cellular had bought 40.8 percent stake in Spice Communications for Rs 2,720 crore, including a non-compete premium for the Karnataka and Punjab business. The group had also sold its Kolkata circle to Bharti Airtel for $90 million (around Rs 630 crore at the current rate of conversion). Delhi-based Shyam group too had it good when Bharti Airtel paid Rs 430 crore to buy its 67.5 percent stake in Hexacom India. Also, Nandas, through Escotel, made a cool Rs 350 crore in selling the stake to Idea in a company which controlled six circles.

The complex regulatory compulsions linked to foreign direct investment (FDI) forced international companies to seek Indian investors, sometimes even in multiples. Until 2005, India allowed only 49 percent foreign equity in telecom companies. Then, FDI up to 74 percent was permitted, and by 2013, telecom was opened up to 100 percent foreign investment. The FDI cap at various stages offered opportunities to Indian investors to get in and pull out at the right moment.

There were others who realised that telecom required deep pockets, with huge investments needed to put up networks. Consumers looking for low tariffs added to the telecom challenge. So, Indian investors looked for buyers seeking aggressive entry into the country or those who wanted to expand inorganically.

The Ruias, who had a JV with Hutchison, topped the list. When the Hong Kong-based company sold its majority stake to Vodafone for $11.1 billion in 2007, the Ruias stuck on and signed a put option giving them the right to sell later. They did so in 2008 by selling their 33 percent in Vodafone-Essar to the UK company, making $5 billion and an additional $400 million as control premium.

The money came handy as the group was on a massive expansion spree. It planned an investment of $18 billion, which included doubling the refinery capacity, expansion of steel and the ports business. The group raised loans on the basis of the cash to finance the equity for these investments. Subsequently, the company lost control of two of the three companies due to high debt.

In an earlier interview to Business Standard, Analjit Singh had summed up the fears of many Indian companies venturing into telecom. After the group started operations in Mumbai, it bid for Gujarat, Maharashtra and Punjab circles, but the winning bids were four times more than what they had quoted, he said. “I quickly saw the writing on the wall, that this is a business of scale for the big boys.”

With Hutchison-Essar JV (Essar had bought the Delhi licence from C Sivasankaran) looking to expand quickly, there were opportunities for many others to sell off. Hindujas, who were the key promoters of Fascel with mobile operations in Gujarat (Hutch did not have operations), stuck a deal again with Hutchison-Essar to sell. As the government raised the FDI cap in 2005, Hindujas’ 5.11 stake in Hutchison Essar too got bought over for $450 million.

BPL Mobile, owned by Rajeev Chandrasekhar, also saw an opportunity. He sold his telecom business to the Essar group and made Rs 4,400 crore for a controlling stake of 67 percent. The acquisition was made to merge BPL with Hutchison Essar and subsequently the company’s operations in the circles of Maharashtra, Goa, Tamil Nadu, Pondicherry and Kerala were merged into Hutchison Essar. The company also bought the licence of Escotel, a JV in which the Escorts group was partners for the Punjab circle. Thought the deal numbers were never divulged, it is believed Escorts made over Rs 150 crore.

Putting money in Vodafone of course was always a good investment, but there were challenges. While the telecom subscriber base was booming, in 2008, the government opened the doors to new licences through the “first come first served” basis. As many as 122 new licences to over 22 entities were issued, leading to cut throat competition, price wars and bruised balance sheets. Soon after the probe into the alleged 2G scam, the Supreme Court ordered that the licences were illegal and were to be cancelled. Many players went out of business. Foreign telcos including Telenor, Maxis and Sistema had to exit India.

But despite the challenges, investors in Vodafone hardly regretted earlier. Analjit Singh was back in 2006 but this time as an investor buying 7.58 percent stake from various groups for Rs 1,019 crore. Three years later, he sold a part of this stake for Rs 533 crore, bringing down his shareholding to 3.87 percent, but following it up in 2011 by buying Asim Ghosh’s entire remaining stake of 2.39 percent. When Singh eventually sold his entire stake in Vodafone in 2014, he made Rs 1,241 crore.

Ajay Piramal’s investment in Vodafone too yielded good result. In 2012, Piramal bought a total of 11 percent stake in the company through two tranches for Rs 5,864 crore at a time when Vodafone was trying to comply with the FDI regulations. When Piramal sold it two years later, after the FDI rules were liberalised to 100 percent, he made Rs 8,900 crore, translating into a 52 percent return on investment.

Even Asim Ghosh who straddled two managements –of Hutch and Vodafone — bought stake in two tranches which were again essentially to ensure compliance with FDI norms. Ghosh sold part of his stake in 2009 to Vodafone for Rs 330 crore and the rest to Analjit later at an undisclosed amount. He’s estimated to have made more than Rs 600 crore from it. Even in these hard times, some industry watchers are hopeful that telecom will regain its place, though not before some more struggle.―Authored by Surajeet Das Gupta, Business Standard