Growth of Indian Telecom

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Project Report


Submitted in fulfilment of PGDM 2007-2010


Prof. Akshey Kumar

Rajesh Kumar
R.No. 11/11

Apeejay School of Management, Dwarka, New Delhi.
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This is to certify that the project work done on “Growth of Indian Telecom Industry, (Mergers and Acquisitions)” submitted to Apeejay School of Management, Dwarka, by RAJESH KUMAR in fulfillment of the requirement for the award of PG Diploma in Management, is a bonafide work carried out by him under my supervision and guidance. This work has not been submitted anywhere else for any other degree/diploma.

Date: 18/05/10

Name of the guide: Prof.Akshey Kumar

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I am thankful to my mentor Prof. Akshay Kumar, Apeejay School of Management, Dwarka, New Delhi, for giving me the opportunity to work on this project and provide me with valuable inputs throughout the period of completion of this project. I, therefore, express my sincere gratitude for his constant guidance and motivation without which this project could not have taken its form and shape.

I also thank Apeejay School of Management for providing deep insights in the field of Management and for constantly guiding me throughout the project.

My project was a great learning experience and for that I shall always be indebted to Apeejay School of Management.



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1. 2. 3.

• • •

5 6 9 10 19 22 25 26 27 32 33 35 43 47 48 54 55 57 60

Regulatory Environment Key Players Market Share


RESEARCH • Contours of M&A • Allure of M&A ANALYSIS • Major M&A Deals • Idea Cellular takeover of Spice • Reliance MTN merger failure FINDINGS • M&A Success or Failure • Recent Trends • Future Opportunities CONCLUSION ANNEXURE/ REFERENCES



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Executive Summary Indian Telecom industry is the second fastest growing telecom market in the world after China. The overall tele-density India has reached 48.04% at the end of April 2010. The growth has been
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fueled by progressive policies of TRAI and deregulation. The telecom industry is changing at a rapid pace with constantly changing policies, new players, alliances and partnerships being announced on a daily basis. In this study, I have looked at various M&A transactions that have taken place in the recent past. After doing a broad review, I have focused on two specific events, namely, Idea Cellular takeover of Spice Telecom and Reliance MTN merger failure. I have identified the following trends and drives in the industry: • • • • Global ambitions of Indian Telecom giants will see acquisitions and joint ventures in growing African and South East Asian markets. Telecom players are also looking to tap into global funds to finance their aggressive growth plans. This will result in partnerships joint ventures and equity sellout to foreign players. New license holders will continue to look to sell their stake at a premium. New policies will seek to curb this license arbitrage. Smaller players with operations in only a few circles will find in difficult to compete with the nationwide players. The industry may see consolidation with these smaller operators being acquired by the larger ones. •

“Unbundling of the corporation” will continue as companies will seek for economies of scale and lower startup cost by infrastructure sharing. 3g and WiMax license auctions presently under way will spur M&A and partnership activity for the over all growth of the market.

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INTRODUCTION Mergers and Acquisitions(M&A) are strategic tools in the hands of m anagem e to achi ve greater nt e efficiency by exploitingsynergies and growth opportunitie. Mergers are moti ated by desire to grow s v inorgani ally at a fast pace, quickly grab market share and achi ve econom ie of scale. c e s The objective of my project is to study the Telecom industry in India and understand how the recent trends of Mergers, Acquisitions and Partnerships are making it truly an international business. I will focus on the following two deals in the industry to gain deeper understanding of the M&A nuances in this industry. India has become a hot bed of telecom mergers and acquisitions in the last decade. Foreign investors and telecom majors look at India as one of the fastest growing telecom markets in the world. Sweeping reforms introduced by successive Governments over the last decade have dramatically changed the face of the telecommunication industry. The mobile sector has achieved a teledensity of 44% by t h e e n d o f A p ril 2 0 1 0 has been aided by a bouquet of which factors like aggressive foreign investment, regulatory support, lower tariffs and falling network cost and handset prices. M&A have also been driven by the development of new telecommunication technologies. The deregulation of the industry tempts telecom firms (telcos) to provide bundled products and services, especially with the ongoing convergence of the telecom and cable industries. The acquisition of additional products and services has thus become a profitable move for telecom providers. Idea Cellular takeover of Spice Telecom: I have selected this as it is one of the biggest deals that happened in Indian Telecom. It is a deal that will throw light on the consolidation trends in the Indian Telecom industry. Reliance MTN merger failure: Studying the drivers in this deal will help me understand the global expansion trends in the Indian Telecom industry. The above two deals will provide me with deeper understanding of both consolidation and global expansion trends in this industry.

Sector Overview
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• Regulatory Environment • Key Players • Recent Trends

Regulatory environment Telecommunications is one of the few sectors in India, which has witnessed the most fundamental structural and institutional reforms since 1991. Considering the great potential for the growth of telephone demand with the accelerated growth of economic activities, the Government of India announced the National Telecom Policy in 1994 and the New Telecom Policy in 1999. The National Telecom Policy provides for private sector participation to supplement the efforts of DOT in basic telephone services. The opening up of the basis services provided a big opportunity for private & foreign investors. More policy initiatives include Addendum to NTP-1999, Broadband Policy 2004, Amendment to Broadband Policy 2004 etc. The opening of the sector has not only led to rapid growth but also helped a great deal towards maximization of consumer benefits. The tariffs have been falling continuously across the board as result of healthy and unrestricted completion.

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M&A in telecom Industry are subject to various statutory guidelines and Industry specific provisions e.g. Companies Act, 1956;

Income Tax Act, 1961;
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Competition Act, 2002; MRTP Act; Indian Telegraph Act; FEMA Act; FEMA regulations; SEBI Takeover regulation; etc. We will cover some of these regulations hereunder which are unique to the telecom industry. TRAI Recommendations Telecom Regulatory Authority of India (TRAI) is of the view that while on one hand mergers encourage efficiencies of scope and scale and hence are desirable, care has to be taken that monopolies do not emerge as a consequence. TRAI had issued its recommendation to DoT in January 2004 regarding intra circle Mergers & Acquisitions which were accepted by DoT and are stated below. Regulatory Authority of India Act, 1997 (as amended in January 2000). Under the TRAI Act, TRAI carries out various functions. It is empowered to make recommendations, either suo-moto or on a request from the Licensor on a wide range of matters. These include: • the need and time for introduction of a new service provider; • terms and conditions of a telecommunications license; • revocation of licences; •measures to facilitate competition and promote efficiency in the operation of telecommunication services; • technological improvements in services; • specifications as to the type of equipment to be used by the service providers • measures for the development of telecommunication technology and “any other matter[s] relatable to [the] telecommunication industry in general;” • efficient management of spectrum. • ensuring compliance with terms and conditions of telecom licenses;
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• fixing terms and conditions for inter-connectivity between service providers; • ensuring technical compatibility and effective inter-connection among different service providers; • regulating arrangements among service providers for sharing revenues; • laying-down standards for quality of services; • prescribing and regulating periods within which local and long distance telecommunication circuits are to be provided by service providers; • maintaining a register of inter-connect agreements; • ensuring effective compliance with universal service obligations • fixation of tariffs DOT Guidelines Department of Telecommunications (DoT) can be credited with issuing a series of liberalising initiatives in telecom sector which has led to phenomenal growth of the Industry. Based on recommendations of TRAI, DoT issued guidelines on merger of licences in February 2004. The important provisions are state below: Prior approval of the Department of Telecommunications will be necessary for merger of the licence. The findings of the Department of Telecommunications would normally be given in a period of about four weeks from the date of submission of application. Merger of licenses shall be restricted to the same service area. There should be minimum 3 operators in a service area for that ser vice, consequent upon such merger. Any merger, acquisition or restructuring, leading to a monopoly market situation in the given service area, shall not be permitted. Monopoly market situation is defined as market share of 67% or above of total subscriber base within a given service area, as on the last day of previous month. For this purpose, the market will be classified as fixed and mobile separately. The category of fixed subscribers shall include wire-line subscribers and fixed wireless subscribers.
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Consequent upon the merger of licenses, the merged entity shall be entitled to the total amount of spectrum held by the merging entities, subject to the condition that after merger, the amount of spectrum shall not exceed 15 MHz per operator per service area for Metros and category ‘A’ service areas, and 12.4 MHz per operator per service area in category ‘B’ and category ‘C’ service areas. In case the merged entity becomes a “Significant Market Power” (SMP) post merger, then the extant rules & regulations applicable to SMPs would also apply to the merged entity. TRAI has already classified SMP as an operator having market share greater or equal to 30% of the relevant market. In addition to M&A guidelines, DoT has also issued guidelines on foreign equity participations and management control of telecom companies. The National Telecom Policy, 1994 (NTP 94) provided guidelines on foreign equity participation and as revised by NTP 99 permitted maximum 49% cap on foreign investment. Recently by its order no. - 842-585/2005-VAS/9 dated 1s t February, 2006 DoT has enhanced the FDI limit in telecom sector to 74%. The key provisions of these guidelines are as follows: The total composite foreign holding including but not limited to investments by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs), convertible preference shares, proportionate foreign investment in Indian promoters/investment companies including their holding companies, etc., referred as FDI, should not exceed 74%. The 74% investment can be made directly or indirectly in the operating company or through a holding company and the remaining 26 per cent will be owned by resident Indian citizens or an Indian Company (i.e. foreign direct investment does not exceed 49 percent and the management is with the Indian owners). It is also clarified that proportionate foreign component of such an Indian Company will also be counted towards the ceiling of 74%. However, foreign component in the total holding of Indian public sector banks and Indian public sector financial institutions will be treated as ‘Indian’ holding.
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The licensee will be required to disclose the status of such foreign holding and certify that the foreign investment is within the ceiling of 74% on a half yearly basis. The majority Directors on the Board including Chairman, Managing Director and Chief Executive Officer (CEO) shall be resident Indian citizens. The appointment to these positions from among resident Indian citizens shall be made in consultation with serious Indian investors. The merger of Indian companies may be permitted as long as competition is not compromised as defined below: “No single company/legal person, directly or through its associates, shall have

substantial equity holding in more than one licensee Company in the same service area for the Access Services namely; Basic, Cellular and Unified Access Service. ‘Substantial equity’ herein will mean equity of 10% or more’ A promoter company/Legal person cannot have stakes in more than one LICENCEE Company for the same service area” Some exceptions have been provided to this guideline. The Licensee shall also ensure that any change in shareholding shall be subject to all necessary statutory requirements. As per recent news reports, the Government wants to arm itself with power to block FDI in case the investment from companies or countries deemed undesirable, even if it is within the approved limit. This is a positive step due to increasing security concern India is facing but has led to apprehension that the new law will be used to block investment from certain parts of the world. FEMA Guidelines The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on issuance of shares or securities
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by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. RBI has issued detailed guidelines on foreign investment in India vide “Foreign Direct Investment Scheme” contained in Schedule 1 of said regulation. As per the FDI scheme, investment in telecom sector by foreign investors is permitted under the automatic route within the overall sectoral cap of 74% without RBI approval. The salient features of FDI scheme as applicable to telecom sector is as follows: Industries which do not fall within the ambit of Annexure A can issue shares under automatic route to foreign companies (Para 2). Since telecom sector is not listed in Annexure A hence foreign investment can be made in telecom sector upto 74% cap without prior approval of RBI. In case, investment by foreign investor(s) in an Indian telco is likely to exceed sectoral cap of 74%, then they should seek approval of (FIPB) Foreign Investment Proposal Board. (Para 3) FDI scheme permits automatic approval of transfer of shares from one foreign shareholder to another, so long as the transfer is in compliance of FDI scheme and the regulation. (Regulation 9) However, if the shares are being transferred by a person residing outside India to a person resident in India, it shall be subject to adherence to pricing guidelines, documentation and reporting requirements of RBI. Application seeking RBI approval is to be made in Form TS 1. (Regulation 10 B) The issue price of share should be worked out as per SEBI guidelines in case of listed companies. In case of unlisted companies, fair valuation method as prescribed by erstwhile Controller of Capital Issues should be adopted and should be certified by a Chartered Accountant. (Para 5) FDI scheme also stipulates the norms on dividend balancing, whereby the cumulative amount of outflow on account of dividend for a period of 7 years from commencement of production or services should not exceed cumulative amount of export earning during those
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years. The dividend balancing guidelines are applicable to companies included in Annexure E of FDI scheme and telecom industry is not included in said annexure. (Para 6) In case preference shares are issued to a foreign investor, the rate of dividend shall not exceed 300 basis points over the Prime lending rate of SBI, prevailing on the date of Board meeting where such issuance is recommended. (Para 7) The reporting requirement are contained in regulation 9 viz. a) The Indian company should report the details of receipt of consideration to RBI within 30 days of receipt and b) The Indian company should submit report of issuance and allotment of shares in Form FCGPR along with necessary certificates from the Company Secretary and the Statutory Auditor of the Company. An Indian Company may also issue shares on Rights basis or issue bonus shares (Regulation 6A); subject to compliance of conditions of FDI scheme and sectoral cap. FDI scheme prohibits investments by citizen or entities of Pakistan and Bangladesh (regulation 5) primarily on security concerns. In the recent past, DoT has also delayed its approval to an Egyptian company’s investment in Hutch India on similar grounds. SEBI Takeover Guidelines SEBI takeover guidelines called Securities and Exchange Board of India (Substantial

acquisition of shares and takeover) Regulations, 1997 are applicable to listed Public companies and hence would be applicable in case of M&A in listed telecom companies like Bharti, Reliance Communication, Shyam Telecom, VSNL, Tata Teleservices (Maharashtra) Limited, etc. These guidelines have been dated 26.05.2006. The highlights of the amendment are as follows: No acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company shall acquire by himself or through persons acting in concert unless he makes a public announcement as per the regulations. Further, if a target company was unlisted, but has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. Regulation 11(2)
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amended by SEBI and notified vide SO No. 807(E)

If an acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company is desirous of consolidating his holding while ensuring that Public Holding in the target company does not fall below the permitted level of listing agreement he may do so only by making a public announcement as per the regulations. Further, if a target company was unlisted, but has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. Regulation 11(2A) The minimum size of public offer to be made under Regulation 11(2A) shall be lesser of a) 20% of the voting capital of the company; or b) such other lesser percentage of voting capital as would enable the acquirer to increase his holding to the maximum possible level, while ensuring the requirement of minimum public shareholding as per listing agreement. Competition Laws Competition Commission of India (CCI), established in 2003, holds statutory responsibility for ensuring free and fair competition in all sectors of the economy. The Competition Act, 2002 has provided for a liberal regime for mergers, whereby combinations exceeding the threshold limits fall within the jurisdiction of CCI. The threshold limits are quite high. Most competition laws in the world require mandatory prior notification of every merger to the competition authority but under Indian law it is voluntary. However CCI can also take suo motu cognisance of a merger perceived as potentially anti competitive and it can also enquire until one year after the merger has taken place. Once CCI has been notified, it must decide within 90 days of publication of details of the merger or else it is deemed approved. The CCI can allow or disallow a merger or can allow it with certain modification. Most of the operative provisions of Competition Act have still not been notified.

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Pre-reform Pre-1994 • MTNLMumbai and Delhi: DTS elsewhere • • No mobile service NLD-DoT per/ BSNL ILD • • • • • •

Partial Deregulation 1994-1999 4 private fixed service providers with less than 1% market share 2 GSM mobile players in each circle 13 players start National Telecom Policy (NTP)1994 TRAI constituted 1997 National Telecom Policy 1994 • • • •

Further Deregulation 1999-2002 Licenses converted to revenue sharing Private sector share less than 5% in revenue terms Competition in NLD and ILD Licenses on Revenue share NTP 1999 BSNL formed Oct.2000 Internet Telephony 2002 New Telecom Policy, 1999 • • • •

Take-off 2002 ward

s Calling Party Pays CDMA launch 3-6 operators in each circle Intra-circle merger guidelines

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Broadband policy 2004

Unified Licensing

Key players. BSNL: BSNL recorded a revenue of Rs 35,296 crore in the last fiscal, down from Rs 40,135 crore in FY 2006-07, a decline of 12.1%. The company is looking at new business streams to increase revenue and reduce losses. BSNL is toying with the idea of entering into managed network services and enterprise business, which will add value to mobile as well as landline.
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Apart from this the company is also looking at adding IPTV and VoIP services in its portfolio. BSNL would also be investing Rs 15,000 crore for the next three years in a bid to return to its profitable position. Like other service providers, BSNL is also planning to focus on the rural segment in the coming years. BSNL leads the broadband segment, as far as subscribers are concerned. Currently, the company has 2 mn out of the 3.9 mn subscribers in the country

Bharti: Bhari Airtel as it crossed the magical figure of 100 mn subscribers in the country. The customer addition has taken its revenue to Rs 32,624 crore (Approx.) in FY 2009-10, clocking 47.8% increase. The company has also formed an alliance with four global IT majors: Alcatel Lucent owned Mobilitec, Germany-based CoreMedia, US-based Adamind and UK's Apertio for its service delivery platform. Continuing with its strategy of focusing on its core business and outsourcing the rest, Bharti signed a $35 mn three-year outsourcing deal with BPO service provider, Firstsource Solutions. Bharti has launched operations in Sri Lanka and has invested $200 mn for the same. The company also launched its DTH services. Bharti is focusing on the rural and enterprise segments as its growth areas. Reliance: Reliance Communications recorded an increase of 71% in its net profit. And an increase of 28.8% in its revenue, which is Rs 23,638 crore in fy 2009-10. It received start-up GSM spectrum. It has huge expansion plans in rural India. It also expanded globally with acquisition of UK-based Vanco and Uganda-based Anupam Global Soft. In a landmark deal,
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Reliance partnered with Microsoft to deliver IPTV in India on the latter's mediaroom platform. Reliance Communications will have the exclusive deployment rights for the platform in India. Vodafone: Vodafone Essar achieved 46.5% rise in telecom revenue in India with its income from operations touching Rs 22,477 crore in FY 2009-10. Vodafone entered India through its acquisition of Hutchison Essar stake.

Tata Communications: The Tata-run VSNL created a significant landmark when it announced financial results for the last fiscal-an astounding growth of 85%, to touch Rs 18,857 crore. VSNL's transformation has helped it lead in segments such as wholesale voice, wholesale and enterprise data, and retail broadband; and ensured global infrastructure and global customers Telecom Equipment Players. The top equipment players in the Indian telecom space are Nokia, Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Cisco, Sony Ericsson, Huawei and ZTE.
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THE CONTOURS OF M&A IN TELECOM M&A are also referred as Corporate Marriages and Alliances. Mergers can be across same or similar product lines. In many cases mergers are initiated to acquire a competing or complementary product. A reverse merger is another scenario in taxation parlance where a profit making company merges with a loss incurring company to take advantage of tax shelter.
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A horizontal merger (mergers across same product profile) adds to size but the chances for attainment of profit efficiency are not very high. On the other hand a vertical merger (entities with different product profiles) may help in optimal achievement of profit efficiency. Say a mobile operator acquires a national long distance company and thus saves IUC charges. In telecom Industry, most of the acquisitions were horizontal which helped the acquirers to expand the area of their operation and customer base quickly. These provided economies of scale with phenomenal benefit to the acquirers in terms of higher profitability, and better valuations. Takeovers generally have three typical patterns: a) In the first model, the investor acquires a controlling stake in the acquired company and retains it as a separate entity. This is the simplest model with the intent to avoid the legal hurdle for merging the company into the parent company. This route also gives the acquirer a flexibility to sell off the operation on a stand alone basis later on, in case the merger is not successful. This mode has been followed by Hutchison, which has retained most of the acquired companies (Usha Martin- Kolkata, Fascel- Gujarat, Aircel Digilink – Haryana, Rajasthan and UP East, Sterling Cellular- Delhi, Escotel - Punjab) as separate legal entities. b) In the second model, the acquirer merges the acquired company with the parent after acquiring controlling stake. This model requires completion of merger formalities with due approval of High courts and also from DoT. It has the advantage of avoiding statutory compliance for several entities and integrate all operations seamlessly into a single legal entity. This model has been followed by Bharti, which has merged most of the acquired entities with the parent in due course of time. c) The third model entails purchase of assets of the target company on stand alone basis without purchasing the company as a whole. In some cases, where the licences were cancelled by DoT due to default, such companies sold the telecom assets and customer database to the acquirer, who could easily integrate the same into his existing licence and strengthened his network and customer base at a nominal cost. The seller company which was stripped of licence as well as telecom network was ultimately wound off. THE ALLURE OF M&A IN TELECOM
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by Global

investors in 1995



Government permitted entry of foreign telecom operators through Joint venture route. Some of these global giants included Vodaphone, AT&T, Hutchison Whampoa, Telekom Malaysia, and Telestra Australia. We now need to understand some of the predominant objective of takeovers in telecom sector, which can be summarised as follows: Acquisition of licences or geographical territory; Acquisition of spectrum; Acquisition of telecom infrastructure and network; Acquisition of customer base to achieve an economic base; Acquisition of brand value; Higher operating profit (EBITDA) margin; A combination of above. Market access: There has been almost saturation of demand in the home market of majority of foreign investors where teledensity ranges from 40% to 100%. On the other hand, the teledensity in Indian market though currently hovering at 48% is like a low hanging fruit. The rural teledensity is almost negligible at about 8%. India’s young and middle class market offers tremendous scope for market expansion and new business. For example, even after 15 years of economic reforms, sale of most consumer durable goods has not exceeded Rs. 60 million, whereas telephone penetration has already crossed the Rs. 120 million mark and is all set to cross Rs. 250 million mark by 2010. This huge expansion is possible only with higher focus on rural telephony, bridging the digital divide and higher allocation of network and funds to rural areas which are not so rewarding in terms of ARPU. Spectrum: Spectrum is turning out to be the biggest bottleneck for Indian mobile operators as they face network problems, poor voice quality and call dropping. GSM operators initially get 4.4 MHz of spectrum while CDMA operators get 2.5 MHz spectrum. In case of GSM operators with 10 lakh or more subscribers, they are eligible for 10 MHz spectrum, while CDMA operators get 5 MHz for 10 lakh subscribers. Since CDMA technology carries the voice in small
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packets, it can carry about five times more traffic and hence has a lower spectrum allocation. However, as the number of mobile users is growing at an amazing rate of 4 million per month), spectrum is falling short of requirements. Thus the foreign investors prefer to acquire an existing operation to ensure ready availability of spectrum, instead of applying for a new licence where spectrum allocation from DoT is really a challenging task. The Government is also taking effective steps to get approx 40 MHz spectrum vacated from Indian defense services which will give a fresh lease of life to spectrum starved market. This will be a key driver for all future M&A in India. Network roll out: Network roll out is a nightmare for telecom operators. It is more complex for a foreign operator who may not be conversant with local conditions. Network roll out involves Right of way (ROW) approvals, coordination with local government departments, acquiring BTS and BSC sites on rentals, acquiring municipal and local approvals to set up tower and antenna, obtaining electrical connection for the sites, import of equipment, installation of tower, equipment and shelter, SACFA and TEC approvals, integration of various sites and final launch of services in a geographical area etc. Generally the time to roll out a network in a circle takes minimum 6 months to 1-year time. The industry is also resorting to site and infrastructure sharing with other operators to reduce its capital expenses and operating expenses cost and optimise profitability.

Human Resource: The dovetailing of human resources of the acquired company into the culture of parent company has significant importance in any M&A deal and can even spoil a deal if not properly managed. It is now an established principle that local leaders decide the success or failure of a cross boarder deal. The savvy acquirer retains competent local leaders and dangles incentives and awards to align their personal interest with that of the merged entity. Premium is placed for target companies which have strong management team in place, lower manpower base and higher employee productivity. Some benchmarks used in this regard are – Number of customers per employee, Revenue per employee per month etc.
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Majority of the telecom companies resort to outsourcing of routine and non core activities and reduce number of “on roll employee” to attract better valuations. Hence, it is essential to make an assessment of the off roll and outsourced staff involved in a telecom operation to ascertain the true operational efficiency and real manpower cost. Brand value: In most cases, where the role in valuation acquisition is for majority control, the foreign investor is likely to introduce its own brand in India instead of local brand. Hence, generally no value is placed on brand related expenditure amortised or any goodwill. However, where the investor takes minority stake and the brand stabilised by the controlling local partners has become popular, brand value plays an important Better margin possibility: Across Asia-Pacific, be it China, Indonesia, Philippines, Thailand or Australia, operating margins (EBITDA) average 40% - 60%, which are considerably higher than the mid-30% for Indian telecom operators. The EBITDA margin of Bharti Airtel at 37% is the highest among all telecom operators whereas for other operators it ranges from 11% to 25%. Thus, the scope for enhancing margins is fairly significant in Indian market since Government levies, licence fees, etc. are likely to come down to give further fillip to teledensity. The Government is also providing Universal Service Obligation (USO) support to operators to expand their network in rural areas. The foreign investors continue to look at India to spread their market. In the initial years, the number of operators in each circle were limited to four which was a major entry barrier. Further the entry fee for acquiring a licence was also high. But over the years, the DoT has been consistently liberalising entry norms and making market access easier for foreign investors with the ultimate objective of benefiting consumers. THE VALUATION OF A TELECOM LICENCE George Bernard Shaw had once said, “Economists know the price of everything, but the value of nothing.” This saying is aptly reflected in case of telecom valuation also. The acquirer pays hefty valuation to acquire an entity and the “Business value” placed is much higher than “Accounting value”. The local promoters strive hard to enhance the enterprise value of their project by adopting a multi pronged strategy. This involves a careful incubation of network across the entire
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circle, hiring a strong management team, installing robust billing system, well oiled channel partner network and above all, an aggressive selling strategy to build a critical mass of customer base. In their aggression to inflate enterprise value, some operators end up creating “phantom subscribers” to attract better valuation. Phantom subscribers refer to low value prepaid cards, which are sold by channel partners to unwilling end users. These cards are not likely to yield much revenue to the operator, but just retained as customers to show an inflated subscriber base and fetch higher valuations. The Investment banker has to decide what is being valued – a) Whether its a valuation of company’s equity or its assets; b) Whether the company is being valued as a going concern with all its assets and liabilities or is under liquidation; or c) Is it a valuation of minority interest or a Controlling stake; d) Whether the valuation of entity on per sub base is appropriate; e) Whether the EV/EBITDA ratio is in line with Industry trend. The list of these factors is endless. Enterprise value (EV) refers to the market capitalisation of a company plus debts. When an investor acquires a company, it takes over not only the assets of the company, but also assumes the liability to pay the existing debts and liabilities of the company. Thus, Enterprise value is the sum total of all fair value of assets and the liabilities of the acquired entity. The key performance metrics to evaluate the EV are:

a) EV / EBITDA ratio: This ratio reflects number of years the unit has to yield operating profit (EBITDA) to return the basic investment made by the Investor. This ratio is in the nature of PE ratio from the viewpoint of a retail investor and varies from Industry to industry. In telecom Industry, most of the deals struck in the past couple of years have been at EV/EDITDA ratio of 6-10 times. b) EV/Revenue Ratio: This ratio indicates number of years required to generate revenue to return the investment price paid by the acquirer. In one way it can be likened to pay-back period. EV/Revenue ratio is on an average five or less. c) Per subscriber EV (EV/number of acquired
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subscribers): This ratio represents value placed by the acquirer on subscribers acquired along with complete network and infrastructure. Smart acquirers on the lookout prefer to pay a premium for taking over an existing operation say US$ 450 per subscriber as against network rollout which costs even less than 1/3rd cost @ US$ 100. As we would see later, the per subscriber rate varies from US$ 400 to US$ 1000. A company earning higher Average Revenue Per User (ARPU) is likely to command better per subscriber rate. A better rate is also dependent on other factors like Churn ratio, VAS revenue, type of circle, average life cycle of customer, subscriber acquisition cost, quality of customers etc. An indicative Enterprise value can also be computed by multiplying the subscriber base of the company with the per subscriber rate. For example, if the subscriber base of a telecom operator is 1,00,000 customers and the applicable per subscriber rate for this categor y of operator is US$ 400, then the indicative enterprise value will be US$ 40,000,000 (US$ Forty million).

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Major M&A deals in Indian telecom sector RECENT PARTNERSHIPS, MERGERS & ACQUISITIONS NTT DoCoMo takes stake in Tata Teleservices $10 bn. New GSM license holders In January 2008 the Department of Telecommunications allocated 2G GSM spectrum for 120 circles to nine applicants—Unitech, Datacom (Videocon), Loop (BPL), Shyam, Idea, STel, Spice, Swan and Tata Teleservices. This allocation based on a first-come first-serve basis and the subsequent second-hand deals where some global major acquired stake in the new allotee companies valuing them much higher than the license fee sparked major controversy. Currently there is a proposal under discussion to ban dilution of promoter’s equity in a company for 3-5 years. Telecom Infrastructure (Tower) consolidation Mobile subscriber base is expected to touch 500 million by 2010 for which at least 3.8 lakh more towers are required. In a bid to tap this opportunity, telecom players have demerged their infrastructure into separate tower business to
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unlock the value by selling minority stake. Reliance Telecom Infrastructure (RTIL) and Swan Telecom are in advanced talks for a multi-year infrastructure sharing deal. RTIL, which has about 47,000 towers is the third largest telecoms infrastructure company after Indus towers (85,000 towers) and Bharti Infratel The first M&A deal in India was the sale of Mumbai licence by Max group to Hutchison Whampoa group of Hong Kong. The deal fetched over half a billion dollars for Max group and was touted as a major success for Indian entrepreneur in telecom venture. This followed a series of M&A in subsequent years as stated hereunder. Some of the other high profile deals were Vodaphone’s acquisition of 10% equity in Bharti in 2006 for US$ 1 billion, Maxis acquisition of Aircel at enterprise value of US$ 1 Billion, Birla Group’s acquisition of Tata’s stake in Idea Cellular. Interestingly some of the high profile investors who had sold their stake around year 2000 are now reentering India like Telekom Malaysia (exited India in 2000 from Kolkata licence and recently acquired 49% stake in Spice Telecom) and Vodafone (exited India in 2003 from RPG Cellular Chennai and recently acquired stake in Bharti). In April 1998, Max group had sold its stake in Mumbai licence to Hutchison Telecom for US$ 560 million. Somewhere along the way Max group again picked up a small stake of 3.16% in Hutch and resold it to Essar Group in October 2005 for US$ 147 million. Max India has staged another comeback in Hutch by acquiring an 8.33% from Kotak Mahindra Bank for Rs. 1,019 crore in 2006. This second return to the telecom business reflects the buoyant conditions in tele-com sector. The valuation of state owned Bharat Sanchar Nigam Limited (BSNL) is estimated to be US$ 30 Billion one of the highest in India. On a global scale, China Mobile has emerged as the world’s most highly valued telco with enterprise value of US$ 131.46 billion, followed by Vodaphone at US$ 123.11 billion as on July 2006. From the table, readers can find that average valuation per subscriber ranges from US$ 400 to US$ 550 which in turn is based on a variety of factors including Average ARPU, type of circle, competition in the circle, Category of operator—whether only a Mobile service provider or an integrated telecom player (like Bharti and Reliance) etc. Valuation is generally lower in case the acquirer takes a minority stake as against controlling stake. Similarly, valuation also suffers if the target company is not listed and hence has lower liquidity (as in case of Idea, Hutch etc). As a thumb rule, suggested by one economist, the differential for non liquidity of non listed entity could be as high as 20% -25%. While most of the GSM
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operators resorted to M&A in order to achieve growth, Reliance Infocomm did not go for inorganic route and instead rolled out a green field project. This was also due to the fact that Reliance had adopted CDMA technology and was able to roll out the network at much lower costs. In 2008, Tata communication expanded its global VPN service to china through an NNI(Network to Network Interface) agreement with Chine Enterprise Netcom Corporation, a value added telecommunication services and integrated IT solution provider and subsidiary of CITIC (Chine International Trust and Investment Corporation), allowing them to serve their many global and India MNC customers who require a single scalable and reliable global VPN with deep reach into both India and Chine and broad reach around the world.

Idea Cellular takeover of Spice Telecom On 25th June 2008 the country’s fifth-largest mobile operator in terms of subscribes, Idea Cellular announced the acquisition of B K Modi-owned Spice group’s 40.8 per cent stake in Spice Communications for Rs. 2,716 crore. Idea acquired the stake at Rs. 77.30 a share. The Birla group company, Idea Cellular said it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares for every 100 spice shares held. It will also pay an additional Rs.544 crore as non compete fee.
Idea Cellular Ltd Dec 2008 Locked –in-shares Aditya Birla Nuvo Ltd Tmi Mauritius Ltd Birla Tmt Holdings Pvt Ltd Promoters Aditya Birla Nuvo Ltd Birla Tmt Holdings Pvt.Ltd Hindalco Industries Ltd 34 | P a g e No. of shares % of total shares 16.08 14.99 0.92 27.02 9.15 7.37

49,85,97,140 46,47,34,670 2,84,74,968 83,75,26,221 28,35,65,373 22,83,40,226

Grasim Industries Ltd Igh Holding Pvt Ltd. Public Shareholding Tmi Mauritius Ltd. P5 Asia investments Maurities Ltd Monet Ltd Hsbc Global Investment Funds A/C Hsbc Global Investment Funds Mauritius Wagner Ltd Lic of India Money Plus Lic of India- Market Plus

17,10,13,894 24,91,498 46,47,34,670 33,00,00,000 8,95,00,000 8,42,50,000 6,15,00,000 3,93,60,382 3,56,45,682

5.52 0.08 14.99 10.64 2.89 2.72 1.98 1.27 1,15.

Idea Cellular Overview Idea Cellular, the leading GSM mobile services operator has licenses to operate in all 22 service areas of India with Commercial operations in 11 service areas. With a customer base of over 26 millions, it runs operations in Delhi, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh (East), Uttar Pradesh (West) and Uttaranchal, Madhya Pradesh and Chhattisgarh, Gujarat, Maharashtra and Goa, Andhra Pradesh, and Kerala, hold spectrum for Mumbai, Bihar, Orissa, Tamil Nadu (including Chennai) and Karnataka and licenses for the remaining six service areas. With the planned launch of services in Mumbai, Bihar, and Jharkhand in Q3 2008, and Orissa and Tamilnadu (including Chennai) towards the end of the calendar year, idea’s footprint will soon cover approximately 90% of India’s telephony potential. Idea is listed on the National Stock Exchange (NSE) and the Bombay stock Exchange (BSE) in India. Idea Cellular is a part of the US $ 28 billion Aditya Birla Group. The group has a market cap in excess of US $ 31.5 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities. Refer to Exhibit 8.4 for financial results summary of Idea Cellular. Spice Telecom Overview Spice Telecom is the brand name of Spice Communications Limited, a mobile phone service provider in India. Spice Telecom was operating in the states of Punjab (India) and Karnataka i.e. in 2 circles of 23 Telecom Circles of India. Spice Communications Limited was promoted by Dilip Modi of Modi Wellvest Private Limited, which owned 40.80% of the Company. Telekom Malaysia Berhad owns 39.20% through TMI India Limited, Mauritius. TMI India Limited is a wholly owned subsidiary of TM’s International investment holding company TM International. Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private Limited company. Spice subsequently became a deemed public company under Section 43(1A)
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of the Companies Act, 1956 of India with effect from 1 April 1999 and its name was changed to Modicom Network Limited. Spice assumed its present name via a fresh Certificate of Incorporation dated 3 December 1999. With the addition of the word ‘ Private’ in Spice’s name under Section 43 (2A) of the Companies Amendment Act, 2000 of India, Spice’s name was changed to Spice Communications Private Limited with effect from 28 October 2003. On 28 December 2006, Spice was converted into a public limited company and assumed its present name. Spice currently offers mobile telecommunication services in the Punjab and Karnataka states of India. As of 30 April 2008, Spice had 4.4. million subscribers representing a 1.7% market share in India, and was the second and fifth largest mobile telecommunication service provider within the Punjab and Karnataka circles respectively. Spice was listed on the Bombay Stock Exchange Limited on 19 July 2007, and on the National Stock Exchange of India Limited on 16 June 2008. Refer to Exhibit 8.2 for financial results summary of idea Cellular.

Spice Communication Ltd. Type / Name of holder Dec 2008 Locked –in shares Idea cellular ltd. Promoters Tmi India Ltd. Idea Cellular Ltd. Green Acre Agro Service Pvt. Ltd.

No. of shares

% of total shares 20


33,80,63,250 28,34,89,350 6,07,68,043

49 41.09 8.8

TM International Overview TM International (‘TMI’) is an emerging leader in Asian telecommunications with significant
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presence in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia. In addition, the Malaysian-grown holding company has strategic mobile and non-mobile telecommunications operations and investments in India, Singapore, Iran, Pakistan and Thailand. The Group’s mobile subsidiaries and associates operate under the brand name ‘Celcom’ in Malaysia, ‘XL’ in Indonesia, ‘Dialog’ in Sri Lanka, ‘AKTEL’ in Bangladesh, ‘HELLO’ in Cambodia, ‘Spice’ in India, ‘M1’ in Singapore, and ‘MTCE’ in Iran (Esfahan). Listed on Bursa Malaysia, TMI is among the top ten biggest public listed companies in Malaysia by market capitalization, and the first listed pan-Asian pure cellular service provider in the region. The Group, including subsidiaries and associates, has over 44 million mobile subscribes in Asia, putting it among the largest mobile telecommunication providers in the region by turnover. The Group has approximately 13,000 people under employment in ten countries. Synergies Anticipated This deal gave Idea Cellular another 44-Lakh subscribers of Spice Communications in Punjab and Karnataka circles in addition to own 2.6 crore subscribers in 11 circles. The acquisition of Spice gives idea the much needed headway in Punjab and Karnataka – states that account for more than 10 per cent of India’s wireless subscribers. “ It will give us incumbent advantage in both these circles, “said Mr.Kumar Mangalam Birla, Chairman, Aditya Birla Group. “ We are now in the big league of telecom players in the country.’’ Added Mr Birla. Idea Cellular would get hold of crucial spectrum of licences recently got by Spice for operations in four more circles including Delhi, Tamil Nadu & Andhra Pradesh. The primary benefits of this transaction are: Idea gains entry in the contiguous wireless markets of Punjab and Karnataka, which account of 11% of India’s total wireless subscribers. Spice, a pioneering operator, delivers a strong running start in Punjab and Karnataka. 4.4 million subscribers as at 30 April 2008,equivalent to a 15.1% market share in the two service areas. # 2 wireless operator in Punjab with a 22.3% market share. Idea to consolidate its position with its all-India subscriber market share increasing from 9.5% to 11.1%. Importantly, Idea would be No.1 in 3 service areas, in the top 3 in 5 more service areas,
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and with a rapidly improving share in all its other operating service areas. Idea’s operations in the 900 MHz GSM spectrum band will increase from the current 7 services areas to 9 service areas, driving scale economies and operational synergies resulting in lower operating and capital expenditure. TMI, an emerging leader in Asian telecommunications with over 44mn subscribers and a presence in 10 countries, will grow its presence in the Indian telecom sector and become substantial shareholder in Idea. The primary benefits of TMI’s investment into Idea are: Idea is currently rolling out operations in Mumbai, Bihar, Orissa, and Tamil Nadu (incl. Chennai) services areas, and will also roll out in the remaining service areas of Kolkata, West Bengal, Assam, North East and J&K, after receipt of spectrum. This investment will support idea’s aggressive growth plans. Idea and TMI will develop areas for business co-operation to leverage TMI’s strong presence in 10 principal Asian Market, including neighboring countries like Sri Lanka & Bangladesh where TMI is a market-leader. TMI’s experience of operating 3G in similar markets will be of value to Idea, as also the convergent interests of the 2 companies in areas extending from international traffic to roaming, to mobile value added services etc. Idea and TMI would sign a Business Cooperation Agreement to this effect. Mr. Kumar Mangalam Birla, Chairman, Idea Cellular Limited said: “ This announcement marks a major step in the Aditya Birla Group’s telecom business. Idea has performed strongly, but I believe its best lies ahead. Idea will benefit operationally by leveraging synergies with TMI which will be a significant shareholder in our Company. Further, I look forward to welcoming colleagues from Spice into the Idea family, and indeed the over 100,000 strong Aditya Birla Group. Together we aim to grow a top class organization in the service of our subscribers”. Mr. Sanjeev Aga, Managing Director, Idea Cellular Limited said: “ The strategic import of this move travels beyond Punjab and Karnataka. By the end of the year the idea yellow will increasingly colour the Indian landscape.” In addition, the resulting infusion of funds from TMI will (Rs. 7300 crore) will support the capital requirement for Expansion from 11 service areas to PAN India by CY 09. Capex plan of ~ Rs. 65bn for FY 08-09 and ~ Rs.60 bn for FY 09-10 for existing service areas and new launches (excluding 3G)
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Current Status Idea has launched its brand in Punjab on Dec 19,2008 and in Karnataka on Dec 29,2008. It has also announced plan to invest 300 cr. In Karnataka to expand its reach and services. Deal Structure The takeover deal was a complex one. Idea will be acquire the Modis’ 40.8% stake in Spice (for Rs.2,720 crore) at Rs. 77.30 per share. According to the complex agreement, TM International (TMI), the Malaysian telecommunication giant holding 39.2 per cent stake in spice, will swap its stake for Idea shares and will be offered 469 million shares by way of preferential allotment of shares in Idea at a price of Rs. 156.96 a share. This will take TMI stake in idea to 14.99 per cent. The TMI will invest Rs.7,500 crore for buying this stake in Idea Cellular and a part of these funds will be used to buy Modi’s stake. The balance Rs. 4,500 crore will be used to retire the bebts in Idea’s books, Birla said, TMI will get one seat on Idea’s board. Spice holding structure before the acquisition was: 40.8% Modi Group (Promoter) 39.2% TMI 20% Other public shareholding. Spice holding structure as to today is (Refer to Exhibit 8.1 for details): 49.9% Promoter Group including Idea Cellular 49.0 TMI 1.1% Other (public ) Current idea holding is as follows (Refer to Exhibit 8.3. for details): 49.13% Promoter and Promoter Group 14.99% TMI 35.88% Other public shareholding including institutions Planned Merger Idea Cellular has said it would merge Spice with itself through a share swap where Spice shareholders would get 49 Idea shares for every 100 Spice shares held. However at the current (Feb 12,2009) price levels: Spice Communication Stock Price = Rs.77.0 Idea Cellular Stock Price = Rs. 49.15 At current prices, Spice communications shareholders will lose when the share swap happens.
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One reason for the high price for Spice could be that only 1.1% of its shares are currently floating and news reports suggest a lot of speculative buying and selling is happening. 20% open offer The SEBI Takeover Regulations at the very rudimentary level is all about giving the public shareholders an opportunity to get the same price which a shareholder – usually a promoter – gets on a negotiated deal. The regulation ordain an acquirer 20 per cent of the stake from the Public after having acquired 15 per cent or more of the same from the promoters. As per the SEBI SAST (Substantial Acquisition of shares and Takeovers) Regulations, in a listed company’s acquisition if promoters sell out to a new company, public shareholders are also entitled to the same per share amount. As per the Idea –Spice deal, Idea launched the mandatory 20% open offer for the spice shareholders, jointly with Telekom Malaysia International (TMI) at Rs.77.30. The open offer commenced on 17th Septemeber 2008 and closed on 6th October 2008. Following the successful completion, the above 40.8% stake which was hitherto held in an escrow account pending open offer formalities stands transferred to Idea as of date. Non Compete fee Sometimes, these deals involve a non-compete fee

, a sum payable to the promoter for not re-

entering the same field for a certain period. That the fee is discretionary is evident from not all deals having a non compete component. The logic for the non-compete is that the promoter has certain unique skills and possesses industry knowledge, and if he were to start the same business again, he could become a formidable competitor. That entitles them to a payment which is not given to minority shareholders, because obviously they do not possess these skills. What this means is that in the above cases, the public shareholders got a lesser amount than the promoter. Regulations 20 (8) of the SEBI SAST says: “ (8) Any payment made to the persons other than the target company in respect of non-compete agreement in excess of 25% of the offer price arrived at under sub-regulations (4) or (5) or (6) shall be added to the offer price.” Idea will pay approximately Rs.544 crore as non-compete fee to the Spice Group. This is an addition to the Rs.77.30 per share that the Idea will pay for acquiring 40.8% stake (Rs. 2,720 crore) . Hence the total payment to Spice Group is Rs.3,264 crore (Rs. 2,720 crore+ Rs. 544 crore). In the absence of non compete fee the Idea group would have to offier a higher per share price to Spice Group and as a result to other shareholders (for 20% open offer).
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Valuation A back- of -the envelope estimate of valuation of Spice can be arrived at based on the (Enterprise Value) / (Number of subscribers) multiple. Idea has paid Rs. 2716 Crore for 40.8% stake in spice. Hence the total enterprise value (100%) of Spice will be Rs. 6657 Crore approximately. With a subscriber base of 44 lakh subscribers, the Enterprise value per subscriber comes out to be approximately Rs. 15,129 or approximately $ 300 (Assuming USD 1 = Rs. 50) as per this transaction. This is on the lower side as generally EV per subscriber ranges between $ 400 to $ 550. One of the reasons for this low valuation could be that Spice is present on only 2 circles. Spice has also underperformed as compared to other players . It has a lower EV/EBITDA multiple, ROCE and EV/Subscriber. A comparison of these metrics (in January 2008) across players is shown belowxvii.. Summary The drivers for this deal are as follows: TMI Grow presence in growing Indian Telecom Sector via ownership in a large Indian telecom operator. Idea Cellular. Inorganic expansion in Karnataka and Punjab circles. Infusion of funds from TMI to support Idea’s aggressive growth plans. Technical expertise from TMI including 3G operations Leverage TMI’s strong presence in 10 principal Asian markets, including neighboring countries like Sri Lanka & Bangladesh where TMI is a market-leader. Spice Communications Being a small player in a highly competitive market requiring huge investments and economies of scale is not sustainable.

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Reliance MTN merger failure MTN Group MTN was launched in 1994. It has a market value of about $ 38 billion and more than 68 million customers across 21 countries in Africa and the Middle East. MTN is operating services in Africa, Iran, Afghanistan and Syria. These are high potential markets. Some analysts have estimated that MTN has potential to accumulate up to 240 million subscribers in these markets by 2012. Reliance Communications Reliance Communications Limited founded by the late Shri Dhirubhai H Ambani (1932-2002) is the flagship company of the Reliance Anil Dhirubhai Ambani Group. The Reliance Anil Dhirubhai Ambani Group currently has net worth in excess of Rs. 55,000 crore (US $ 14 billion), cash flows of Rs.11,000 crore (US$ 2.8 billion), net profit of Rs. 7,700 crore( US$ 1.9 billion) and zero net debt. Rated among “Asia’s Top 5 Most Valuable Telecom Companies”, Reliance Communications is an integrated telecommunications service provider. The company, with a customer base of over 48 million including over 1.5 million individual overseas retail customers, ranks among the Top over 250 global carriers. Reliance Communications has established a pan-India, next generation, integrated (wireless and wireline), convergent (voice, data and video) digital network that is capable of supporting best – of-class services spanning the entire infocomm value chain, covering over 15,000 towns and 400,000 villages. Reliance Communications owns and operates the world’s largest next generation IP enabled connectivity infrastructure, comprising over 165,000 kilometers of fibre
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10 Asian Telecom companies by number of customers. Reliance

Communications corporate clientele includes 1,850 Indian and multinational corporations, and

optic cable system in India, USA, Europe, Middle East and the Asia Pacific region. Relieance Communications (previously Reliance Infocomm) was formed in 2005 when Anil Ambani and Mukesh Ambani carved up the Reliance empire, which included telecom, oil, and financial services, after a rivairy developed between them when their father died in 2002 and left no will. When lacking a will, the sibs developed some ill will toward each other. An agreement was hashed out by their mother,under which Anil Ambani took the telecom, energy, and financial services assets while Mukesh Ambani took the oil and petrochemical business to form Reliance Industries. Reliance has rapidly become a global wireline and wireless powerhouse, having acquired companies such as U.S. –based Yipes Enterprise Services in recent years Reliance in talks with MTN: Exclusive negotiationsxxi As soon as Bharti backed out of MTN, on May 26th Reliance Communications Ltd. (RCom) stepped in, and the two have now entered “ exclusive negotiations for a period of upto 45 days with respect to a potential combination of their businesses.” Shri Anil Dhirubhai Ambani, Chairman of Reliance Communications, said “ We are delighted to be engaged in exclusive negotiations with MTN Group to achieve a partnership , which would growth, creating substantial long term shareholder value .” The discussion were around a broad framework, where MTN would take up to 74 percent in Reliance Communications and Reliance Chairman Anil Ambani could swap between 43 and 63 percent of his holding, depending on the success of an open offer, to become the biggest shareholder in MTN. Morgan Stanley had estimated an open offer for Reliance Communications shareholders could be at 613 rupees per share, a 7 percent premium to the stock’s closing price on May 23, the last day they traded before the firms said they were in talks. The Reliance-MTN deal was complicated by restrictions on foreign ownership in India and South Africa and political sensitivities in each country about which company would be dominant. Under South African rules, buying 35 per cent of a company obliges the purchaser to make an open offer for the rest. India limits foreign ownership in the telecoms sector to 74 per cent and a purchase of 15 per cent of a company triggers a mandatory open offer for another 20 per cent. Mr.Ambani owns 66 per cent of Reliance Communications, valued at about $ 520 billion, and
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provide investors,

customers and the people of both companies a unique and global platform for exponential

intends to exchange this under a mechanism, yet to be agreed, for a 34.9 percent stake in MTN. The deal would represent the biggest foreign direct investment in India to date and Mr.Ambani would become the single largest shareholder in the South African company. The deal could involve cash as well as equity to avoid breaching the restrictions - especially on Reliance, which is already 11 per cent foreign-owned. Mr. Ambani is reported to be offering to buy MTN’s shares at a significant premium in exchange for management control. Economic Times reported that the two sides were negotiating the ratio for a share swap. Mr.Ambani was pushing for 66 MTN shares for 100 Reliance ones, while MTN wanted 51 MTN shares for 100 Reliance shares, it said. Some proposed details of the deal were; Deal expected to be a part-cash and part-equity deal with a west Aisa-based sovereign wealth. It might commit close to $ 10 billion to ADAG. A special purpose vehicle will be created for this deal with ADAG, which will have the controlling stake. Deal needs approval of black empowerment group as a non-South African company will have majority stake. Sources said the other equity holders of the SPV are expected to chip in around $ 4 billion. Given MTN’s current valuation of nearly $ 28 billion, a deal is expected to be done at a valuation of around $ 35 billion, assuming a 20% premium. This means, the SPV may need to pay around $ 11-12 billion for a 35% stake . Given the other equity holder’s contribution of $4 billion, RCOM will have to chip in around $7 billion to $8 billion. This is likely to be funded by a mixture of internal accruals and debt. The exact amount of debt depends on the amount of equity which RCOM is willing to put in. The acquisition cost will go up if RCOM is allowed to hike its stake further to 40%. Both the parties are yet to arrive at the exact deal size which would depend on the premium, sources said xxiii . Lombard Odier Darier Hentsch & Cie, promoted by Lebanon’s former prime minister Najib Mikati, holds 9.82 per cent, Newshelf 664 (Proprietary) Ltd holds 13.06 per cent and directors and subsidiaries hold 0.03 per cent. The public and financial institutions hold the rest. The Failure: Sibling Rivalry On June 12th 2008, in a male fide effort to disrupt the talks, Reliance Industries Ltd (RIL), part of the Mukesh Ambani group, sent a communication to MTN Group, making a claim of an
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alleged right of first refusal to buy the controlling stake in Reliance Communications Ltd. (RCOM). The letter further said that RIL will take legal action against RCOM and also make exemplary damages against MTN. Reliance communications spokesperson refuted the claim saying “ RIL’s claim is legally and factually untenable baseless, and misconceived.” RIL based its claim on an agreement of January 12, 2006, which was unilaterally signed only by RIL’s officials, when RCOM was under RIL’s control, under a procedure which the Hon’ble Bombay High Court, vide its judgement dated 15th October 2006, has held to be “unfair and unjust.” In July 2008, Reliance Communications Ltd. (RCom) and African operator Mobile Telephone Networks (MTN) have walked away from M&A talks” owing to certain legal and regulatory issues,” namely an ongoing feud between Reliance chairman Anil Ambani and his brother Mukesh Ambani, chairman of Reliance industries. On July 9th 2008, RCOM and MTN agreed to continue their negotiations in relation to such potential business combination, and have extended the period of exclusivity until 21st July 2008. However, on July 18th 2008, the two companies mutually decided to allow the Exclusivity Agreement to lapse citing certain legal and regulatory issues. Summary The Reliance-MTN deal would have created a $66 billion emerging- markets telecoms group with operations in about two dozen countries and about 120-million subscribers. This episode highlighted the following issues: Such cross border deals need to be sensitive to the issue of national pride and control of the Companies. Who controls which entity and ultimately who is taking over whom is an important consideration in this kind of merger of equals. Many Indian businesses are owned and controlled by promoter families. The issue of loss of control and the difference of opinion among family members is an important consideration for such deals. This came to fore in the Reliance MTN deal.

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M&A IN INDIAN TELECOM SUCCESS or FAILURE A merger to be successful should create new capabilities, offer better value proposition to the combined entity’s customers and above all enhance shareholders’ value. Empirical studies prove that M&A brings with it the advantage of synergies to the operators and in majority of cases results in immense increase of shareholders value. M&A in Indian telecom industry has also benefited other stakeholders i.e. customers, Indian economy and society at large. M&A have acted as catalyst to stupendous growth in teledensity to 14% in 10 years (1995 -2006), as against 2% in 48 years (1947-1994) of independence. According to a study conducted by the reputed international agency, OVUM on “The economic benefits of mobile services in India” on behalf of Cellular Operators’ Association of India, it was found that mobile sector has generated 3.6 million jobs directly or indirectly and the same will rise by at least 30%. Similarly the Mobile industry contributes over Rs. 145 billion per annum by licence fees, spectrum fees, import duties, taxes, etc. Taking the OVUM findings on the base of 48 million subscribers in January 2005, COAI has estimated million jobs and over Rs. 500 billion annual revenue to the Government. From foreign investors’ perspective, they have immensely gained from investing in India. As per recent news, out of Hutchison’s total global revenue of Rs. 13440 crores, over 45% comes from India which is no mean achievement. Indian promoters who commenced their telecom operation on a small scale in few circles, gained immensely on sale of their stake to foreign investors. In fact, some of the world’s largest telecom companies, who have left India with a bitter experience a few years ago like British Telecom, Vodaphone, France Telecom, Telekom Malaysia, Telestra Australia are all set to return even as minority shareholders on witnessing telecom success story. ACCOUNTING ISSUES The accounting issues arising in any M&A include merger accounting by the acquirer, treatment of goodwill and reserves of the acquired company, treatment of Goodwill/capital reserve arising on M&A, choice of the method of accounting – pooling of interest or
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that at a

mobile subscribers base of 200 million in 2007, the industry would contribute over 10

purchase method, accounting for share of profits/losses and dividends for investments made in Indian operating company. Accounting Standard 14 classifies amalgamations (also referred as business combination) into two categories for the purpose of accounting a) amalgamation in the nature of merger and b) amalgamation in the nature of purchase. AS 14 provides that in case of amalgamation in the nature of merger, pooling of interest method is to be applied, whereas for other cases purchase method is to be applied. This standard is appli-cable only if two or more entities are merged to form a new entity. In case of takeover of majority interest which does not yield to formation of a new merged entity, AS 14 is not applicable. In order to apply pooling of interest method (in case of merger scenario) five conditions have to be fulfilled i.e. a) transfer of all assets and liabilities to transferee company b) 90% of shareholders of transferor company should become shareholder of transferee company c) Consideration for purchase should be paid by issue of equity share of transferee company d) Continuation of business of the acquired company and e) No adjustment to be made for assets and liability taken over. Since in most of the telecom acquisitions, conditions No. (B) and (C) are generally not applicable, the purchase method is applied for takeovers.

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IFRS 3 prohibits pooling of interest method and permits only purchase method of accounting

by the acquirer in M&A. With issuance of IFRS 3, IAS 22 stands withdrawn. The significant changes

introduced by IFRS 3 are as follows: In June, 2001, the US Financial Accounting Standards Board (FASB) adopted two new accounting standards: FAS 141 ‘Business Combinations’ and FAS 142 ‘Goodwill and Other Intangibles’ which was applicable for business combinations from 1 July 2001. These introduced major changes in US accounting as follows: a ban on pooling (i.e. merger accounting); all business combinations are to be treated as purchases (i.e. acquisitions); no amortisation of goodwill and in most cases, annual testing for goodwill impairment testing rather than amortisation, for acquired intangible assets with indefinite lives. Takeovers in Indian telecom industry have seen following common accounting and financial issues: In telecom acquisitions, goodwill is stated at cost/book value less accumulated

amortisation and is amortised on straight-line basis over the remaining period of service
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licence of the acquired company from the date of acquisition. For example, say A Limited acquired B Limited at a purchase consideration of US$ 1.5 billion, as against the book value of US$ 1 billion on 1s t August 2006. The licence of B Ltd is expiring on 30th July 2016. In this case, US$ 500 million is the goodwill in the books of A Limited and will be amortised over next 10 years being the balance period of licence of B, on SLM basis, In case of change of brand and launch of ten off fully. For example, when Hutchison finally decided to introduce Hutch Brand on consolidation of its operations across India, it had to write off all the local brands like Orange, Fascel, Command etc which were am-ortised earlier. Major write off of debts is also seen. For example, upon demerger of Reliance Infocomm from Reliance Industries Limited, over US$ 1 billion were written off from the Balance Sheet which included; inter alia, bad debts, receivable etc. Change in key accounting policies of acquired unit in line with the acquirer’s accounting policies, like revenue recognition, treatment of licence fee payment, debtors provisioning, treatment of activation revenue. In many cases, the new operators also junk the existing billing system leading to major write off. Intelligent network (IN) system is the heart for credit monitoring and management of prepaid services. In some cases, IN system of a preferred vendor is installed leading to junking of existing IN system and its resultant write off. TAXATION Following are the major taxation issues in any M&A deals including telecom sector: 1) Carry forward of losses of the acquired company. 2) Capital gains on sale of shares by Indian shareholders. 3) Capital gains on sale of shares by foreign shareholders. Carry forward of losses:

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The Income Tax law relating to carry forward of losses are contained in Section 72, 72A and Section 79 of the Income Tax Act, 1961. While Section 72 provides timeline for carry forward of losses, Section 79 stipulated conditions for carrying forward of losses. Capital gains The capital gains arising from transfer of shares is liable to taxation under the Income Tax Act depending upon the nature of gain, whether it is long term or short term. Section 112 provides for taxation of long-term capital gains (LTCG). However, Section 10 (38) in-troduced in 2004 provides for full exemption from Income Tax for long term capital gains (LTCG) provided a) The capital gain arises on transfer of shares of listed public companies; b) At the time of transfer, the transaction is chargeable to securities transaction tax (STT ). In case of short term capital gains on listed securities (arising in less than 12 months), on fulfilling same conditions, Indian investor has to pay tax on STCG @ 10% u/s 111A. Twelve months holding period is appli-cable only for listed securities, in case of unlisted securities, the minimum holding period has to be 36 months, before it qualifies as long term.

Section 10(23G) This section was introduced in 1995 with an objective of promoting investment in telecom sector by Indian and foreign investors. Telecom operators, whether listed or not were required to get the approval of Ministry of Finance u/s 10(23G) on submission of requisite details. In case a telecom entity was approved under this section, the investors in such entity were entitled, objective of promoting investment in telecom sector by Indian and foreign investors. Telecom operators, whether listed or not were required to get the approval of Ministry of Finance u/s 10(23G) on submission of requisite details. In case a telecom entity was approved under this section, the investors in such entity were entitled, inter alia, tax exemption on long term capital, interest on long term finance and dividend. The approval was given by Ministry of Finance (MOF) on year-to-year basis or for a block of years based on satisfying eligibility criteria
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The Mauritius connection The scenic Mauritius has emerged as the favourite landing point for foreign investors for FDI in Indian telecom companies. Mauritius accounts for more than a third of the aggregate FDI inflows. India’s tax treaty with Mauritius provides exemption from capital gain arising out of Investment in India made by a Mauritius resident company. A common strategy adopted by foreign investors is to hold the shares of Indian operating company through Mauritius based special purpose vehicle (SPV). In case of exit, these SPVs are sold to foreign investors who land in Mauritius. Board level changes are made in such SPV and new investors take control of the SPV and nominate their representative on the Indian telecom company. In such a case, in accordance with DTAA with Mauritius, no capital gains tax is levied on the foreign nvestor. No transfer is needed to be recorded in the register of transfer of Indian telecom company as the same Mauritius SPV continues as a shareholder. Mauritius accounts for more than a third of the aggregate FDI inflows. India’s tax treaty with Mauritius provides exemption from capital gain arising out of Investment in India made by a Mauritius resident company. A common strategy adopted by foreign investors is to hold the shares of Indian operating company through Mauritius based special purpose vehicle (SPV). will take necessary steps to ensure compliance of the proposed guidelines by a) offloading the minimum stake required for listing on Mauritius based stock exchanges and listing of their SPV b) Maintaining office infrastructure and incur operational expenditure as per proposed guidelines. Licence fee on sale proceeds of licence: As per current licensing guidelines, telecom operators have to pay licence fee on Adjusted Gross Revenue (AGR) which includes non operating revenue like revenue from handset sale, Interest revenue etc. There is no clarity whether the sale proceeds of a telecom licence will be included within the levy of AGR and attract licence fee. In this regard, let’s review the case of Shyam Telecom Ltd (a DoT licencee itself ), Holding company of Hexacom (Rajasthan Licence) who sold its Hexacom operation. The following extract from the Annual report of Public listed company Shyam Telecom (Year 2006, page 53) is self explanatory: “The company sold its holding in HIL to Bharti Televenture
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Limited for a consideration of Rs 1751.87 Million. ……With respect to Income arising on transaction referred above, the company based on a legal opinion believes that it is not covered under the definition of Adjusted Gross Revenue, as inter alia, such revenue do not accrue out of operation licenced or require to be licenced by DoT… The issue is covered under generic petition filed by Association of Basic Telecom operators (ABTO) with TDSAT contesting the inclusion of non telecom related service revenue in the AGR which is pending resolution. In view of the legal opinion obtained by the company and the above petition filed by ABTO with the TDAST, the company is of the opinion that no revenue share is payable from sale of above investments and has accordingly made no provisions in its books of accounts.” As the telecom operators consolidate their op-eration, they are likely to utsource more and more operational and financial activities. Chartered Ac-countant firms which have attained economies of scale and have knowledge base, operational skills, IT savvy team, cost effective manpower support are likely to see a vista of opportunity ahead of them in India’s telecom Industry.

Recent trends The world in the last decade has seen a boom in the number of mobile subscribers. Fixed line subscribers on the other hand have remained more or less flat or down with some increase in the developing markets. Figure below shows that the trends of fixed telephone lines in the period 1997-2007. Sector Mobile subscribers on the other hand have increased exponentially reaching a penetration of 49 per 100 inhabitants worldover. Mobile penetration in India is currently around 35%. Internet has caught on in the developed world with penetration reaching 62 per 100 inhabitants in 2007. However, in the developing world internet penetration is still abysmal. In 2007, only 17 per 100 inhabitants had used internet on an average. had used internet on an average. The following figure shows the growth in wireless subscribers in India. The number of subscribers was very small prior to 1998. The sector has exploded since then due to a favorable regulatory environment and intense competition.

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India has one of the lowest average revenue per subscriber (ARPU) rates. The ARPU was Rs. 239 in June 2008x. As more subscribers are added from the rural areas, which represent a majority of the unpenetrated market, ARPU is expected to go down further. This trend is seen in the figure below. The number of internet subscribers in India is on a steady rise. Many of the wireless service providers are also providing internet subscribers in India is on a steady rise. Many of the wireless service providers are also providing internet services to their subscribers. Future opportunities 3G & WiMax Auction of spectrum for 3G services is currently on. 3G offers opportunities for new players to enter the booming Indian telecom market. Better spectral efficiency and high speed data services are some of the advantages that 3G has to offer. However, high license fee, handset costs, and low acceptance rate among consumers may dampen the hype. WiMax offers high speed data connectivity in a radius of up to 50km. It is attractive not only for providing broadband access in urban areas but is also touted as a technology that can bridge the digital divide by providing broadband access in rural areas without the high costs associated with laying cables. Major differences between 3G and WiMax: • WiMax offers better spectral efficiency through OFDM and multiple antenna support. • It offers higher peak rate • It offers variable channel bandwidth on uplink and downlink. It also allows for symmetric uplink and
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• 3G has better mobility support. WiMax mobility is an add on feature and is unproven.

Growth and future of VAS Currently, MVAS in India accounts for 10 per cent of the operator's revenue, which is expected to reach 18 per cent by 2010. According to a study by Stanford University and consulting firm BDA, the Indian MVAS is poised to touch US$ 2.74 billion by 2010. Fortune at the bottom of the pyramid The Indian rural market is going to be the next big thing for wireless telecom providers. With the tele- density in rural areas being still about 10 per cent against the national average of about 21 per cent, there seems to be huge untapped potential for mobile phone penetration in rural India. The government also plans an investment of US$ 2 billion, during 2008 to 2009, for the development of around 100,000 community service centres in rural India to provide broadband connectivity Additionally, by 2010, the government targets • 80 million rural connections • Mobile coverage of 90 per cent geographical area • Internet Protocol Television (IPTV) in 600 towns • Quadrupling manufacture • Two-fold increase in telecom equipment R&D from the current level of 15 per cent.

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CONCLUSION The Indian Telecom industry is one of the most dynamic in the world with an evolving regulatory environment. It is the second fastest growing telecom market in the world after China. The overall tele-density India has reached 44.04% at the end of April 2010. Much of the untapped market is in rural India. ARPU has been declining for most mobile operators over the years as more and more rural customers are tapped. On one hand telecom operators are driven towards specialization and consolidation to achieve economies of scale and improve margins, and on the other hand they are looking to forge partnerships to fund their growth and get operational and technical expertise. In this study I have looked into various Mergers and Acquisitions that have happened in the Indian Telecom Industry. Critics claim telecom mergers reduce competition and promote monopoly. In reality, these mergers are part of a healthy competitive process and would foster innovation and bring benefits to consumers. Finally, the success of a merger hinges on how well the post-merged entity positions itself to achieve cost and profit efficiencies. As Robert C Higgins of University of Washington points out “careful valuation and disciplined negotiation are vital to successful acquisition, but in business as in life, it is sometimes more important to be lucky than smart.” The various drivers for future GROWTH/ OUTLOOK through partnerships and M&A in the Indian telecom industry is summarized below.
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Players from Europe, Malaysia, Japan and Middle-East entering India: second largest in the world after China, displacing the US.

2008 was a

watershed year as India’s subscriber base topped 350 million users to make its network the More foreign participation is expected in future driven by the upcoming 3G and WiMax auctions currently under way. Consolidation and inorganic subscriber growth: In the extremely competitive Indian market, smaller players are finding it extremely challenging to compete with the biggies. The big players too are keen on expending their footprint and acquiring the customer base of these smaller players. Expand global footprint: Indian players are looking to increase their presence in other growing markets like Africa and Sri Lanka. Indian telecom players will continue to look towards other growing markets like Africa and South East Asia by the way of acquisitions and joint ventures. Reduce costs: ARPU for Indian Telecom operators is one of the lowest in the world and continues to fall steadily. Although this is offset by increased subscription, profit margins are decreasing. They are unbundling their core processes and hiving off the infrastructure management operations into separate entities to achieve economies of scale. Bharti Airtel, Vodafone-Essar and Idea Cellular joining hands to set up an independent tower company called Indus Towers is an example of this. More infrastructure sharing is expected in future. The entry of new players such as Swan, Datacom, Unitech, S Tel, Shyam and Loop Telecom may result in many sharing deals in the coming months Funding for growth: Telecom players are also looking to tap into global funds to joint venture. Technical expertise: With the launch of 3G and WiMax operations round the corner, Indian Telecom players will look to tap into global expertise, Idea plans to leverage expertise of TMI in running 3G operations. finance their aggressive growth plans. As part of the Idea-Spice deal, TMI will infuse Rs 7300 crore into the such infrastructure

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REFERENCES * * * * * * * * * * * * * Telecom live. International Telecommunication Union Unbundling the Corporation Harvard Business Review The Handbook of competition Enforcement Agencies 2008. Voice & Data Telestats Idea Cellular (Investor Presentation) The Economic Times Indian Express The Hindu The Hindu Business Line The Hindustan Times Media Statements from i. ii. iii. iv. v. vi vii. viii. ix. x xi xii.
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MTNL BSNL Bharti Airtel Reliance Vodafone Essar Idea Tata Aircel Sistema Shyam Loop Mobile Uninor HFCL

Media Statements from Manufactures

o o o o o o o

Nokia Siemens o Huawei o ZTE o Ericsson o Alu o Nortel o Moto o Alcatel Lucent o o o o Competition Commission of India SEBI TRAI DOT Min. of Finance Min. of Commerce Min. of Company Affairs


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