Idea-Spice deal fails on pricing

Talks between Idea Cellular, India’s sixth-largest wireless operator, and the BK Modi-owned Spice Telecom on a merger have broken down due to differences in price, a person close to the negotiations said. The two sides had held preliminary discussions on the possibility of a merger or an acquisition by Idea three-four weeks ago. Idea, which is present in 11 out of the country’s 23 circles, was keen on expanding its subscriber base. But it baulked at the price being demanded by Spice Telecom.

“Expectations of the Spice management were unrealistic. They were quoting almost twice the value of the company. The merger was called off around a fortnight ago. There is no question of it even after the Spice IPO,” said the person who did not wish to be quoted as he is not authorised to speak. Idea Cellular MD Sanjeev Aga refused to comment. Spice Telecom CMD Dilip Modi could not be reached for comment.

Spice, which offers cellular services in Punjab and Karnataka, had revenues of around Rs 553 crore in 2006. It was looking at a valuation of about $1.3 billion (over Rs 4,300 crore). Idea found it excessive, as Spice does not have a nation-wide presence and continues to make losses.

Analysts say that if Bharti Airtel’s valuation is taken as the benchmark, Spice would command a price of about $1 billion. But Spice is only present in two circles and is a pure-play mobile company compared with Bharti, an all-India integrated operator. Therefore, Spice’s valuation would be at a discount of 30%-35% to Airtel, or about $650 million-$700 million.

Idea officials are also believed to have cited Spice’s weak presence in Karnataka as a dampener. It ranks sixth in the southern state with a share of around 7% despite having made an early start. While most operators have expanded footprint across India after starting with a few circles in the 1990s, Spice has confined to just two circles. It applied for pan-India licences only in September last year.

Idea is present in 11 out of 23 circles and has licences to operate in Mumbai and Bihar where is expects to roll out services as soon as spectrum is allocated. While a merger with Spice would have given it ready presence in two more circles, the price demanded was almost four times Idea would need for rolling out greenfield operations in these two circles. Idea shares gained 0.79% to close at Rs 115.50 on Friday.

The BK Modi group has a 51% stake in Spice, while Telekom Malaysia holds the rest. After the IPO, Telekom Malaysia will hold 39% and the Modis 41%. Another person close to the Modi group said the group had been keen on exiting Spice at a good valuation. “They have been looking for a buyer and while Telekom Malaysia has shown some interest, it will also not pay too high for buying out Modis,” the person, who did not wish to be identified said.