Spice communications may opt for a stake sale

Promoters of Spice Communications Ltd, India’s seventh largest mobile phone company by subscribers, are considering three options for a stake sale in the business, and are in three-way discussions with Japan’s biggest mobile phone company NTT DoCoMo Inc., partner Telekom Malaysia Bhd and local firm Idea Cellular Ltd, a person close to the talks said.
Spice Communications is interested in scaling up its operations to compete more effectively with bigger rivals such as Bharti Airtel Ltd, Reliance Communications Ltd and Vodafone Essar Ltd. The New Delhi firm is owned 40% by industrialist B.K. Modi and family, with 39.3% held by Telekom Malaysia. The rest is held by public shareholders and institutions.
A deal announcement may be made as early as Monday, the person said.
Detailing the discussions, the person said the first option is that a foreign player will buy out Telekom Malaysia’s stake as also a portion of the Modi family’s equity taking control of up to 74% in Spice Communications. The talks for this option are mainly with NTT DoCoMo, this person said.
Taro Ito, a spokesman for the Japanese firm’s international operations, declined comment specifically on which stage the talks were. “We’re thinking of every possibility on the merger but there is no final decision,” Ito said in a phone interview.
“The second option,” the person quoted earlier said, “is for Telekom Malaysia to increase its stake to 74%” by buying out a portion of the Modi stake.
Both these options will require the buyer—NTT DoCoMo or Telekom Malaysia—to make an open offer for at least 20% equity in Spice Communications under Indian laws that say such an offer should be made by anyone buying at least 15% in a listed firm.
The third option, the person said, involved Spice being acquired by Idea Cellular, India’s sixth largest mobile phone services firm by customers.
This option will entail the promoters of Idea buying out the Modi family and public shareholders. If this transaction goes through, promoters of Idea Cellular will likely hold 80% stake in the merged entity with Telekom Malaysia owning 20%.
The Modi family is asking for at least Rs70 per share as the exit price in a potential transaction, the person said. At close of trading on Thursday on the Bombay Stock Exchange, shares of Spice Communications gained Re1 to close at Rs53.50, valuing the company at Rs3,691 crore. By that valuation, the Modi family’s stake is valued at around Rs1,477 crore.
A Mumbai-based telecom analyst, who did not want either himself or his employer to be identified, said the Modi family has been on the lookout for an exit for some months now but that their asking price was very high.
“It is overvalued. Even if a deal happens, the stock will not move further up. Even in the last merger announcement with Idea, Spice was asking for a valuation that Idea was not willing to give,” he said.
“Foreign companies buying into Spice will only buy for a footprint in India.”
Spice Communications runs phone networks in Punjab and Karnataka and has licences for four more states. Any stake acquisition in the company by a foreign acquirer without a presence in India currently will make the acquirer eligible to bid for licences for so-called third generation or 3G phone services. The department of telecommunications is yet to take a final decision on whether or not to allow new entrants to bid for 3G licences or restrict it to existing players.
Sanjeev Aga, managing director of Idea Cellular said he cannot comment on the issue. Shares of Idea Cellular gained Re0.30 and closed at Rs106.95, giving the company a market capitalization of Rs28,185 crore. Spice Communications has more than 4.7 million customers.