India attracts global notice

06 Sep 2006

With merger and acquisition activity rising, European and Asian telecom companies are staking their claims

As India transforms into one of the fastest-growing mobile markets in the world by adding four to five million new subscribers each month, merger and acquisition activity is on the rise.

Many observers note the Indian telecom market is attracting unprecedented investor interest, with eight M&A deals valued at more than $2 billion completed in the first quarter of '06, compared to just seven transactions reached during the nine previous months.

The recent activity includes:

- Vodafone's 10% stake in Bharti Tele-Ventures for $1.48 billion
- Purchase of Aircel for $1.08 billion by Maxis
- Malaysia Telekom's 49% stake in Spice Telecom for $180 million
- Temasek Holdings' 9.9% stake in Tata Teleservices through its wholly-owned subsidiary Aranda Investments Mauritius.

Total private investment in the cellular mobile sector up until April was estimated at $13 billion, according to the Cellular Operators Association of India (COAI).

The growth in wireless customers is spurring M&A activity in the Indian telecom market as service providers are pressured to step up their customer service levels, according to industry analysts.

'With more than 100 million mobile users, the major challenge today for service providers is delivering adequate customer service,' says Deepak Kapoor, director and leader, of telecom, infotainment and media at PWC. 'And, this is why smaller players are either selling out, roping in a foreign investor or teaming up with a large Indian player.'

Malaysian companies have shown keen interest in moving into the market, with acquisitions plans for the smaller service providers.

Maxis Communications, a leading Malaysian telecom company, after valuing Aircel, a small GSM operator with around two million subscribers, at $800 million, signed a deal that included a cash injection of $280 million. It took a 65% direct stake in Aircel and then formed a joint-venture company with a partner in India that will own the other 35%, giving Maxis an overall holding of 74%. (That's the maximum allowed by the Indian government, which recently liberalized foreign ownership rules for the telecom sector to encourage investment. The previous limit was 49%.)

A similar scenario unfolded in March with Spice Telecom, India's seventh largest cellular phone company with some 1.8 million subscribers. Government-controlled Telekom Malaysia paid $178.8 million for a 49% stake.

'India is the missing piece in Telekom Malaysia's strategy to focus on regional markets closer to Malaysia,' says Yusof Annuar Yaacob, CEO of Telekom Malaysia's international investment arm at the time of this announcement.

The consolidation itch is not confined to smaller players; larger operators, too, are caught up in this game.

The Essar Group, with 1.3 million subscribers in the Mumbai circle, recently called off its deal with Hutchinson and plans to sell its mobile operation to other players. It was one of the largest deals in the Indian telecom market and likely would have gone through had it not been for hurdles from the Indian Department of Telecommunications (DoT) regarding intra-circle mergers. There was also friction between the two partners over an earlier transaction involving Hong Kong-based Hutchison Telecom International and Egypt's Orascom.

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