Idea & Spice yet to take a call

MUMBAI: Merger or acquisition? This is the billion-dollar question around which hinges the deal between Idea Cellular and Spice Telecom. The two companies, along with Telekom Malaysia (TM) that holds 49% stake in Spice, are yet to work out an amicable arrangement.

While Idea, in which the Birlas own 57% stake, wants to fully acquire Spice, the Modis-promoted company is keen for a merger, sources told ET.

“From a market perspective, a marriage of the two is a perfect fit. But who’s a long-term player is not yet clear,” sources close to the development said. Spice has 2.8 million subscribers, largely high-end, in Punjab and Karnataka circles where Idea is not yet present.

Idea, which listed on the bourses in March this year, has grown through the organic as well as the inorganic route in the past. “They clearly want to acquire Spice. However, the Modis would prefer a merger,” said sources. “As of now, it looks as if it is veering towards an all-stock buy-out by Idea, with the shareholders of Spice holding a minority share in Idea,” said sources, adding that it has not yet been finalised.

While an acquisition of Spice will give Idea a ready entry into two new circles and a good user base, the Birlas are not willing to pay over the top. Spice is said to be quoting a price of more than a billion dollars for the two-circle operation, to which the Birlas are not agreeing.

“We are a fast-growing company and our valuation is definitely higher than a billion dollar,” a Spice executive said. However, going by the fact that promoters of Spice will offload 20% stake in the forthcoming IPO for $150 million, the company’s valuation is $750 million. This remains a bone of contention between the two sides.

Idea, which listed on the bourses in March this year, has grown through the organic as well as the inorganic route in the past. “They clearly want to acquire Spice. However, the Modis are looking at a merger,” said sources, adding that Idea will continue to be an AV Birla group company going forward and there was no question of the company diluting its identity in a merger.

Also, a buy-out of Idea by Spice seems unlikely because Idea is seven times bigger than Spice. AV Birla group officials have earlier said the group will not dilute its stake in Idea below 51%. Idea scrip moved up 2.6% during the day to close at Rs 126.10.

Idea Cellular MD Sanjeev Aga refused to comment. Mr BK Modi also said he could not comment on the matter. Meanwhile, TM has clearly said that it will not exit the Indian market, TM bought 49% stake in Spice in March last year for $179 million.

“We are committed to Spice and once spectrum is available for other circles, we will expand. We also understand that consolidation is inevitable in India and if it works for us, we are open to looking at it,” a top TM official told ET.

“However, for us, it is not about an exit situation. We’d like to play a partnering role with Idea Cellular. We are not going to exit,” the TM official said. Spice applied for spectrum in 20 circles in September last year. It has already received the DoT nod for NLD and ILD operations.

It is too early for the deal to come through as Spice was working on its IPO ahead of any agreement. Sebi has given its approval to the public offering. “We should be opening in the end of June. Merger is not what we are working at right now,” a senior Spice official said.

However, an acquisition after the listing of Spice will become more complicated due to regulatory issues. For the year 2006, Spice recorded revenue of Rs 533.78 crore and EBITDA of Rs 107.86 crore. Its EBITDA margin fell from 23.8% to 20.2% at the end of 2006. The company’s capital expenditure at the end of last year totalled Rs 269 crore.