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June 10, 1998


Local cellular promoters are cashing out

Email this story to a friend. Ask Analjit Singh of Max India how to make money in cellular telephony, and he is most likely to tell you: "It's so easy, just cash out."

For most domestic promoters of celltel ventures, Singh's would appear to be the only route left.

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A combination of factors - low airtime usage leading to less-than-projected revenues and unrealistically high licence fees, necessitating substantially more equity infusion than projected - is forcing changes in equity structure.

For operators in Bombay and Delhi, the impending entry of Mahanagar Telephone Nigam Limited into cellular telephony may hasten the process.

Equity changes have come through in quite a few cellular telephony projects - both in the metros and circles - and all this in the first couple of years of operations.

Last month, Singh decided he has had enough and sold out to his partner, the Hong Kong-based Hutchison Whampoa, for Rs 5.61 billion, giving away a 66.09 per cent stake in the company.

Others who did likewise include the Ruias of Essar, who gave Swiss PTT a controlling stake in Sterling Cellular, but not before they themselves had bought out Sivasankaran a couple of years ago.

The domestic promoter is tight-lipped, but the Swiss are said to have subscribed to the full 3 per cent by way of an additional issue of shares, say those in the know.

The Hindujas, too, have reduced their stake by 40 per cent in ITNL, which holds a 30 per cent stake in Fascel Limited, by selling to Sumitomo Corporation.

Himachal Futuristic Communications Limited has reduced its stake in the venture to the minimum permissible 10 per cent from 51 per cent it held while promoting Fascel.

Changes are afoot in Birla-AT&T, too, with the hunt for a strategic third partner in full swing.

While not everyone has sold off the way Max India or HFCL have done, local promoters have, nevertheless, reduced their equity burden by floating a holding company and divesting in it.

For instance, in BPL Cellular Holdings, which controls BPL's stake in two operating companies - BPL Mobile and BPL US West - the BPL stake is down to 67 per cent, with the rest being held by funds like AIG, AIS and the Commonwealth Development Corporation.

Financiers to these projects point out that few domestic promoters are cash-rich enough to meet fresh equity demands, especially in the circles. A decline in lender comfort only accentuates the need for equity dilution to a stronger partner or perhaps a foreign-investment fund.

Says ABN Amro Bank's structured finance head Ravi Suri: "The nature of the telecom industry necessitates shareholders with deep pockets. Thus changes in ownership structures are more than welcome as existing players will get replaced by those with deeper pockets and a long-term interest in the industry."

Others like BankAm's corporate finance head Sunil Gulati are convinced that in the days ahead, "it is most likely that the entire telecom industry would see two to three dominant players when the dust settles".

Players being named as the most likely long-haul ones in the investment-banking circles include Reliance, Birla, Tata and Bharti.

What is complicating matters further is the impending entry of MTNL into cellular services. With MTNL's entry in the metros, revenue per subscriber, for starters, will dip further putting pressure on loan servicing.

Lenders will force additional equity infusion if fresh loans are sought.

Debt rescheduling will be subject to stiffer covenants.

And rest assured deep-pocketed foreign partners would buy out domestic collaborators to go ahead with the cellular telephony projects.

Most financiers seem to have factored in MTNL as a player in the two metros, notwithstanding the Telecom Regulatory Authority of India order to the contrary, which is being challenged by MTNL in the Delhi high court.

But MTNL's entry will make it all the more tough for Hutchison Max, BPL Mobile, Sterling Cellular and Bharti Cellular.

Deutsche Bank General Manager Ravi Singh, points out: "The entry of MTNL would affect the viability of metro operators who would be breaking even in 1998 after three years of making losses. Even on the principle of equal license fees, an important part would be the timing of MTNL's entry."

Singh says MTNL would have an inherent advantage of existing infrastructure and rights over existing builders/towers, reduced duty rates on equipment and handsets (when private operators started, duty on handsets were as high as 82 per cent), an educated customer base, ease of interconnection, etc.

"Thus the entry has to be at such a time and conditions that as far as possible a level-playing field is ensured," he says.

A study by Deutsche Morgan Grenfell on the advantages MTNL would have cites that the company would achieve a significant synergy in offering mobile telephony as it already has fixed-line operations and can develop its network on existing infrastructure, thus reducing capital costs significantly.

Besides, it will also have the power to cross-subsidise its cellular services with revenues from its fixed-line operations.

Financiers to cellular telephony projects are keen that a 'handicap' by way of license fee be imposed on MTNL too. But most feel that the best way will be to opt for revenue-sharing agreements with private operators too.

Lenders say this can greatly reduce the licence-fee burden of private operators, especially in the initial years of operation.

So, are lenders bothered? Not really. ANZ Investment Bank Assistant Director, Global Media and Telecom Group, Ashok Pandit says "In most project finance non-recourse transactions, the sponsors give an undertaking to lenders to maintain a particular holding in the operating company... like 51 per cent held by the original sponsors till the maturity of the loan. Any change in the ownership structure would require consent of the majority banks. Most banks would give an acceptance if the weaker sponsor is being replaced by a stronger one."

BankAm's Gulati says that promoters who want to stick out would require a long-term commitment: "Many of them do not have a long-term interest or the resources necessary to play successfully in this industry. This has led to frequent changes in ownership structures with financial investors also playing an intermediary role in many cases."

For several Indian promoters of cellular telephony, the writing on the wall is clear - only those with deep pockets will survive. And most appear to have read it.

- Compiled from the Indian media

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