It was the merger that would have created the largest cellular company in India. When cellular giants Birla-AT&T-Tata (Batata) and BPL Communications signed an agreement in June 2001 to form a joint venture, industry participants were agog with enthusiasm about the prospects for the telecoms industry in India. Everyone assumed it was a done deal and the merger would have accounted for 24% of cellular subscribers covering 44% of the population and 51% of all fixed line telephone users.
A year later, the joint venture is still grounded and is mired in controversy and uncertainty. The merger deal, worth $2.1 billion, would have seen BPL holding a 49.32% take in the new venture with Batata's stake being 50.68%. Last minute jockeying is underway to save the merger, which is unlikely to go through before the deadline. The agreement expired yesterday.
At the heart of the problem lie two issues relating to BPL, the cellular service provider for the states of Maharashtra (including Goa), Tamil Nadu (excluding Chennai but including Pondicherry), Kerala and the city of Bombay. The first issue is the dispute between BPL and its overseas shareholders over their restructured holding in the merged company.
Led by CDC Financial Services, overseas investors which control 40% of the voting rights in BPL through their preferential shares, have blocked the merger and filed a lawsuit against BPL. The Supreme Court, however, has ruled in favour of BPL stating that CDC, as a foreign investor, would not be able to hold more than 49% in the new merged company as per restrictions under Indian law. The dispute is now under arbitration between the two parties.
The other issue is the sale of BPL's stake in the Maharashtra circle, a pre-condition for the merger to go through. BPL has been unable to offload its stake because of lack of interest from other players. Bharti was recently awarded a licence in the Maharashtra circle. The only telecom firm not having a licence in the Maharashtra circle is Hutchison, and according to observers, is not interested in buying BPL's stake because of differences over valuations. Observers also believe that Hutchison is in no hurry to buy the stake.
Industry statistics support that view as Hutchison's Indian cellular operations figured among the top players in the subscriber league tables at the end of May 2002. Of a total of 6.99 million cellular subscribers, Bharti accounted for 1.84 million followed closely by Hutchison with 1.42 million subscribers.
BPL's total subscribers totaled 932,000 while Idea Cellular - the new corporate identity for Batata - accounted for 873,000 subscribers. BPL, with the exception of Bombay, lagged behind its competitors in almost all the states and nearly 60% of its subscribers were pre-paid subscribers. Some observers feel that BPL's network service is also not said to be of good quality.
BPL and Idea Cellular will now look to renegotiate the terms of the merger, which is likely to be completed now by the end of the year. Clearly, Idea Cellular is now in a stronger position as it is not strapped for cash. As both BPL and Idea Cellular are not listed companies, detailed financial information is not publicly available.
But, industry participants estimate that BPL's sources of financing have dried up and with telecoms valuations plummeting globally, it is being pushed into a corner. The longer BPL takes to sell its stake in the Maharashtra operations, the more its value is being eroded. As more competition results in price wars and decreased revenues, observers feel that BPL would eventually see its subscribers migrating to other providers. The merger with Idea Cellular seems the only way forward for BPL's shareholders and the sooner the deal is completed the better it will be.
JM Morgan Stanley and ABN AMRO brokered the original deal. A source at JM Morgan Stanley says there have been a lot of sniping by rival investment banks about the deal and claims to be confident of it going through. Concluding that the deal remains in the best interests of both parties, he says that if one party walks away penalties will arise. He also plays down the importance of selling the Maharashtra circle, denying it is a pre-condition.