It’s an elegant way to change a name you hate. When the great Indian business houses of Birla and Tata merged their mobile phone assets last year, the new entity was quickly given the name Batata by the rickshaw public.
Unfortunately the name Batata means ‘potato’ in the local Marathi language and this was a particular source of annoyance to the scion of the Birla empire. While the United Kingdom and Hong Kong may have spawned a company called Orange, a cellular company with the name Potato didn’t seem to have the same zing.
Luckily, the name will be eradicated by yet another merger with the Chandrashekar-controlled mobile phone company BPL. A new name has yet to be decided, but you can be sure it won’t be Potato.
The $2.1 billion merger – a record for corporate India – was engineered by JM Morgan Stanley chief Nimesh Kampani, possibly the best-connected investment banker in India. He was mandated by BPL to speak to the Birla-Tata combine (which also included AT&T) and figure out whether a cultural and business fit could be created between two of India’s oldest business houses and one of its newest and most dynamic.
Consolidation in the Indian mobile phone business has been rampant in the past year, and all parties have been putting aside their pride in favour of taking a pragmatic view of their market position.
That’s because telecoms analysts say that the potential for IPOs and ADRs has undergone a fundamental change. Investors are only willing to buy into a company with at least one million subscribers. Up until recently, none of India’s mobile companies came close to that, thanks to the fragmented nature of the market (which in turn was thanks to a highly convoluted licensing process).
The ante was upped last year when Hong Kong’s Hutchison went on an acquisition spree in India and took its subscriber base to around 700,000.
It was thus that tycoon Rajeev Chandrashekar began to realize that organic growth wasn’t an option. Some kind of merger would be necessary. He began speaking to Bharti Televentures, another player, one which has recently had a cash injection from SingTel. And via Kotak Mahindra, he also spoke to Hutch.
But it was thanks to Kampani that he saw that the best fit might be with Birla-Tata. The newly merged entity will have over 50% of India’s telecom revenue, cover 44% of its urban population, and have a market-leading 24% market share.
The company will be 49.32% owned by Birla-Tata-AT&T and 50.68% owned by BPL Communications. From a family perspective, this means that the Birlas and Tatas will each own 17% of India’s biggest cellular company, while Chandrushekar will have 27%, making him the single largest shareholder. No details have yet been announced as to how the board representation will be divided.
From an Indian corporate finance perspective, the structure gives Chandrushekar the most control. That’s because the Indian rules state that anyone who controls over 25% of a company effectively has a power of veto.
JM Morgan Stanley director Vishal Kampani (Nimesh’s son) says the spirit of the merger was one in which all the family owners looked at the new venture as a partnership, and so this was not an issue. Besides, he says that the new entity plans an IPO in the near future, and that will mean no single shareholder will have more than 25%, since for regulatory reasons at least 10% of the company must be listed (which means, diluting Chandrushekar to at least 24.5%).
Bharti is also looking to an IPO, but its inferior size may mean the new market leader beats it to market. Bharti has a 16.8% market share and covers 15% of India’s population. Meanwhile, Hutch has a 19.9% market share, but only covers 9.36% of India’s population.
When the newly merged entity is listed, and if it beats Bharti to market, it will be the first listed mobile company, and it is reckoned it could be one of India’s top 10 companies by market capitalization.
In the meantime, the new combine will be financially formidable. The Tatas and Birlas are the second and third biggest business houses in India.
Vishal Kampani says everyone is betting on the massive growth in the Indian cellular market. India is four to five years behind China in the cellular stakes but its growth is forecast to be similar. Penetration rates in India are currently only 0.3% of the population, which is staggeringly low. Penetration rates are expected to hit 30-40% within seven years, with compound annual growth rates of 60%.
Even better, high 3G costs are at least five years away, as the Indian market still needs to go through the voice-only, second-generation stage; from the operators perspective this could be a balance sheet blessing.
It is a measure of their belief in this business logic that has seen three big Indian business families unite – a prospect that many would have said impossible only 18 months ago, and which is a fundamental shift in the psyche of corporate India.
Indeed it is a further sign of the way global trends are continuing to shape the development of the previously parochial and closed Indian business environment.
Another part of the business logic, was that all of the family shareholders wanted to get a decent geographical footprint across India without having to bid in the new fourth round of license auctions.
Like Europe’s 3G, this could potentially have loaded their separate balance sheets with debt. The danger was that both sets of families would have been bidding against India’s biggest business house, the Ambani-controlled Reliance Group, which is making a concerted push into telephony.
The Ambanis are the business titans of India and have long had the best political connections in the country. Their businesses are well run, their balance sheet is strong, and most Indians would say they couldn't remember the last time they lost a business battle. In most cases, ambitious rivals outstretch themselves financially and then watch as the Ambanis’ superior financial strength wins the day (the Essar Group and Zee Telefilms are two good examples of new generation entrepreneurs who have taken on the Ambanis and come off the worse).
Clearly, even the great Tatas and Birlas didn’t want to get into a bidding war with the Ambanis for the fifteen licenses.
Reliance needs to win these licenses because it currently only has 209,000 subscribers and a 5.4% market share. However, if it is successful in all of its 15 bids (for 15 Indian states) it will have the only nationwide footprint of any Indian operator.
In many cases, it is bidding against Bharti (for example in Gujurat, Kerala, Tamil Nadu and West Bengal) and in a couple of cases against Hutchison, such as Andhra Pradesh.
However, while it is thought unlikely that Reliance will win all 15 licenses, it looks certain to win many of them as part of an overarching telecoms strategy (it is also building a fibre optic network to connect 115 Indian cities), and this suggests its smaller rivals will have to also consider mergers.
India’s smaller players control around 30% of the market and there are eight of them. The only two that have significant scale are Spice (10.2% market share) and Escotel (8.3%). It will be interesting to see whether Bharti and Hutch further drive consolidation among the smaller players, or whether the smaller players consolidate among themselves, or ally with Reliance – or even if Hutch and Bharti will merge.
As these fascinating chess moves play out, the Tata Birla BPL combine can at least sit back and watch the show from a position of strength.
The groups began talking to each other last September and, as with everything in India, price was a key issue. Both sides went into the talks with vastly different ideas as to what their franchises were worth, and Arthur Andersen was brought in to give an independent valuation three weeks before the deal closed. ABN AMRO was also brought in as an adviser.
And while fees were not disclosed, they are thought to be – by Indian standards – good. Then again, as Vishal Kampani says, it would take him a couple of hours just to count the number of man-hours put into this deal.
