Telenor invests $1 billion in Indian mobile operator

Norwegian telecom operator Telenor gains majority control of India's Unitech Wireless through an injection of capital that will be used to fund capex.
Norwegian telecom operator Telenor will buy 60% of IndiaÆs Unitech Wireless by subscribing to $1.07 billion worth of new shares.

Unitech Wireless is a new company founded in 2007 by the Unitech Group, a real estate developer in India. It has spectrum in 13 telecom circles in India and expects to add the remaining nine circles to its portfolio by the end of 2009. It plans to launch actual services in mid-2009. TelenorÆs investment, which is going into the Indian company, will form part of the $2 billion capital expenditure Unitech Wireless has forecast for the next three years.

The Norwegian company will pay $250 million when the deal closes, scheduled for the end of 2008, while the balance of $820 million will be injected according to a drawdown schedule based on UnitechÆs capex programme. The entire capital injection is expected to be completed by September 2009. Telenor was represented by Goldman Sachs.

The deal is priced based on a pre-money enterprise value of $1.1 billion for Unitech Wireless. After adjusting for $400 million of bank and shareholder loans on Unitech Wireless's books, the deal is being done on a post-money valuation of around $2.1 billion for the firm. This is the largest investment by a foreign major into the capital of an Indian telecom firm (the Vodafone takeover of Hutchison in 2007 was a sell-down by the majority shareholder).

As part of its investment, Telenor has negotiated management control of Unitech Wireless. It will nominate four directors to the company's seven-strong board and will also appoint the managing director, chief financial officer and chief marketing officer. But with the large growth plans that Telenor has for Unitech Wireless, no existing management will be displaced, say sources close to the deal.

Telenor said in an Oslo stock exchange filing that the investment into Unitech Wireless is a strong fit with its expansion criteria: a large population with low penetration; the creation of regional clusters; a predictable regulatory environment; a cultural fit; and a strong business case.

Telenor will fund its initial equity injection through existing facilities and/or short-term commercial paper. It intends to raise additional funding through a rights issue of NKr12 billion ($1.8 billion) in early 2009. Telenor is 54% owned by the Norwegian government which has in principle agreed to participate in the rights issue. However, there is no financing contingency or risk, say sources, as back-up bank facilities are in place for the entire amount.

Unitech Wireless is projecting a market share greater than 8%, a 30% Ebitda margin and a 20% operating cash flow margin.

UBS conducted an auction on behalf of Unitech Wireless which attracted interest from most leading global telecom firms. Other than price, a strong chemistry between the management of Unitech and Telenor contributed to the Norwegian firm winning the deal, say sources.

The opportunity presented by India is attracting international telecom operators as the mobile penetration of the countryÆs 1.2 billion people is only around 26%. In 2008 the country has seen a net addition of approximately 8 million subscribers per month.

Sources describe Telenor's investment into Unitech Wireless and the chance to get a foothold in India as the opportunity of a lifetime for the Norwegian firm. And they could well be right. The confidence crisis caused by the subprime-sparked meltdown has investors in its grip right now, but it is indisputable that China and India are markets with high-growth potential for all infrastructure firms and especially telecom operators.

TelenorÆs shareholders however seemed spooked by the billion dollars Telenor is shelling out, the possibility of equity dilution through the large forthcoming rights issue and the operating cash flow dilution of 90% in 2009 and 40% in 2010 which the Norwegian firm is projecting. Its share price lost 23% on the Oslo exchange yesterday for a close of NKr34.60.

TelenorÆs share price has been under pressure for a few days after a Russian court froze its 30% shareholding in Vimpelcom, RussiaÆs second-biggest mobile operator. While declaring results for the third quarter of 2008 yesterday, Telenor remarked that times are turbulent and added: "In Asia in particular, the revenue development continues to be affected by the macroeconomic development as well as strong competition.ö TelenorÆs third-quarter profits fell short of consensus estimates compiled by Bloomberg.

The Telenor deal is a huge vote of confidence for India at a time when many international firms are fleeing emerging markets, add sources.

And Unitech shareholders certainly share this view. Unitech Group's shares gained 2% to close at Rs49.10 ($0.99) on the Bombay Stock Exchange yesterday. Last Friday, the share price lost 51% to touch a one-year low of Rs26.60 before closing at Rs30.10, following reports that the firm had defaulted on payments for a land deal in Noida, near Delhi in the north Indian state of Uttar Pradesh.

The Telenor deal seemed to be just the news shaky investors needed. Even though the entire Telenor investment is going into the wireless company, the partnership increases the level of certainty that Unitech will be able to fulfil its ambitions to create a dominant player in India's telecom sector.

Meanwhile, deepawali, the Hindu festival of lights which signifies a new year in India, seemed to bring some cheer to IndiaÆs beleaguered stock and currency markets when they reopened yesterday after a public holiday on Tuesday. The rupee strengthened on Wednesday to close at 49.69 per dollar, bouncing back from the record low of 50.29 it touched on Monday. Stock markets gained marginally yesterday as well, as foreign institutional investors started buying again.
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