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Bharti Tele: Hexacom in the bag

Apr 6, 2004

The unified licensing regime has thrown open the doors of consolidation in the Indian telecom sector. However, while there has been just a single large acquisition deal, a lot of noise has characterized consolidation in the sector. The deal we are referring to here is the buyout of Escotel's GSM operations in three circles by Idea Cellular. However Bharti Tele has joined the act and has announced an acquisition of its own. Bharti Tele has announced that it has entered in to an agreement with the Shyam Group to acquire a 67.5% stake in Hexacom, which primarily has operations in Rajasthan and has license to operate in the North East. The deal is to the tune of Rs 4.3 bn. However Bharti will only be able to acquire the stake provided Telecom Consultants India Limited (TCIL) exercises its right of first refusal. The transaction will involve mainly the swap of shares of Bharti Tele for the stake in Hexacom. The consideration of Rs 4.3 bn, proposed to be funded, by way of issue of equity shares of Bharti Tele for Rs 750 m, issue of OCRDs (Optionally Convertible Redeemable Debentures) for Rs 3 bn and balance in cash.

As far as the benefits to Bharti Tele go, it will get a foothold in a new circle and is likely to emerge as one of the largest players in that state, only behind BSNL. The company also gets an established telecom infrastructure, which includes the license fee for a new circle. With this, Bharti's presence will now be in 16 states. Hexacom has over 0.25 m subscribers in Rajasthan and claims to have a market share of 44%. However, one must understand that post the entry of BSNL and Reliance, Hexacom's market share has fallen drastically. Also due to the buy out of Escotel (which has a license to operate in Rajasthan) by Idea Cellular, the competition in this circle has intensified.

As far as valuations are concerned, Bharti Tele is paying a premium to its earlier offer to buy out TIW's (Telesystem International Wireless) stake in Hexacom. Bharti Tele, at that point of time, had offered Rs 1,020 m for a 27.5% stake in Hexacom. On that basis if one were to value Hexacom's 67.5% stake it works out to be Rs 2.5 bn. However one must not forget that if Bharti Tele is able to acquire this stake, it will have management control over the company as well as control over a zero debt company. That apart, Hexacom also has cash reserves of Rs 390 m in its books.

At the current price of Rs 170, the stock is trading at a P/E multiple of 81x its annualised 9mFY04 earnings. Bharti Tele has joined in the process of consolidation and rightly so as it is the largest GSM cellular services provider in the country and was expected to be at the forefront of this process. With nearly 10 cellular operators in the country, the process of consolidation is still not completed. Going forward, it may be worthwhile to observe whether Bharti Tele, with its strong brand and marketing muscle, is able to sustain market share considering severe competition from the likes BSNL, Tata Group and Reliance.

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