A second chance in the high-stakes M&A arena, any investment banker will tell you, is rare, even unheard of. So last fortnight, when the Tatas and the Aditya Birla group decided to increase their respective stakes in Idea Cellular more than a year after Cingular Wireless put its 33 per cent stake on the block-the Birlas now hold half of Idea's equity and the Tatas 48.91 per cent-they doubtless would have considered themselves very lucky to have got the opportunity. After all, the duo of Singapore Technologies Telemedia (STT) and Telecom Malaysia (TM) had all but sealed the deal for the Cingular stake; they, however, hadn't reckoned with the Department of Telecom, which scuttled the transaction because STT is completely owned by Temasek. Temasek also holds 65 per cent in Singtel, which, in turn, holds a little over 30 per cent in Bharti.

The Tatas and Birlas didn't take too long to throw their hats into the ring the second time round-it took them just a fortnight to conclude that a hike in stake in Idea Cellular made immense sense. A notice to the stock exchanges on July 30 from the Aditya Birla Group company, Indian Rayon, said that Cingular had offered to sell its holding in Idea Cellular to the Aditya Birla Group and Tata Industries for $300 million (Rs 1,320 crore) at Rs 17.50 per share.

Now, naturally you have to wonder why wasn't the Birla-Tata combine-unflatteringly dubbed Batata till not too long ago-keen on buying out Cingular the very first time the opportunity arose. Considering Idea's steady improvement in performance since then, valuations would surely have been more attractive then (for instance, ebitda-earnings before interest, depreciation and tax-has increased to Rs 874 crore for fy05 from Rs 392 crore the previous year, and the subscriber base has shot up by 38 per cent over the same period). The STT-TM combine may have agreed to a $390 million (Rs 1,716 crore) deal, but that also included an infusion of fresh equity, which, in effect, meant they were paying for a 47.7 per cent holding. The Tata-Birla combo could have snapped up Cingular's 33 per cent for just around $250 million (Rs 1,100 crore) at that time.

Analysts point out that the Tatas might have been hesitant a year ago to commit more to Idea simply because they had cast their weight behind a CDMA-based national rollout, which involves a total investment of Rs 20,000 crore. The Birlas, for their part, appeared to be more focussed on commodities-cement, aluminium, yarn-a notion the acquisition of Ultratech Cement (l&t's cement division) for Rs 2,200 crore only sought to reinforce. GSM-based telephony, it appeared, didn't fit into the Tatas' telecom blueprint; and indeed telecom itself didn't seem to have a fit in the Aditya Birla Group's strategic scheme of things.

Creating Value

It does now, for sure. Today, the value created by Idea Cellular is more apparent, and appears more sustainable than a year ago. "Idea has created value and going forward, there is certainly more value to be created. It is a good business," emphasises Tata Industries Managing Director Kishor Chaukar. Idea Cellular has 5.72 million subscribers and accounts for a market share of a little over 12 per cent in the GSM space. More importantly, it has for the first time registered a net profit of Rs 76 crore against a whopping loss of Rs 236 crore for fiscal 2004. "Our ebitda too has grown by a healthy 64 per cent and we today enjoy an ebitda margin of 37 per cent, which is higher than Bharti's," points out Idea Cellular CEO Vikram Mehmi. Besides, all the circles, with the exception of Haryana, are profit-making today.

Birla's Aga (L) and Tata's Chaukar: An idea whose time has come

If a doubt still lingers regarding the Tatas' commitment to Idea, in the face of the huge investments lined up in the CDMA (Code Division Multiple Access) space, Chaukar duly rubbishes it. "The fact remains that over the last four years, both the GSM and CDMA markets have grown and there has been value in both," he rationalises. Indeed, India has been the fastest growing wireless market and there has been a clear buzz about the untapped potential in it. Evidently, neither the Tatas nor the Birlas want to miss out on this opportunity. For the Birlas, the way forward on Idea Cellular is amply clear. "We would like Idea Cellular to be a top class operation," says Sanjeev Aga, who is the Birla nominee on the Idea board. He adds that the focus would be to build a robust, durable and profitable business.

The way forward is clearly in that direction with an entry into three new circles, Uttar Pradesh (East), Rajasthan and Himachal Pradesh, which will become operational by the end of the current fiscal. Whilst capital expenditure for the eight existing circles for 2005-06 is Rs 1,300 crore, which is twice that of the previous year's investment, another Rs 300 crore has been set aside for the new circles. Mehmi points out that the ebitda of Rs 1,100 crore that's expected to be generated in the current year will be good enough to take care of the capex requirements.

The licences for the new circles came with the acquisition of Escotel last year. Escotel earlier had won these at the time of the bids for the fourth operator licences. Clearly, a large part of Idea's growth has come through M&A, starting with the merger of Tata Cellular and Birla-at&t. Then came the buyout of RPG's operations in Madhya Pradesh and the big-bang Escotel acquisition. Evidently, future M&A strategy will revolve around getting in high-quality subscribers with, more importantly, circles that are contiguous. This comes at a time when there has been more than just a buzz that Idea Cellular is keen on offering services in Mumbai (in the wake of the acquisition of BPL Communications by Essar Teleholdings). If that materialises, things could change dramatically for Idea Cellular considering it enjoys a position of comfort in the Maharashtra circle and is doing well as the fourth operator in Delhi too. An entry into Mumbai will ensure that it will be among a handful of service providers having a presence in both Delhi and India's financial capital. This is apart from the fact that both Spice and Aircel have operations that Idea is closely eyeing.

India, as it is, has had a hectic pace of M&A activity in the telecom sphere. As Gartner's Principal Analyst (Telecom) Kobita Desai puts it: "Consolidation will be dictated by scale and service offerings. In the short-term, there will be some regional players, but the market environment is not conducive for them to run sustainable businesses."

If there is one glaring shortcoming in the Idea strategy, it's the absence of a pan-India presence, which Bharti, for instance, enjoys. But, as Mehmi points out, the vision of the company is less about footprint and more about profitability. "At the end of the day, profitability is key and we exist because of our consumers," he says.

Obviously, both the Tatas and the Birlas have seen merit in investing in Idea Cellular and that is not without reason. Not being in Indian telecom today is an opportunity lost. According to Ravi Menon, Director and Co-Head (Global Investment Banking), HSBC Securities, the Indian telecom model today is about increasing minutes of usage (MoU), which, in turn, calls for more investments in networks. "It is a large market with low average revenue per user (ARPU) figures and is still profitable. India is one of the most exciting wireless markets in the world and operators have shown how a market with high potential and low ARPUs can be converted into a profitable business."

The Idea Cellular deal is still hot off the oven and Chaukar thinks it should be concluded by November. Understandably, since the deal is between partners, it is expected to be wrapped up smoothly. Going forward, could the much-talked about public offering be an option? "We will take a final call after the deal is consummated. An initial public offering (IPO) is only one of the options. In fact, there are plenty of options," he says cryptically. Indian telecom is rarely devoid of surprises and the Idea Cellular deal only seems to confirm that axiom.