R. Chandrasekhar, Chairman, BPL Comm.

K.M. Birla, Chairman, A.V. Birla Group

Ratan Tata, Chairman, Tata Group

On June 27, 2001, after seven months of frenzied negotiations, four telecom giants in the cellular space-BPL Communications, and the Birla-Tata-AT&T combine (which had got together earlier in March 2000)-signed an initial agreement to merge operations. At an enterprise value of $2.1 billion, this was slated to become the largest merger and acquisition deal ever pulled off in Indian corporate history. Other than the sheer size, the deal was also set to create the country's largest cellular company, with a stranglehold on almost a quarter of the country's cellular market.

As Nimesh Kampani, Chairman, JM Morgan Stanley-who represented BPL on the transaction-will vouch for, the deal threatened to break down over several issues, valuations being one major sticky point. Eventually, it was agreed that the BPL consortium (which includes France Telecom, AT&T and fis like Commonwealth Development Corp.) would get 49.32 per cent, and Birla-Tata-AT&T, since christened idea Cellular, 50.68 per cent.

That agreement might have been signed last June, but almost a year down the line precious little progress has been made in converting that initial memorandum into a concrete joint venture. Indeed, if the transaction almost fell through during the initial negotiations, 11 months later the chances of the June 2001 engagement getting translated into a marriage appear remote. The issues are several. Unresolved disputes with financial partners (in the case of BPL); tussles over who will manage the merged operations; the cash-strapped nature of one of the players (BPL again), which investment banking sources reveal, could prompt the others in the fray to call for a renegotiation of the deal; and the individualistic moves of one of the partners (the Tatas) in the telecom space are four major stumbling blocks that could ensure that this mega-merger doesn't see the light of day. ''I think it's going to be extremely difficult for this merger to go through, and I can think of hundreds of reasons why it won't,'' says a Mumbai-based investment banker, who is representing one of the parties. There's little doubt: India's largest-ever proposed merger is on the rocks.

None of the parties participating in the drama are keen to elaborate on what's delaying the matrimony. Rajeev Chandrasekhar, Chairman, BPL Communications, insists he is ''as committed to the merger today as I was last June...we are determined to make up for lost time''. Sanjeev Aga, whose term as CEO of idea Cellular expires on June 30, says it's for the shareholders to sort out those issues; AT&T's representative in the region, Ty Graham, says negotiations are currently on, which makes it difficult for him to comment; and a senior Tata official points out: ''The work on the merger is going on and we hope it leads to a positive result. Some delays here and there should not be considered as setbacks.''

The Tata-Advantage

He may be right. If the merger doesn't take place, it certainly won't be a setback-not at least for the Tatas, who have charted out an ambitious course in telecom, which may well make the cellular joint venture incidental to the grand game plan (See The Tata Tele-Juggernaut). This includes national and international long distance services (courtesy the acquisition of VSNL), and more contentiously major forays via the limited mobility platform, which cellular operators by and large look at as a competing service. ''It appears that the Tatas are chalking out their own telecom plan, which may not include the cellular joint venture,'' says Rahul Singh, Equity Analyst, SSKI Securities.

Sources point out that BPL has been prodding the Tatas for more details about their wireless strategy, but Chandrasekhar hasn't received any clear and precise reply yet. AT&T too is concerned about the Tatas' blueprint for limited mobility (considered the poorer person's cellular service as it operates within a restricted radius), which it sees as contradictory to the initiatives at the cellular venture. The Tata camp, however, maintains that the two are complementary. ''will (the acronym for limited mobility technology) and cellular services cater to distinct sets of consumer profiles and as a player in both segments, our objective is to expand the market for both services. We certainly view both services as complementary in that the Indian market is large enough to amply support both services and also that the Indian consumer profile is varied enough to ensure demand for both,'' explains a senior Tata executive.

THE TATA TELE-JUGGERNAUT

Ratan Tata, Chairman, Tata Group If anybody at Bombay house connected in any way with the Tata's grand telecom gameplan tells you that the group is the only truly integrated telecom player in India, he isn't kidding. With a war chest that could swell to as much as Rs 14,000 crore over the next five-seven years (Rs 10,000 crore on the lower side), Ratan Tata is pulling out all the stops to ensure that he is present across the entire spectrum of telecom services. ''Our telecom plans are essentially based on a focused strategy that incorporates a specific geographic footprint consisting of the South of the Vindhyas and Delhi initially, and subsequently spreading to other locations,'' says a senior executive at the telecom operations. What this effectively means is that the Tatas want to address at least 70 per cent of the country's voice and data traffic, with a ''very focused footprint''. What should make competitors sit up and take notice is that the Tatas have already spent Rs 5,000 crore of the total investment earmarked. Of course, a substantial part of that has gone into the acquisition of 25 per cent in VSNL and the subsequent open offer, which has resulted in the Tatas now holding 45 per cent in the former PSU. With VSNL in the bag, Bombay House has a clear headstart in international and national long-distance, even as it bolsters its position in the internet space. The Tatas, for their part, are still in the acquisition mode, once again re-kindling negotiations with Hughes Tele.com, an existing basic services player in the Mumbai and Maharashtra circles. Tata officials say it is premature to comment but point to ''certain mutual benefits'' that will accrue to both parties if they go ahead with the alliance. Hughes Tele's attraction is the access to limited mobility services, which Tata Teleservices has already rolled out in Andhra Pradesh, and by the year-end operations will commence in four other circles. Being an existing player in Mumbai and Maharashtra, Hughes has built up a sizeable customer base and the required infrastructure. ''Working together will mean that we get some time advantage in this crucial telecom circle. (What's more) the returns will arrive sooner as the gestation period will be shorter,'' avers the Tata honcho. Of course, it's the Tatas' moves in the limited mobility arena-where it will be investing a little over Rs 8,000 crore over five years-that are giving its partners in the cellular business sleepless nights. There's little doubt that the services from the limited mobility platform will cannibalise the cellular pie in the shorter term. The Tatas' contention, though, is that they're offering an entire bouquet of services, and with tele-density in the country still very low, multiple telecom services are the way to go. ''The fall in cellular rates coupled with the fall in hand-set rates and the rationalisation of basic telephony rates along with the changing requirements of WLL subscribers effectively remove the possibility of cannibalisation,'' insists the Tata spokesperson. Now only if the Tatas' cellular partners would agree.

Not just that, the Tatas point to the situation in Andhra Pradesh, where Tata Teleservices has kicked off limited mobility services even as idea Cellular is present as a cellular provider in that circle. There is a crucial difference, however: Tata Cellular had bagged the basic services licence for Andhra before the Tata Cellular-Birla-AT&T merger took place. On the other hand, the other four basic licences (which allow the Tatas to provide limited mobility) came post-merger. Little wonder then that AT&T and BPL are cut up.

Tata officials, however, point out that idea Cellular and Tata Teleservices have competed against each other in the past, that the board of directors of idea Cellular, which is equally represented by three partners, is different from the management team that handles day-to-day operations, and that it is not necessary to ''bring the routine policy or day-to-day operations decisions of two telecom companies to the Tata group level'' to sort out any potential conflicts. ''This is best left to the respective managements,'' says the Tata official. This clearly implies that Ratan Tata and the Bombay House top brass are maintaining an arm's length distance from the telecom blueprint, leaving the execution instead to the Managing Director of Tata Teleservices, S. Ramakrishnan, and the CEO of idea Cellular.

If the cellular operations thereby get relegated to secondary status, it won't be unnatural, considering Tata Teleservices is a wholly-owned Tata company (with VSNL and possibly Hughes Tele in the fold). On the other hand, if the BPL-merger does go through, the Tatas will have to be content with just 16-17 per cent. Unless, of course, Bombay House decides to buy out the stake of the AV Birla group, who are passive investors, having outlined their strategy of growing aggressively in the commodities business.

In Search Of Avenues

That, of course, is in the realm of speculation. The situation on the ground today is that the multi-partner cellular venture is just another arrow in the Tata quiver. For Chandrasekhar of BPL, however, it's the only one, which is why the merger assumes almost make-or-break proportions for the former Intel software engineer. Chandrasekhar might be making all the right noises in public about his commitment to the merger, but telecom analysts point out that he's already exploring other options in case last June's agreement doesn't get translated into a merger. Sources point out that Chandrasekhar-and unsurprisingly the Birla-Tata-AT&T-combine too-have been chatting up B.K. Modi's Spicecom. A BPL-Spice alliance becomes a merger of equals of a slightly different kind: Both Chandrasekhar and Modi are cash-strapped. Modi has already sold his Kolkata cellular operations to Bharti, and is now sitting on the highly-lucrative Punjab circle, which reportedly has over 3 lakh subscribers and a revenue per user of as high as Rs 1,100 per month.

RELIANCE: BORN AGAIN

Mukesh Ambani, Vice Chairman & MD, Reliance Didn't create a big bang when getting into cellular services, bidding low and bagging the unimportant circles of the East and the North East. Reliance stormed back when the government brought in limited mobility via fixed line sevices, by bagging 17 circles (in addition to Gujarat). It also brought in Qualcomm early this year by selling a 4 per cent stake for Rs 1,000 crore. It now plans to come up with competitive tariff rates by providing bundled options for the corporate and household segments. It is looking at 5 million WLL lines by deploying Qualcomm's CDMA technology. The plan is take on the might of BSNL and MTNL. And-how can we forget-the Tatas too.

If Chandrasekhar is considering buying out Modi's Punjab circle, you have to wonder where he's going to get the cash from. The chances of idea Cellular bagging it are brighter, given that at the time of writing the company was fast moving toward financial closure. The company plans to invest Rs 5,000 crore over the next couple of years, much of which will go into expanding the footprint (including some Rs 700 crore in the Delhi circle). The partners will contribute equally to the equity component, which has now swelled to Rs 2,240 crore (an increase of some Rs 600 crore).

BPL, on the other hand, is nowhere near to financial closure. ''The unresolved issues with its investors have delayed financial closure as negotiations with lenders are still not complete,'' says an executive at the corporate advisory unit of a Mumbai-based investment bank. For BPL, Mumbai is the only money-spinner, and it is bleeding profusely in its other circles (Maharashtra, Kerala and Tamil Nadu).

It isn't as if any of the other operators are making any money what with peak rates falling from Rs 16, four years ago, to under Rs 2, the entry of a fourth operator, and also the emergence of BSNL. But the difference is that idea Cellular is close to tying up its funding requirements for the next two-three years, Bharti has already collected Rs 834 crore via an initial public offering, and Hutchison can rely on its parent for funding. BPL, on the other hand, is all alone, up the creek, and without cash. The company has large unpaid debts, which even prompted Motorola India to drag the company to court for non-payment of some Rs 4.3 crore for equipment supplied. The cellular company can't reach out to its parent, BPL Ltd, for help as the consumer electronics giant has fund pressures of its own.

BSNL: DARE TO (PIPE)DREAM

D.P.S. Seth, Chairman & MD, BSNL Does a government legacy mean a headstart? Perhaps. BSNL has cellular licences for all circles other than Mumbai and Delhi. BSNL officials have talked about pumping close to Rs 2,000 crore in cellular services across the country; company is targeting 4 million subscribers in the near term, and 50 per cent of all subscribers in the country by 2007; is already running fixed lines all over the country; plans to cover the entire country through its limited mobility service. Bharti recently ended its monopoly in domestic long distance but BSNL has reacted aggressively by outdoing Bharti's rates; has applied for an international long distance licence; in talks to set up a network in Ghana...phew!

BHARTI: HERE, THERE, AND EVERYWHERE

Sunil Mittal, Chairman & MD, Bharti Enterprises GSM cellular operations, limited mobility, domestic long distance, international long distance, broadband, undersea cable, internet service provider...Bharti could contend with the Tatas for the position of most integrated telecom player. But what the Tatas can't match is Bharti's expertise in rollout and funding. Or can it? It beat the Tata-Birla-AT&T combine in the initial public offer race by raising Rs 834 crore when it offered 10 per cent of the company to investors. The issue was oversubscribed 2.5 times. it was first traded on the BSE at 11 per cent premium to the IPO price. Sunil Mittal is now looking at raising Rs 1,500 crore of debt over the next couple of years. He'll need it.

Going forward, too, BPL Communications clearly needs big money if it plans to widen its footprint on its own. Chandrasekhar had even planned a $150-200 million issue of American Depository Receipts (ADRs), which had to be deferred because of poor market conditions. That's when Kampani convinced Chandrasekhar that a merger of equals (with the Birla-Tata-AT&T combine) was a possible way out.

Today that avenue appears to be blocked, as BPL will be hard-pressed to bring to the table its contribution to the venture. That's why one Mumbai-based investment banker points out that the other partners in the venture are calling for a re-negotiation of the deal, which could only result in the BPL consortium's stake in the cellular venture being whittled down from the proposed 49.32 per cent.

A Dead-end

Another spoke in the merger came courtesy the opposition to the merger from foreign investors, including the Commonwealth Development Corp. (CDC), which hold close to 40 per cent in BPL, in addition to preferential shares. These investors want their preferential shares converted into voting shares. If that happens their stake in BPL Communications could well cross the 49 per cent threshold, which would go against the foreign investment norms in telecom. That's perhaps why CDC's case against BPL was thrown out from the high court as well as the Supreme Court. The danger for BPL, of course, is if the government removes the equity cap of 49 per cent on foreign investment in telecom, which could relegate them to a minority stakeholder in BPL Communications, and put paid to their dreams of merging into the Birla-Tata-AT&T fold.

ESCOTEL AND SPICE: FOR SALE?

B.K. Modi, Chairman, Spice Comm. Manoj Kohli, CEO, Escotel From the bridesmaid to the bride-that's the kind of transition that Spice Communication and Escotel, the cellular services arms of old business houses ModiCorp and Escorts, respectively, will make if the mega-merger falls through. Escotel created ripples when it bagged four of the fourth cellular licences. A remarkable feat since First Pacific, Escorts'' partner in its existing three operations, had stayed away from the bidding. It has, however, been all quiet on the roll-out front. CEO Manoj Kohli says talks are on for strategic partnership with three companies, but a decision has not yet been arrived at. Regardless, Escotel remains a prime candidate for anyone looking to plug gaps in its footprint. Chances are that the Nandas, the promoting family, would try to make it, at least prima facie, a merger instead of an acquisition. Anyone looking for a quick acquisition may do well to look at Spice, whose two circles will make the process of integration much less of an effort. The two operations-Karnataka and Punjab-have a huge base of subscribers, most of whom believe in using the phone liberally, and can be ideal additions to someone like idea Cellular, whose presence in the North and South is limited to Delhi and Andhra, respectively. The Modis maintain that they are not looking to sellout. But market gossip, which often proves to be correct, suggests that they are already engaged in valuation talks with idea. The Modis managed an excellent deal for themselves when they sold their Kolkata licence to Bharti last year. An encore wouldn't pack in much of a surprise.

HUTCHISON: GO GETTER

Asim Ghosh, CEO, Hutchison Max (India) Its vehemently cellular-only strategy is identical to that of BPL and idea. The similarity stops there. It began the acquisition game by buying out Max India in the Mumbai operations. It now covers Delhi, Calcutta and Gujarat too, besides bagging the fourth licences for Chennai, Andhra and Karnataka. Hutchison has reportedly invested just under $500 million in the Indian cellular space since 1995. And that investment appears to have paid off. Asim Ghosh, Chief Executive of Hutchison Max Telecom, has talked about positive cash flows, and analysts say the company could have close to a quarter of the Indian market-with operations in the prime metros-in the bag.

What's also ensuring that the merger doesn't go through is BPL's inability-some analysts term it as reluctance-to sell its Maharashtra licence as per the initial agreement as Birla-AT&T too operates in the same state. The obvious buyer for this circle is Hutchison (which operates in Mumbai), but investment bankers point out it won't be hurrying to pick up the licence as it knows that BPL is under financial pressure, and will be waiting for Chandrasekhar's company to sink deeper into the mire. However, Chandrasekhar for his part, may not be putting up the sale signs simply because he would like tto hold on to the Maharashtra circle in the event of the merger not taking place.

Inevitably, when so many partners are in the fray, the issue of management also comes to the fore. Idea Cellular has had Sanjeev Aga as its CEO, but once his term expires on June 30, an ''outsider'' will be roped in, for which a headhunting firm has been appointed. ''When there are equal stakes partners, the crucial factor is which player will take the lead, going forward. One of them has to be the driver,'' says Kobita Desai, Research Analyst (Telecom & Mobile), Gartner India. Investment bankers point out that managing the operations has also become a bone of contention, with Chandrasekhar keen to hold the reins. The Tatas, on the other hand, believe shareholders should stay away from day-to-day operations and allow professional management to run the show.

With so many odds stacked so heavily against the merger, it does appear that the operational benefits that were to accrue to all the partners will go out the window. Indeed, on paper the merger made perfect sense, with the four-company combine's footprint extending from Delhi to Chattisgarh to Gujarat to Maharashtra to Goa to Tamil Nadu to Kerala. Economies of scale could have been derived from synergies in network costs, brand-building and billing. True, idea Cellular can reap similar benefits of financial leverage, but the company has no hope in its present avatar of emerging top dog in the cellular space. In fact, the footprint will now have huge gaps in the south (where idea currently has a presence only in Andhra) and in the north (where it has only Delhi). What's more, in the west, idea will be only with Maharashtra, but without the lucrative Mumbai circle; Bharti will have both. Clearly, the merger was a win-win proposal, but the inability to pull it off will prove a huge setback for BPL. For idea Cellular, the failure of the merger will mean a trip back to the drawing board-and perhaps many more to the negotiating table.