Essar buys BPL Com for $1 bn

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Bangalore, Mumbai, July 20: In India’s biggest M&A deal, Essar Teleholdings and its associates have signed a binding agreement to buy out Rajeev Chandrasekhar & associates (67%) and foreign investors like CDC, AIG, AIDEC and TVG (33%) in BPL Communications for Rs 4,400 crore (over $1 billion).

Mr Chandrasekhar, who personally owns 37%, will receive Rs1,628 crore. BPL Communications, the holding company of the group’s telecom licences, owns 74% of BPL Mobile (Mumbai circle) and 100% of BPL Cellular (Maharashtra, Kerala and Tamil Nadu circles).

Essar’s promoters, the Ruias, indicated they will eventually merge BPL Communications with Hutchison Essar-their joint venture with Hutch in which they own just over 30%. The combined subscriber base of 11.07 million between BPL (2.63 million) and Hutch Essar (8.44 million) will create India’s third largest cellular company behind Bharti’s 12 million and Reliance’s 11.64 million (GSM+CDMA).

Ravi Ruia, vice chairman of Essar said,” It gives us the ability to increase our presence in the country and add muscle to an already strong presence through Hutchison Essar.” Announcing the deal, Mr Chandrasekhar said, “We needed to plug into something bigger and larger. It was an emotionally complex but financially rational deal.”

However, for the merger to go through, Essar will have to work around the intra-circle merger guidelines because both Hutch Essar and BPL have licences in the Mumbai circle. The guidelines are: One promoter cannot own two licences in the same circle; the promoter of one cellular service provider cannot own more than 10% in a rival service provider; and, merger between two rivals must not create an entity that has more than 66% of subscriber base in the circle at the time of merger.

As per the June data released by the Cellular Operators Association of India, the combined entity will have a subscriber base of 2.78 million in Mumbai, which is just a little higher at 66.68% of the total subscribers in the city. “This deal is an intra-circle merger and all the guidelines stipulated under it are being complied with,” Mr Chandrasekhar said.

In 2004-05, BPL Communications reported an operating profit of Rs 406 crore on revenues of Rs 1,012 crore. Its profits grew 35% while revenues grew 39% in the last fiscal.

The deal concludes the exit of yet another fringe telecom player in India’s fast consolidating telecom industry. BPL is India’s sixth largest player with 2.63 million subscribers. Though a 10 million subscriber base has become a global benchmark to sustain telecom services, India still has five small players: Idea (5.55 million), Aircel (1.86), Spice (1.47), Reliance (1.36) and MTNL (1.11). The latest consolidation will put more pressure on them.

While MTNL is likely to be merged with BSNL, Reliance’s GSM business is owned by ADAE. The other players will have to find a way out for themselves. At one point, India had 26 telecom players. Today it has only eight.

The deal gives Essar promoters, the Ruias, tremendous leverage in their merger talks with Hutch. While Essar and Hutch are partners in telecom in India, differences over equity stake in the holding company Hutchison Essar led the Ruias to go solo while applying for seven new telecom licences—Orissa, MP, Assam, North-East, Bihar, J&K and Himachal. Hutch executives had then called it a ‘hostile’ act.