M&A Speculation Swirls Spice, Telkom

M&A is a hot topic in emerging markets right now, with speculation about Spice Telecom in India and South Africa’s Telkom SA Ltd. (NYSE/Johannesburg: TKG) hitting the headlines this week.

Spice is nice
Speculation is swirling again around a potential merger between Indian regional mobile operators Spice Telecom and Idea Cellular Ltd.

TM International Bhd. (Telekom Malaysia International), which holds a 39.2 percent stake in Spice, is reportedly in talks with IDEA Cellular that would have IDEA replacing Spice chairman BK Modi’s investment vehicle, Modi Wellvest, as its Indian partner. (Regulations limit foreign ownership in telecom companies to 74 percent.) Telekom Malaysia International would then take a stake in the merged companies.

It’s not the first time Spice and IDEA have talked about combining their operations, but a merger between the two operators now would immediately extend their network coverage at a time when India’s mobile operators are building out their networks following a round of license awards. (See Spice Mulls Hot Merger IDEA.)

Spice operates in Punjab and Karnataka, two circles (service areas) where IDEA Cellular, which operates in 11 circles, has licenses but is yet to roll out networks. Spice has received licenses for four other regions, while IDEA has licenses to extend its network into all 23 circles. (See A Guide to India's Telecom Operators.)

But the Indian press is also reporting that the Modi group is trying to bring in Bahrain Telecommunications Co. (Batelco) to buy out Telekom Malaysia International’s stake in Spice. Batelco isn’t the only Middle Eastern carrier that’s trying to get into the Indian market through Spice. United Arab Emirates-based Etisalat has recently exited talks with the operator; apparently it felt Spice’s asking price was too high. (See Etisalat Eyes India's Spice.) Modi told CNBC-TV18 last week that any M&A offer below 60 Indian rupees (US$1.40) per share "may not be acceptable."

Either way, it looks as if the partnership between Modi and Telekom Malaysia is set to come to an end. Both sides have been mulling their options for the future of the carrier after the Indian government refused its application for licenses that would give it nationwide coverage, on the grounds that it failed to meet financial requirements.

Spice reported a net loss of INR365.06 million ($8.55 million) for the quarter ended March 31, compared with a net loss of INR146.67 million ($3.43 million) for the same quarter last year. IDEA Cellular, meanwhile, reported quarterly net income of INR2.78 billion ($65.01 million), up from INR1.92 billion ($44.96 million) last year.

Spice’s share price closed 2.41 percent higher Monday at INR53.20. IDEA Cellular’s stock was down 3.24 percent at INR101.55.

Opex drags on Telkom SA profits
South African incumbent operator Telkom, also in the midst of sale talks, reported a 7.76 percent drop in net profit for the fiscal year ended March 31, reflecting the challenging conditions that have it restructuring its business.

The carrier reported a net income of 7.98 billion South African Rand ($1.01 billion) for the year, down from ZAR8.65 billion ($1.09 billion) in the previous financial year, as higher operating costs offset growth in its mobile joint venture, Vodacom. (See Telkom SA Reports FY08.)

Operating expenses climbed by 12.8 percent to ZAR42.34 billion ($5.34 billion) during the year. In a Webcast presentation to investors, Telkom CEO Reuben September blamed "rising inflation, a very competitive environment, and lots of pressure on our prices."

Revenues were 9 percent higher to ZAR56.87 billion ($7.18 billion), with a 17 percent growth in mobile revenues from Vodacom making up for a 0.7 percent increase in fixed-line revenues. Telkom has ranked as one of the top carriers in emerging markets in terms of revenues. (See Top Ten: Emerging Markets Carriers.)

Telkom is in negotiations with Vodafone, its partner in Vodacom, to offload its stake in the mobile joint venture –- a condition of a takeover offer by local investment firm Mvelaphanda Holdings. (See Telkom SA Fields Another Takeover Bid.)

By giving up its stake in Vodacom, Telkom would be able launch mobile services in African nations as part of a converged offering, which its partnership with Vodafone prevents it from doing. The carrier is already aiming to offer WCDMA-based data services and plans to invest ZAR1.7 billion ($214.5 million) in a fixed/wireless network over the next three years as part of its NGN strategy.

CEO September said Telkom expects to connect its first customers to the network in September, which, he joked, is "a very important month for me."

— Nicole Willing, Reporter, Light Reading

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