Spice Mulls Hot Merger IDEA

There's quite a lot cooking over at India's Spice Telecom . In the space of about two weeks the regional mobile operator has been awarded licenses to enter the long-distance market; received the go-ahead from the Securities and Exchange Board of India to launch an IPO in June; and now, it's at the center of red-hot speculation that it will merge with fellow regional player Idea Cellular Ltd.

Rumors making the rounds in the Indian press have pegged the potential merger anywhere from the preliminary discussion stage to an imminent announcement. The Economic Times this morning cites an official from Spice shareholder Telekom Malaysia Bhd. as saying that consolidation is inevitable in India and it's open to a "partnering role" with IDEA Cellular.

Talk of consolidation among India's smaller operators has intensified since Vodafone Group plc (NYSE: VOD) snapped up Hutchison Essar , the country's fourth largest carrier, for $11.1 billion in February. Both IDEA and Spice have applied for licenses to become nationwide players, but a lack of spectrum availability makes an acquisition the fastest route to expansion.

The operators were already in discussions along with Reliance Telecom, a subsidiary of Reliance Communications Ltd. (RCom) , to form an operational alliance that would encompass network sharing, handset bundling, roaming, and international arrangements. Spice was awarded domestic and international long-distance licenses in May that will allow it to use Telekom Malaysia's network to handle traffic outside India. (See Spice Gets Licenses.)

A sticking point in a potential tie-up is likely to be whether the companies will merge or IDEA will acquire Spice, which is the smaller of the two. IDEA had around 15 million subscribers in 11 regions of India at the end of April, while Spice had 2.8 million subscribers in two regions.

According to numbers released by the Telecom Regulatory Authority of India (TRAI) , Spice Telecom reported revenues of INR2.29 billion ($56.01 million) for the quarter ended March 31. IDEA's revenues were INR13.41 billion ($329 million) during the quarter, a 54.9 percent increase over the same quarter last year. (See IDEA Cellular Reports Q4.)

Telekom Malaysia bought its 49 percent stake in Spice for $179 million in March last year, and the carrier's official told the Times it's "not going to exit" Spice. (It's worth noting that a few months ago Hutchison Telecommunications International Ltd. (NYSE: HTX) was saying the same thing.) At the same time, the Aditya Birla Group holds a 57 percent stake in IDEA and has said it doesn't want to dilute its stake below 51 percent. One possibility making the rounds is for IDEA to acquire Spice for $1 billion, with Spice shareholders getting a 12 percent stake in the combined company.

Spice's planned IPO looks set to go ahead for now, even if it does end up as part of IDEA Cellular. The operator is listing 137.9 million shares, a 20 percent stake, on National and Bombay Stock Exchanges. The IPO could help the companies come to an agreement on the value of Spice, but regulatory issues would also make a post-IPO deal more complicated.

IDEA staged its own IPO and a rights issue in March, raising INR28.19 billion ($689.75 million). (See India's IDEA Has Ideal Debut.)

— Nicole Willing, Reporter, Light Reading