VCCircle

As the Reserve Bank of India has been tightening the lending screws on the real estate sector, special purpose vehicles have become a preferred route to raise money for real estate companies from private equity players. "Private equity players find it safer to invest in projects rather than a developer. A lot of developers are also finding easy that way. Once a private equity fund enters, the project suddenly becomes viable because it has the money to execute," said Ashish Bahalla, Managing Director of Millennium Spire India Management, a real estate investment firm.
Look at some of the recent SPV deals. Sun Apollo Ventures is believed to have closed a $76 million deal in the SPV of Amrapali Group, which is developing a 200-acre township in Jaipur, and a 15-acre high-end housing project in Noida. Similarly, TAIB Bank is investing $50.44 million for a 26 per cent stake in the SPV of Anant Raj Industries, while Lehman Brothers Real Estate Partners is acquiring a 50 per cent stake in Unitech's Mumbai project. (See a list of major SPV deals).
An increased liquidity pressure coupled with declining internal accruals and reduced funding options, the sector is already reeling under pressure. Add to it, is the post quarterly monetary review of the Reserve Bank of India, where it's decision to raise repo rate and cash reserve ratio is expected to further add to woes of the real estate sector. Already banks have raised their prime lending rates, and the residential demand is likely to get hit, said industry observers. "Even if the developer now takes loan which is difficult to get anyways, where is the assurance that buyer is there," Bhalla.
Real estate players are already grappling with dwindling sales, correction in land prices, tepid demand, and rising input costs, even as they face a liquidity squeeze. The developers are now looking at other sources of funds, and they find no other option than to raise money from PE players for particular projects, because the situation out there is extremely scary.

"Most mid size developers, be it at the regional levels have taken over a lot of load. All these people have got more projects than they can execute. They have more agreements to buy land than they have money for. They have applied for licenses but have no money for licensing fee and construction. All of them have three – four files lying somewhere in want of funds. And in a market where sales are being restricted to genuine investor and to some extent cautious investors, there isn't much liquidity for a free flowing real estate river that it was a few years back. Ever larger guys are trying to shed their load", said Bhalla. Bhalla added that all those who banked on the land bank concept of investing in real estate are having very difficult times.

Having said that, Bhalla also believes that although raising funds have become difficult now, this is the best time for investing in the sector as valuations have reached the rock bottom levels and there are lesser options available for financing now. "Now that the real estate river has reached the bottom line, it will definitely find well hidden nuggets", said Bhalla.

Matrix partners in the U.K. raised an India focused fund and returned the money to investors. Since it has opened its shop in India, Blackstone Real Estate Partners has only managed to make one investment (Synergy Properties), the investors are increasingly cautious to invests in real estate, finding it safe to invest in individual projects and keep scouting for the same. Hopefully, they will also find the nuggets.

Indian real estate fund FIRE Capital Fund Pvt Ltd is all set to announce the first closing of its $500 million fund. This is the second fund of the Gurgaon-based real estate investment firm. The first closing will be made at $200 million, a top official said.
Though this fund will be real estate centric, it will also look at investing in new areas such as logistics, hospitality, hotels, entertainment and commercial real estate. The company is also keenly looking at infrastructure. "We would be increasing the number of our investors for this fund, who are mainly US-based entities such as financial institutions, family offices and HNIs," Om Chaudhary, CEO, FIRE Capital Fund, told VC Circle in an interview.
Before starting FIRE Capital, Chaudhary was a partner at Feedback Ventures, a project development consultancy firm. He has been involved in the development of real estate projects, from conception to commissioning for over 10 years.
"Our strategy is to form a joint venture with a small or mid-sized local developer where the developer brings the land and we bring the capital," he added. Commenting on fundraising on the current environment he said: "Fundraising has never been easy, especially for real estate." He also added that in the current macro environment developers will also be much more realistic about prices and this scenario provides opportunity funds such as FIRE Capital. The fund currently has a team of 30 people and plans to expand up to 70 after its second fund is closed.
The size of their first fund was $121 million, which could go upto $250 million with co-investments. So far the company has invested $150 million across seven projects in Indore, Chennai, Bangalore, Jaipur, Nagpur, Bhubhaneswar and Dehradun.
"All of these are integrated townships in emerging cities with the largest of them being 1,000 acres. Bulk of these are targeted at the middle-level segment," added Chaudhary. "We tie up with one of the top five players in the region and our strategy is to focus on emerging developers because we believe 90 per cent of the market is there."

Going To Tier II
The fund's strategy is to invest in tier-II cities. "We believe that as India grows, the growth will not only be in metros. Also in these cities there is aspiration with people to stay in an integrated township setup. The supply in these cities of such townships is low and we plan address that demand-supply gap," said Sanjeeva Shivesh, Executive Director at FIRE Capital. Expanding on the fund's approach, he said that they have built a niche in the integrated township segment. "We are also very selective about our investments. Out of 100 proposals we get, we invest in one," Shivesh added.
"Rather than partnering with national players we partner with players who are local DLFs and help them become their regional DLF." He further added that local developers know their market very well and have the requisite connections to execute and sell the project.
The fund's first investment, a 136-acre integrated township in Indore called 'Silver Springs' is expected to finish its first phase by Diwali this year and have first wave of people moving into their houses.

The billionaire investor

Even as the revised exclusivity deadline for talks between Reliance Communications (RCOM) and MTN is set to end on July 21, Mukesh Ambani-led Reliance Industries (RIL) has initiated arbitration proceedings against younger brother Anil Ambani's RCOM. As expected, RCOM has dismissed RIL's move and said there was no scope for arbitration as there was neither any dispute nor any occasion for a conciliation and arbitration as it can happen only when 'both' parties refer the dispute to a person outside the court.
The development comes at a time when the Ambani vs Ambani fight has taken a political colour. Mukesh Ambani had met Prime Minister Manmohan Singh early this week and there were speculations that the PM would play the role of peacemaker between the feuding brothers.
Samajwadi Party leader Amar Singh (a close confidante of Anil Ambani) has been "lobbying" at the highest levels of the government to arrive at rapproachment between the Ambani brothers. Samajwadi Party, whose support is crucial for the survival of the ruling UPA government, had earlier slammed RIL's move to thwart the RCOM-MTN merger and demanded that the PM should intervene to resolve the matter.
Meanwhile, the 'war of letters' continued between the two camps with RIL sending yet another communication to MTN, stating it would take legal action if the South African telco merges with RCOM.
In this backdrop, MTN has reportedly asked RCOM to sort out all legal issues with RIL as a precondition for the deal. So RIL's move could pose trouble in the ongoing talks between RCOM and MTN.
These developments come amidst reports that MTN has sent feelers to Bharti Airtel for reviving talks if it failed to clinch a deal with RCOM. MTN and Bharti Airtel were close to a merger in May but the Indian firm backed out after the two companies failed to reach at an agreement over the corporate structure of the combined entity.
The dispute between RIL and RCOM, relates to the RIL stance that it has the right of first refusal over RCOM in the event of a change of management, a claim that has been repeatedly denied by Anil Ambani's Reliance-ADAG.
A merger between RCOM and the South African telco will create a global telecom giant with close to 120 million subscribers with its footprint across 23 countries and covering a population of two billion, a third of the world.

Was it difficult to raise the fund in the current scenario?

No. It wasn't. The institutions that we were focusing on are basically those which got allocations for Asia as in investing in India and other places. These institutions are very long term sellers, these upswings and down swings, I guess they have seen ten – twenty cycles each. They are quite comfortable and base themselves on the process of a judgment which people like us employ which helps them gain confidence. Also, historically all across the world whenever funds have been invested at down time, they perform better, because of better pricing and catching the sector cycles when they rise up.

Has fund raising environment for new players ?

It is but we are not new in a way. There are a few more players who are raising monies now. Some are absolutely new and some have done one or two products in the past.
New players will have to distinguish and differentiate why they are different and what is their strategy to work better than the others. But here experience and track record is seen by the investors, the pension funds, the fund of funds and they base the judgment on that as well.

Did you also have a network of distributors helping you to raise the fund?
We did it primarily through our own contacts because I have been handling pension funds money for last 10-15 years. The contracts have been primarily on our own at this stage. Only now we will be going for a distribution or a placement agent. Because we are going to concentrate our time in investing it rather than spending too much time on marketing it.

Who are your investors? How much of it is foreign and domestic?
All is foreign. This fund does not have a domestic component at all.

We have fund of funds, corporates, family offices, pension funds are also in process with us.

If you could just specify the regions from where you have raised the major chunks of it?

The major chunks have come from Europe at this stage and we have investors in Asia that are in process as well and then the U.S.

Would you be looking at making PIPE transactions? If yes, what will be the share of such deals in your portfolio?

We don't expect more than 20-25 % in PIPE. We will do PIPEs only to the extent that we have Board memberships and we are involved in the strategy of the firm in terms of expanding. Typically we might do a PIPE when we have an investment in an unlisted company, so take up a PIPE stake and do a merger or a roll up. It helps the strategy of work in both firms. PIPE just for the sake of getting exposure to a sector or market, No. We won't do secondary market transactions types.

Funds entering in a bear market like this, if I may call so. Are you hoping to get some value picks?

We have started seeing improvement in value already See, apart from this that the environment is producing a better value, we are typically the first of investors in most of the deals we do and that has a price advantage in itself but given this environment the pricing for us has improved.

So what remains your future outlook on the private equity market now?

Its gone through a very interesting phase. There is more to come. Even if you compare the present date to about seven or eight years back, the depth of sectors that require private equity are more, the number of players have increased and matured. Also companies who take money from us have a better understanding and appreciation of our role and how we should be the shareholders and regard them as partners etc.

Now that the valuations have become realistic. What remain your future outlook on the market?

You make more money .:)

If you could tell us the IRR expectations of your fund and the payback period?

We are in the business for making a few multiples :) laughs . But talking on a conservative basis, we can say that we cant give investors less than 30-35%. Given what we have done in the past and what we are in the business for, its always a few times returns that we generate and give back.

We expect the first returns to go back to investors in about 2.5-3 years. The full payback is about 5-6 years.

What is the life of the fund?
The life of the fund is seven years.

Any particular sectors that you are upbeat about?

We like transport, logistics, financial services. We like the services related to corporate training and education, auto ancillary and sectors that are riding on the current expansion of the consumer market in India etc.

Would you stay out of real estate ?
Pure real estate yaa!!!

And Infrastructure?

Infrastructure we actually invest in the drivers and some of them who are suppliers in the infrastructure companies.

Do you mean infrastructure enabling companies?

Absolutely, service enabling companies other than distributors etc. Electrical transformers or engineering parts or aspects of logistics etc, and all that we do.

In terms of positioning this fund, how would you do that? How is your entry strategy different?

Our partners and me, we have been investing in India since 1990. We have invested in many companies in the past and have seen many investment cycles. Our depth of contact in the market is very deep and we get good deal flow before other people hear of it. These are two differentiators. We are also very good stock pickers in a way so we are able to invest in very good management team. Our typical deal size is between 15 odd million dollars and will be focusing on the midmarkets.

How many investments do you see yourself making in a year?
In one year, we probably be looking at around six.

Do you usually demand Board representation?

Always

What is the kind of value do you see yourself bringing to the portfolio companies?

Based on what we have done in the past we provide inputs both at the strategy level and operational level. We provide value in helping people hire new key level people or getting additional advisory Board members who can help operationally. We help in providing inductions to potential clients, OEM's or distributors . Occasionally, we also do M&A related advice, companies going for listing, the handholding required with the merchant banks and all that.

You just raised your fund. What is the kind of sense that you bring as in how are the foreign investors looking at India? Are they still upbeat on India?

Yaa they are ..although happenings on the home ground have made people a little conservative as everyone is watching. The decision to increase allocations to India have happened over 3-4 years. They are wanting to capture the growth that countries like China and India offer to them. Its the growth that they are looking at. Also looking at asset diversification away from their home markets in Europe or the United States. They look forward to capturing the increase in consumptions which countries like India offer. If you look at consumption or infrastructure or services the low base at which things are being built upon in India, they offer a great deal of attraction. Some of our investors would come down and they are 60-65 years old. They say that they are seeing these trends and that they are comparable to the things that we saw in the 50s or 60s in the U.S. When people say that they have seen that growth, its exciting that they can relate it back to their own lives decade back.

Coming back to your first fund, 2i capital PCC, how much of it has been invested?

We have invested everything. We had a total of approximately 200 million.

Pipavav Shipyard, India Infoline, Titagrah Wagons, Idea Cellular, Excel telecom, Gayatri Projects, most of which have been listed.

When do you see yourself making the first investment?

We are evaluating many deals now. May be in the next month or so.

From the current pipeline of things, what does it look like which sector would it be?

At closed levels we are evaluating six companies and we may invest in one or two Get more money and invest in the rest. Its like touch and go at this stage but it could be services or logistics.

By when do you see yourself making the second closure?

We are targeting something by end of October, November, Also factoring in the degree of assumed slowness in the world. The second closure would be in another 60-70 and the final closure of about 200 odd.

Former founders of DVD rental company Madhouse are back with another venture. This time it's not a classical startup but an advisory company to help startups kickstart their businesses. Sameer Guglani and Nandini Hirianniah have left their jobs at movie rental firm Seventymm, the company which acquired their DVD rental startup last year, to start Morpheus Venture Partners. Morpheus is a desi version of the Silicon Valley's famed Y-Combinator, according to Guglani.
The difference between Morpheus and Y Combinator is that the latter will give some seed capital to startups, besides loads of intensive lessons in entrepreneurship, bootcamps, alumni network and so on, and make them ready for venture funding.
But Gulgani's version will not give capital, while will provide everyting else. "Morpheus Ventures would pick up 4 to 8 per cent stake for this, depending on what stage the start-up is and what value we can add," he said. "We will take the companies to such a level from which they can easily raise next round of funding," said Gulgani.
Though Morpheus is more interested in technology space, it also plans to invest in areas such as retail, broadcasting, mobile and also healthcare. It does not have a fund at this point of time but it is open to raising one next year, Guglani said. Morpheus also plans to use networks and events such as The Indus Entrepreneurs (TiE) and Proto.
The model has had some success in the US and has so far incubated around 100 companies. Morpheus plans to give advise and mentor companies who are still at a very nascent stages of development. There will be close association with the portfolio companies for about four to six months where one partner will be assigned to each company. "Post that we will continue to be in touch, but we expect them to become self sufficient after six months," said Gulgani. " Morpheus is also panning to add one more partner in the near future. Each partner will look after three companies.
"We plan to hold our investments for 3-7 years because three years is when any early acquisition happens and seven years is when any strategic exit can happen" added Gulgani. Morpheus plans to include 10-20 companies in its portfolio for the first year and the first 'bootcamp' will be held in Banglore, which will require some of the companies to relocate.
Morpheus already has five companies in its portfolio which include - Foodathome, a Gurgaon based food delivery company; Instablogs, a social networking site and Commonfloor, a niche socialising portal. Though Gulgani has previously worked startups in mobile handsets domain (Sonim, Pelephia) he admits that his expertise does not extend to every field. "We have a pool of specialised advisers. So, part of the value add that we will bring in introduce the companies to the right advisers who can provide expert advise in that domain. They will be paid out of the equity which Morpheus takes," said Gulgani.

Idea Cellular has come a long way since its avtar as Birla Communications in 1995. From a single promoter-owned company, the Aditya Birla group's telecom venture has grown to become a prominent player in the telecom sector through innovative joint ventures and acquisitions. The
low point of AV Birla's journey in telecom came last year when the group had a spat with the Tatas who were then pushing for the launch of CDMA-based telecom services.
In 1995 Idea Cellular, promoted by the AV Birla Group, obtained licences for providing GSM-based telecom services in the Gujarat and Maharashtra Circles. Next year it changed its name to Birla AT&T Communications following a joint venture pact between the group firm Grasim and US-based telecom
giant AT&T Corporation. Operations started in 1997. The next three years witnessed the evolution of the telecom policy in the country with advances in wireless technology. The market started picking
up in 2000 and the firm merged with Tata Cellular which brought on board Tatas and also acquired
a licence for the Andhra Pradesh circle.

Acquisitions Unfold
The inorganic growth strategy continued in the following year when the firm acquired RPG Cellular which also brought along the operators licence for the Madhya Pradesh (including Chattisgarh) circle. Around this time the firm's name also changed to Birla Tata AT&T or Batata, as it was more popularly known as. As Batata it also obtained the licence for providing GSM-based services in the lucrative Delhi
circle.
The Idea Cellular as we know today took birth in 2002 which also led to the umbrella consumer branding of 'Idea'. This year the firm crossed the milestone of a million subscriber in the country.
However, it got a true national presence with the acquisition of Escotel in 2004 which gave it presence in Maharashtra (excluding Mumbai), Goa, Gujarat, Andhra Pradesh, Madhya Pradesh, Chattisgarh, Uttar Pradesh (East and West), Haryana, Kerala, Rajasthan and Delhi NCR. It also completed a major debt restructuring exercise and got additional funding for expansion in the Delhi circle.

AT&T Exits
This year was also significant for another reason as it saw the exit of AT&T from the JV, where the three partners AV Birla, Tatas and AT&T held around 33 percent stake each. After AT&T merged with
Cingular in the U.S. in 2004, it decided to sell its 32.9 percent stake in Idea.
Initially there were many suitors for this stake including Telekom Malaysia, which now gets an entry into Idea after the Spice Communication deal, and Maxis (which has invested in another telco Aircel). Eventually AT&T's stake was bought over by the other existing promoters: the Tatas and Birlas at 16.45 percent each, becoming equal partners in Idea. They paid Rs 1,300 crore for the 32.9 per cent stake which valued the firm at around Rs 4,000 crore. Telekom Malaysia is now forking out
more than Rs 7,000 crore for a 15 percent stake through a preferential allotment, which values Idea at around $10 billion translating into the value appreciation of 10 times in less than four years.

The Tata-Birla Row
After the buyout of AT&T share, the Birla-Tata partnership began to see problems as Tatas entered the telecom business separately through their own subsidiary, Tata Indicom, which was a CDMA-based
service provider. Given this move the licence for Mumbai circle for Idea was delayed and led to further difference of opinion between two of the most prominent business groups in the country. As per the sector licence norms, one promoter could not have more than 10 percent stake in two companies operating in the same circle. Since Tata Indicom was already operating in Mumbai, the norms did not allow Idea to get a licence.
After months of an acrimonious dispute with Tatas who had interest in two competing firms, the partners came to an agreement. The Tatas sold out their 48.18 percent to Birlas in 2006 at Rs 40.51 a share which translated into a deal worth Rs 4,406 crore, valuing the firm at around Rs 9,000 crore.
In the meantime the firm turned profitable in 2005, which explained a sharp premium for the equity stake given that the firm's valuation doubled in just one year since the time AT&T sold its stake.
While 15 percent of the 48.18 percent was acquired by Aditya Birla Nuvo, a company which housed the new business initiatives of the Birlas, other group firms held the remaining stake.

Life After Tatas
In 2006, Idea also acquired Escorts Telecommunications, reached the milestone of 10 million subscribers, received the licence for Mumbai circle and indirectly received a licence for the Bihar circle
through the merger of Aditya Birla Telecom with Idea. Aditya Birla Nuvo which owned Aditya Birla Telecom apart from being one of the key shareholders of Idea, transferred its entire shareholding in the firm to Idea for Rs 10 crore.
The clarity over promoter ownership -following exit of Tatas - and with a pan India presence, Idea went public with an IPO raising Rs 2,818.7 crore. Today Idea Cellular has close to 26 million subscribers and closed last financial year with net sales of Rs 6,720 crore ($1.6 billion)
and net profit of Rs 1,042.3 crore ($240 million). Though Idea has fallen behind other key players in the industry like Bharti Airtel, Vodafone Essar and Reliance Communications, who entered the sector
either at the same time or much later, Idea's business has grown in size and the company's market cap now stands at about Rs 26,887 crore or $6.4 billion.

If the Indian pharma industry is said to be ripe for consolidation (think Ranbaxy's sellout to Daiichi Sankyo), then the clinical research segment is set to witness so deals too. A few firms which are engaged in contract research for development of new medicines, clinical trials of medicines in human beings, pre-clinical studies and animal testing are said to be looking for buyers, according to a report. While there are two such clinical research organisations (CROs) based in Mumbai and another two in Hyderabad which are on the block, there are many others in the pipeline.
Besides, some of the bigger CROs are looking at mergers with other large players to gain size. Large players in the segment include Quintiles Spectral, Clinigene, SIRO Clinpharm, Lambda Therapeutics besides Reliance Clinical, among others.
The CROs which are up for sale have small size with revenues ranging between $1 to $2 million. The industry itself is in a nascent stage with overall size pegged at around $250 million.
The consolidation in the industry is linked to widespread mushrooming of CROs in the country over the last five years. There are more than 100 CROs in India today as against just about 20 players in FY'05.
This inturn was due to global interest in testing medicines on a diverse group of Indian population at much lower costs. These CROs are also facing acute shortage of skilled staff, with very few institutes in India today being able to train clinical professionals.

Moreover, regulations are getting tighter, both in India and abroad which is leading to a push for consolidation. Other firms who jumped on to the bandwagon without getting their business basics right are also facing problems.

Emerging economis like India "If in 2007 economies begin to grow more slowly, stock markets decline a bit, and debt becomes more expensive and harder to secure, we will be ready."

That was Carlyle last year's annual report, which highlighted an explanation for Carlyle's cautious approach. The private equity biggie claims further in its just released annual report http://www.carlyle.com/Annual%20Report/Carlyle_Annual_Report_2007.pdf
that their investment professionals heeded their advice, and they were able to close all eight of the deals with committed financing in their buyout pipeline at the time the credit markets collapsed. However, Carlyle was not immune to the credit crunch.

"The credit crunch marks the end of the period of extraordinary liquidity that began in 2003. For Carlyle, the implications are threefold. First, LBO debt has become harder -- and more expensive -- to secure...Second, the slowdown in economic growth resulting from the credit crunch will likely create a more challenging operating environment for some of our portfolio companies. And third, depressed asset prices may constrain our ability to exit from some of our current investments."

In 2006, they established Carlyle Capital Corporation (CCC) to invest primarily in mortgage-related securities which went bust with its value impaired by the unprecedented meltdown in the mortgage market. "We regret that CCC did not perform as planned."

The Washington based private equity biggie, however, points out that this failure of CCC
"demonstrates the difficulty that companies with mortgage-related securities in
their portfolios—even those rated AAA and issued by U.S. government-backed agencies—have experienced during the global credit crunch."
Among the report's highlights were:
2006 and 2007 were Carlyle's best two years ever as it returned $19.1 billion in equity and profit to limited partners in that period.
Carlyle raised nearly $31 billion for 17 funds in 2007.
It invested $17.6 billion in new deals in 2007.
Carlyle Asia Growth Partners III , L.P. invested $262 million in 18 new and follow-on transactions in eight sectors in China, India, Japan and South Korea.
Carlyle's investment in Housing Development Finance Corporation, India's leading housing finance company, in July 2007, was then the largest equity investment in India measured by the amount of equity deployed.
Established in 2000, Carlyle's growth capital investment group in Asia advises three funds: Carlyle Asia Venture Partners I, L.P., launched in 2000 at $159 million; Carlyle Asia Venture Partners II , L.P., launched in 2001 at $164 million; and Carlyle Asia Growth Partners III , L.P., launched in 2006 at $680 million.
Continued to expand internationally, opening offices in Madrid and São Paulo, and establishing a team in Mumbai.

The investment strategy post credit-crunch

"We believe that the fast-growing economies of Asia, Latin America, Central and Eastern Europe, and the Middle East and North Africa (MENA ) region are likely to generate many of the most attractive investment opportunities in the years ahead. Moreover, investments in these markets generally involve little to no leverage, making them largely immune to turmoil in the credit markets. In 2007, we hired a team to invest in Central and Eastern Europe and expanded the firm's presence in Asia, the MENA region and Latin America."

Vik Ghei, an ex- Goldman Sachs executive and working with a hedge fund in the U.S explains why it has been easy to do PE in the U.S than India and that a downward trend in the Indian stock markets will help deal making.

Will all private equity firms follow the same route

Vik said that in the U.S., PE firms relied so much on debt to finance their acquisitions, and with the current "credit crunch" cheap debt is not available. "PE firms are having trouble but they are sitting on warchests of money and are no doubt trying to deploy it if they can make good unlevered returns in India. If the market corrects downward in India, that can help dealmaking. PE returns have been great the last decade in the U.S and so investors looking at the past have sent these firms tons of money to deploy but the problem is the credit crunch literally stopped everything cold since last August in the U.S, and there are no signs of abating those firms need to find a way to make money without leveraging their target portfolio company 8 to 1 or 10 to 1 . if they have to put in a huge equity check in the U.S., the returns will be sub-par so they can't afford to do that, the investors will not tolerate returns less than 20% So that was why in the past it has been so much better to do PE in then U.S. than India."

Idea Cellular has come a long way since it business origins in 1995 when it was incorporated as Birla Communications. From a single promoter owned company it struck joint venture and acquisition deals and even merged with other telcos to bring on board other partners and then eventually became a Birla Group company again in 2006.
However, the journey included a number of twists and turns among those a particularly acrimonious split with another business group the Tatas who tended to put their eggs in two different baskets with their independent launch of CDMA-based telecom services.

EARLY YEARS:

Lets rewind to 1995 when the firm promoted by the AV Birla Group obtained licenses for providing GSM-based telecom services in the Gujarat and Maharashtra Circles. This was as part of the original bidding process for GSM license in the country.

The following year it changed its name to Birla AT&T Communications which followed a JV between Group firm Grasim and US-based telecom giant AT&T Corporation. Actual operations however started in the two circles for which it obtained licences in 1997.

The next three years witnessed the shaping up of the telecom policy in the country. It was also a period which was just at the cusp of a major revolution in wireless communication. The market started picking up by 2000 around the same time that the firm merged with Tata Cellular which brought on board Tatas in the venture and also acquired a license for the Andhra Pradesh circle.

ACQUISITION STRATEGY UNFOLDS

The inorganic growth strategy continued in the following year when the firm acquired RPG Cellular which also brought along the operators license for the Madhya Pradesh (including Chattisgarh) circle. Around this time the firm's name also changed to Birla Tata AT&T or Batata, as it was more popularly known as. As Batata it also obtained the license for providing GSM-based services in the lucrative Delhi circle.

The Idea Cellular as we know today took birth in 2002 which also led to the umbrella consumer branding of 'Idea'. This year the firm crossed the milestone of a million subscriber in the country.

However the firm first got a true national presence with the acquisition of Escotel in 2004 which gave it a presence covering Maharashtra (excluding Mumbai), Goa, Gujarat, Andhra Pradesh, Madhya Pradesh, Chattisgarh, Uttar Pradesh (East and West), Haryana, Kerala, Rajasthan and Delhi NCR. It also completed a major debt restructuring exercise and got additional funding for expansion in the Delhi circle.

AT&T EXITS

This year was also significant for another reason as it saw the exit of AT&T from the JV. Till then the three partners AV Birla, Tatas and AT&T held around 33 per cent stake each. After AT&T merged with Cingular in the US in 2004, it decided to sell its 32.9% stake in Idea.

Initially there were many suitors for this stake including Telekom Malaysia, which now gets an entry into Idea after the Spice Communication deal, and Maxis( which is now invested in another telco Aircell). Eventually AT&T's stake was bought over by the other existing promoters: the Tatas and Birlas at 16.45% each, who ineffect became equal equity JV partners in Idea.

WHAT A MISS FOR TELEKOM MALAYSIA

They shelled out Rs 1,300 crore for the 32.9 per cent stake which valued the firm at around Rs 4,000 crore. The valuation appreciation can be gauged by the fact that Telekom Malaysia is now forking out more than Rs 7,000 crore for a 15 per cent stake through a preferential allotment, which values Idea at around $10 billion translating into value appreciation of ten times or 900 per cent gain in less than four years.

BIRLA-TATA DUEL

The Birla-Tata partnership turned for the worse after buying out AT&T. This was because Tatas entered the telecom business separately through its own subsidiary, Tata Indicom, which was a CDMA-based service provider. Given this move the license for Mumbai circle for Idea was delayed and led to further difference of opinion between two of the most prominent business groups in the country. This was because as per the sector license norms, one promoter could not have more than 10 per cent stake in two companies operating in the same circle. Since Tata Indicom was already operating in Mumbai the norms did not allow Idea to get a license.

After months of an acrimonious dispute over the conflict of interest of Tatas which had interest in two competing firms, the partners came to an agreement to sell out. The Tatas finally sold out their 48.18 per cent to Birlas in 2006 at Rs 40.51 a share which translated into a deal worth Rs 4,406 crore, valuing the firm at around Rs 9,000 crore. In the meantime the firm turned profitable in 2005 which explained a sharp premium for the equity stake given that the firm's valuation doubled in just one year from the time AT&T sold its stake.

While 15 per cent of the 48.18 per cent this was acquired by Aditya Birla Nuvo, a company which housed the new business initiatives of the Birlas, other group firms held the remaining stake.

LIFE AFTER TATAS

During 2006, Idea also acquired Escorts Telecommunications, reached the milestone of 10 million subscribers, received the license for Mumbai circle and indirectly received the license for the Bihar circle through merger of Aditya Birla Telecom with Idea. Aditya Birla Nuvo which owned Aditya Birla Telecom apart from being one of the key shareholders of Idea, transferred its entire shareholding in the firm to Idea for Rs 10 crore.

The clarity over promoter ownership- following exit of Tatas- and with a pan India presence, Idea went public with an IPO raising Rs 2,818.7 crore.

Today Idea Cellular has close to 26 million subscribers and closed last financial year with net sales of Rs 6,720 crore($1.6 billion) and net profit of Rs 1,042.3 crore($240 million). Though it has fallen behind other key players in the industry like Bharti, Vodafone and Reliance who entered the sector either at the same time or much after Idea, the business has grown in size and has a market cap of around Rs 26,887 crore or $ 6.4 billion.