India?s telecom sector has shown remarkable growth over the years, attracting significant interest from investors, both domestic and international. Between April 2000 and March 2011, the sector received Rs 482.2 billion as foreign direct investment (FDI), accounting for over 8 per cent of the total FDI inflow into the country during this period.
However, with controversy and policy uncertainty plaguing the sector during 2011, private equity (PE) movement slowed down during the year. Only a handful of PE deals materialised in the sector. Most of these investments were in small-sized firms in emerging segments such as e-commerce and value-added services (VAS).
Lack of clarity in policy resulted in investors adopting a cautious approach. Several companies deferred their plans to get listed on the stock exchanges and, therefore, there was limited PE investment in pre-initial public offering placements.
Funds raised through PE deals were largely spent on operation expansion and driving business growth.
tele.net takes a look at the PE deals signed over the past year…
Service providers
Following Essar?s exit from Vodafone Essar in early 2011, the UK-based telecom group started looking for new domestic partners. The move was important as Vodafone?s share in the company after the acquisition of Essar?s 33 per cent share had increased to 75 per cent, breaching the 74 per cent limit of foreign investment allowed in an Indian company. Therefore, in order to divest at least 1 per cent stake to a domestic partner, Vodafone initiated talks with various PE companies. Piramal Healthcare acquired 5.5 per cent of the issued equity share capital of Vodafone Essar from ETHL Communications Holdings for Rs 28.56 billion.
In July 2011, PE firm ChrysCapital, through its unit Monet Limited, sold its 2.7 per cent stake in Idea Cellular through an open market transaction. The deal was worth Rs 7.51 billion and involved offloading 83.48 million shares at Rs 90 each. Of these, UK-based First State Investment Management bought 57.04 million shares aggregating a 1.73 per cent stake. Following the deal, the entity?s stake in Idea increased to 5.02 per cent.
Sloka Telecom, a Bengaluru-based broadband wireless access (BWA) technology company, received venture capital funding from the Karnataka Information Technology Venture Capital Fund (KITVEN). The deal, the first between Sloka and KITVEN, took almost six months to be finalised. The company has used the funds to strengthen its marketing efforts and manufacturing capacity.
Standard Chartered Bank?s PE arm acquired a 10 per cent stake worth Rs 3.65 billion in Chennai-based IT products distributor Redington India. Also, Himachal Pradesh-based Coral Telecom raised $10 million from PE funds for expansion in the defence product and GSM mobility solution businesses. SBI Captial was the lead arranger for the financing.
Providence Equity Advisors, a US-based PE major, and Sydney-headquartered Macquarie Bank acquired 17.3 per cent stake in Hathway Cable and Datacom Limited for Rs 3.58 billion. The investors bought around 24.7 million shares from Asian Cable Systems through a series of bulk deals valuing Hathway?s shares at Rs 145 each. Of these, Macquarie purchased 10.5 million shares for Rs 1.53 billion and the rest were acquired by Providence Equity for Rs 2.05 billion.
VAS providers
Only a few VAS providers were able to raise funds through PE deals. However, the future seems promising. Having made significant investments in 3G and BWA auctions and roll-out, operators are looking for innovative applications to improve their non-voice revenues. This provides a major opportunity for the Indian VAS market, which will attract investments.
In October 2011, mobile internet services company One97 Communications undertook the third round of fund-raising. It raised $10 million from SAP Ventures, the corporate venture capital arm of software developer SAP AG. The decision to raise funds followed One97?s cancellation of its IPO plans even after receiving the Securities and Exchange Board of India?s approval for raising Rs 1.2 billion. The company has cited volatility in the stock markets for the move.
Also, Mumbai-based mobile application and distribution company Onward Mobility received Rs 180 million from IndoUS Venture Partners and Qualcomm Ventures, the venture capital arm of Qualcomm Incorporated. This was the third round of funds raised by the company. In 2010, it had raised over $1 million in two rounds from Mumbai Angels. Onward Mobility utilised these funds to expand its product portfolio and strengthen its retail distribution channels.
E-commerce
The Indian e-commerce market has continued to grow with expansion and innovation in service categories, diversification and the entry of several start-ups. This resulted in significant PE investments in e-commerce companies during 2011.
Bengaluru-based e-retailer Flipkart raised $20 million from US-based venture capital fund Tiger Global Management. Further, the company was reportedly in talks with US-based PE firms, the Carlyle Group and General Atlantic Partners, for a second round of PE funding for $150 million.
Sequoia Capital and IDG Ventures India invested $5 million each in Sourcebits, a third-party developer of innovative applications for mobile devices. The investment helped the company to expand its footprint in the Indian market.
Snapdeal.com received PE funding of about $40 million from Bessemer Venture Partners, along with existing investors Nexus Venture Partners and IndoUS Venture. In January 2011, the company had raised $12 million from Nexus Venture Partners and IndoUS Venture. SMS GupShup, a Mumbai-based group messaging provider, undertook its fifth round of funding to raise around Rs 500 million from a consortium of venture capital investors. US-based venture capital firm Tenaya Capital led the consortium, which included existing investors such as Lloyd George, New Horizons, Charles River Ventures, Helion Ventures and Globespan Capital Partners. With this round of funding, SMS GupShup raised a total of Rs 2.15 billion through PE investments.
JiGrahak Mobility Solutions, a Bengaluru-based mobile commerce company operating under the ngpay brand, raised $10 million from Nexus Venture Partners.
Handset manufacturers
Handset manufacturers find it difficult to secure bank finance as they do not own hard assets like factories. This is why they are more dependent on PE funds. The companies generally use these funds to set up or expand their manufacturing capacity, acquire research and design capabilities, and increase their retail presence.
PE funds interested in investing in this space include Advent International, Blackstone, HSBC Direct Principal Investments (Asia), Kohlberg Kravis Roberts and Company, Motilal Oswal, Norwest Venture Partners, Temasek Holdings and SBI Caps.
In 2011, Spice Mobility was in talks with PE funds for a qualified institutional buyer placement of Rs 3 billion-Rs 5 billion. Olive Telecom was also reported to be in negotiations to close a $300 million deal with PE investors. Lava Mobile was in discussions with three PE funds to raise $50 million. Kolkata-based Gee Pee Infotech was at an advanced stage of negotiation with the Motilal Oswal Group, SBI Caps, Srei Infrastructure Finance and the PE arm of Deloitte Touche to raise about $50 million in mid-2011.
Analysts believe that the Indian handset market, driven by an expanding rural subscriber base and replacement demand, is expected to double in size by 2014. Further, the government?s policy to encourage indigenous manufacturing will provide a fillip to the segment.
Infrastructure providers
PE firms have always shown interest in India?s telecom tower business. In the past, companies like Bharti Infratel and Viom Networks have received investments from PE players. For most of 2011, Reliance Communications (RCOM) was negotiating with PE players to sell 95 per cent stake in its tower arm, Reliance Infratel. After several rounds of discussions, a consortium of PE majors ? the Blackstone Group and the Carlyle Group ? recently signed a term sheet to buy a majority stake in Reliance Infratel. The consortium valued the business at Rs 150 billion-Rs 200 billion. RCOM will utilise this amount to reduce its debt.
Going forward
The Supreme Court?s verdict to revoke the 2G licences issued in 2008 is a step towards bringing stability in the sector. Further, the National Telecom Policy, 2012 will bring much-awaited clarity on the policy front. These factors, coupled with other policy initiatives such as a planned investment of Rs 6.5 trillion in the Twelfth Plan and promotion of indigenous telecom equipment manufacturing, will drive investments in the sector. Moreover, network expansion by operators, deployment of 3G and BWA infrastructure, and innovation in applications by VAS players will attract PE interest.
