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Idea Cellular Ltd has bought 100% of Escotel Mobile Communications for an enterprise value of around Rs 1,150 crore, of which Rs 275 crore will be paid by way of cash and the balance Rs 890 crore will be by way of debt.

This comes as a setback to Bharti, which had been in the race to buy Escotel. Equity consideration is around Rs 355 crore, which includes the cash component of Rs 275 crore and about Rs 80 crore of promoters' debt (against which promoters can recover cash). There is a slight discrepancy, since the Escotel side said this amount is around Rs 80 crore, while Idea said it was around Rs 65 crore.

Apart from the promoters' debt, Idea would take on its books Escotels' debt of over Rs 800 crore. Industry sources pointed out this would take Idea's total debt to Rs 3,000 crore plus (not including the cash component) for a subscriber base of around three million (2.2 million of Idea, plus 0.83 million of Escotel). They added that Bharti Cellular has a debt of around Rs 3,900 crore for a subscriber base of around 5.5 million

Also, it is not known if the three promoters of Idea, the Birlas, Tatas and AT&T, would bring in additional equity to fund the cash component of Rs 275 crore. If not, the money for this deal could also be raised through the initial public offer (IPO) route or through additional debt, which would further increase t he debt burden.

Idea issued a press release saying they had completed "the largest acquisition in the wireless industry". The transaction includes six telecom circles - the existing three circles of Escotel and the three licences obtained by Escorts at the time of auctions of fourth operator licences. Escorts has more than 8,25,000 subscribers. DSP Merrill Lynch have been advisors to Idea Cellular.

The newly acquired circles represent an addition to Idea's existing footprint with all, except Kerala, being contiguous to Idea's existing operation.

Idea will have incumbency advantage in as many as seven circles, which would entitle the company to an additional two per cent reduction in licence fees for four years from April 1, 2004, which has been granted only to the incumbent first and second operators in non-metro circles," said Vikram Mehmi, CEO, Idea Cellular.

The Nandas hold 51 per cent of Escotel, while the balance 49 per cent is held by First Pacific. First Pacific had decided to exit India two years ago and had been waiting for the right buyer to come along with the right price.

It is learnt that Idea hiked its offer in the last few days. The deal makes great sense for Idea because it is not an operator in any of the circles in which Escotel provides service. Bharti, on the other hand, offers service in all the circles where Escotel operates, as the fourth operator.

The deal is a major setback for Bharti, as Sunil Mittal, chairman of Bharti group, was also eyeing Escotel. "If the price is higher than our benchmark valuation, we are not ready to do the deal. We are very clear. Now if we do acquisitions, it is only for the financials, not strategy," said Mittal, denying that Bharti had lost in the bid war with Idea Cellular for Escotel

We had bid significantly lower," said Mittal. "We are already present in all those circles, so the need for strategy does not exist now. Also, the mergers and acquisition policy is not clear," he added. In the absence of intra-circle merger guidelines, it was difficult for Bharti to evaluate Escotel fully.

Bharti operates on 1,800 MHz. The cost of operation is higher at this frequency. So it made sense for Bharti to acquire Escotel and gain access to the frequency in 900 MHz band that Escotel operates on. Escotel provides cellular mobile services using GSM technology in three circles - Kerala, Haryana and UP West.

The company is the market leader in UP West, with a subscriber base of 3,64,728. In Kerala and Haryana, it is the number two operator, with a subscriber base of 3,38,707 and 3,64,728 respectively. State-owned BSNL is No. 1 in both these circles, though it leads by a relatively small margin.

Idea is a GSM operator in Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh and Delhi. It is jointly owned by the Aditya Birla group, the Tatas and AT&T in equal proportions and is managed by professionals. Idea's subscriber base was 22,41,427 as on December 31, 2003.

It is the fourth largest GSM operator in the country after Airtel, BSNL and Hutch. After the merger with Escotel, its subscriber base will go up to 30,67,272, but it will continue to be at No 4, though its margin will come down.

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