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Telecom returns attract PE players

With return on investments (ROI) ranging between 25-30 per cent, Indian telecom has become one of the most attractive destinations for the private equity players worldwide. And this action is now shifting to the telecom infrastructure and VAS players too.

From initial funding to minority stakes and now even acquiring control, from the start-ups to mid-size companies and even mature listed companies, it is all happening in Indian telecom.

The soaring Indian telecom industry has in the last one year witnessed frenetic activity as PE investors hope to repeat Warburg Pincus' success with Bharti Airtel.
In 2006, the telecom sector accounted for about 44 per cent of the total value of all private equity deals in India, spread over 19 deals, according to a study by Delhi-based KPO firm SmartCube.
The zooming equity markets and robust GDP growth have added to create an increased appetite among private equity firms.
Even though it is ranked sixth in the telco sweepstakes, Idea Cellular, for instance, saw multiple investments from various private equity groups prior to its IPO. UK based GLG Partners picked up an 8 per cent stake in the company for $213 million. ChrysCapital invested $116 million for a 5 per cent stake.
Providence Equity Partners invested $400 million for a 16 per cent stake, while TA Associates acquired a minority stake. In fact, acquisition of the stake in Idea marked the entry into India for funds like Providence and TA Associates.
The other Indian telco that has seen high PE interest was Tata Teleservices. Singapore's Temasek Holdings and Sterling Infotech invested approximately $397 million in the company.
The story of Hutch, of course, is almost telecom folklore. But few would remember that the country's third largest phone company was approached by a clutch of investors, including PE firms Blackstone and Texas Pacific, prior to being acquired by Vodafone.
So what else is driving such attention to Indian telecom markets? To some extent, it is lower returns in developed markets, according to SmartCube.
A combination of surging consumer demand, a rapidly growing services sector, clear laws, a robust financial system and booming stock markets have made India one of the most sought-after destinations for capital, attracting nearly a fourth of the $28 billion that Asia (minus Japan) has received so far in 2007.
And PE firms that have been seeing returns from investments in developed markets dwindle, are obviously betting on emerging economies like India for big returns.
Some of the best-known firms such as Lehman Brothers, Baird Private Equity, Apax Partners and Soros Fund Management have been quite active in India in recent months.
India is currently the third largest telecom market after China and the US, with total number of telephone subscribers at over 235 million as of June 2007.
The most important barometer of telecom penetration among population – the tele-density – is predicted to reach 18 per cent by 2009.
Though that is far behind USA and China, which have a tele-density of 60 per cent and 23 per cent respectively, the c ellular subscriber base in India is expected to quadruple by 2012.
Investors believe that given the low penetration levels, mobile telecom (now accounting for as much as 75 per cent of the total subscriber base) will be the major growth driver, with its ability to continually address larger proportions of the population.
According to analysts, even though India's hot equity markets seem to be competing with private equity opportunities, India also offers a buoyant exit option both through mergers and acquisitions and IPOs.
A few private PE players also made profitable exits. Ashmore Investments and Deutsche Bank sold their stake in Spice Telecom to Telekom Malaysia for approximately $179 million.

Warburg Pincus had sold its stake in Bharti Televentures during 2004-2005 (after having invested $292 million way back in 1999-2001) partly in the stock market and partly through a strategic sale to Vodafone.
Total realization from the exit was a gigantic $1.6 billion, making this the most profitable exit in the history of PE in India. The attractiveness of telecom sector in India is borne out by the relatively higher average PE multiple of over 50 in deals like these.
The good news is that it not just telecom service providers that are seeing the action. As the sector continues to grow by leaps and bounds, the telecom infrastructure segment too is expected to bring significant investment opportunities.
Bharti Infratel (telecom tower subsidiary of Bharti-Airtel valued at a staggering $11 billion, with 40,000 towers and planned 30,000 more towers by end 2007) is considering offloading a 10-12 per cent stake in Infratel to banks and PE funds by the end of fiscal year 2007, or within the next 18 months. It is in talks with Goldman Sachs, JP Morgan, Citi, Lehman Brothers and Warburg Pincus.
Reliance Communication too is expected to either sell stake to PE players/financial investors, or go for a public listing in the coming months in Reliance Telecom Infrastructure.
Tata Teleservices is already in talks with Temasek and some other PE players for divesting a sizeable stake (up to 20 per cent) in its infrastructure subsidiary, holding wireless towers and other related telecom infrastructure.
Other segments too are reaping the benefits of the Indian telecom boom. In April, Aureos Capital announced an $8-10 million investment in Ordyn Technologies, a Bangalore-based manufacturer of optical telecom transmission equipment.
Players such as Seqouia Capital, Northwest Venture Partners, Lehman Brothers, and Matrix Partners are eyeing big growth opportunities in value-added services (VAS) and content aggregation companies.
Sequoia alone has made investments in about half a dozen entities, mostly in the VAS or content aggregation space. Lehman Brothers recently invested about $15 million in Cellebrum while Northwest Venture Partners and Nexus have invested about $12-$15 million in Mobile2Win.com.
This is expected to grow to big ticket investments in the months and years to come, and get a fillip as soon as 3G debuts in India and VAS firms' evaluations soar further.
Source: India Times

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