Column : Taking investors for a ride

Now lets come to the facts of the case,which the report missed but is important for the investors to know. If one understands the M&A guidelines for the telecom sector,any deal between Etisalat and RComm is simply not possible for the next several years. Etisalat already has a 45% stake in Swan Telecom (now known as Etisalat DB) and got the licence in a controversial manner,along with seven other firms,in January 2008. A CBI investigation is currently on in this matter. As per the cross-holding norms,a company having a licence to operate services in a circle cannot have more than 10% equity in another similar company in the same circle. Since Etisalat DB has licences to operate services in 15 circles,it cannot buy a 25% stake in RComm. The report speculated that for a deal with RComm,the company would divest its stake in Swan. Now this is hilarious. The company bought 45% stake in 2009 for $900 million and is the only new licensee to not have started operations so far. Its proposal to hike the stake to 50% is currently before the FIPB. With valuations of Indian telecom firms nosediving by more than 50% in the last one year,who would buy Etisalats stake when all it has is 4.4 MHz spectrum and everyone knows what a ruckus would be created if only spectrum is to be valued?

One can argue that Etisalat DB can merge with RComm,which is permissible under the regulations. For incumbents it is so but not for new licensees like Etisalat DB,which got licences through controversial means and have subsequently been barred for three years from merging with any other company so that the unearned gains do not accrue to them. The newspaper report that made RComm stocks surge the next day conveniently forgot this aspect!

Some analysts have argued that the current Trai recommendations have suggested liberal M&A norms and once they are accepted the stage would be set for an RComm-Etisalat deal. Analysts and business journalists should know better. The Trai guidelines have said that any merger that results in the merged entity having spectrum beyond 6.2 MHz (which it would in this case) will have to pay market rates (the 3G spectrum rates) for the excess spectrum,plus a 5% transaction charge to the government. This means that for Etisalat to have a deal with RComm,first it would take a hit on its $900 million acquisition,then pay money to RComm for the stake,pay the government for excess spectrum,in addition to a transaction charge! Hilarious. But even if one accepts this,what does Etisalat get in returnregulatory uncertainty? With the Trai recommendations just coming in,theres huge regulatory uncertainty in the country that will easily persist for another year,ensuring that no big merger deals happen.

So dear investor,next time you read about an RComm-Etisalat deal,treat it with discountit cannot happen by any means for the next several years. Meanwhile,an MTN spokesperson has already denied that the company is in talks with RComm for any kind of deal.

rishi.rajexpressindia.com