Idea: Not a bad deal

The premium paid by Telekom Malaysia makes up for the expensive buyout of Spice.

If Idea Cellular has paid too much to buy out Spice Communications, which is clearly has, it has also gained from Telekom Malyasia International (TMIL) overpaying for its 14.9 per cent stake in Idea.

At Rs 77 per share that Idea is shelling out for the loss-making Spice, the latter is valued at nearly 20 times forward enterprise value /ebitda (EV/ebitda) while at Rs 157, TMIL is valuing Idea around 15 times FY09 EV/ebitda. Incidentally, Bharti Airtel, India's biggest mobile phone company, currently trades around 10 times forward EV/ebitda. And, at Wednesday's closing price of Rs 102, Idea (pre-merger), is a little more expensive at 10.6 times FY09 EV/ebitda.

That's possibly because at the end of the day Idea is a gainer from the buyout; it will be left with cash, which for a telco that's planning to become a pan-Indian player and is now present in 13 out of 22 circles, can come in handy. So while Idea will pay Rs 2,700 crore for the stake in Spice, it will get Rs 7,200 crore from Telekom Malaysia, leaving it with a net Rs 4,500 crore.

The debt on Idea's balance sheet is about Rs 7,000 crore. With Idea expecting inflows from the sale of a 20 per cent stake in one of its subsidiaries of Rs 2,400 crore, the company can become debt-free.

The Karnataka and Punjab circles, which Idea has acquired, will mean 4.5 million new subscribers and a combined market share at just over 11 per cent.

That will not it move up in the league tables, though it becomes a stronger number five. It will, however, gain from the efficient 900 Mhz spectrum that Spice.The telco plans to roll out networks in four circles""including Tamil Nadu and Mumbai.

However, the three circles that it launched between September and November 2006 are still believed to be losing money. In a deteriorating price environment "" tariff wars and falling arpus "" Idea is more vulnerable than the competition because it doesn't have scale.

The telco's average revenue per user(arpu) is at about a 20 per cent discount to that of Bharti even though the arpu did rise 3 per cent q-o-q in the March 2008 quarter to Rs 287. A 20 per cent dilution in the equity could keep the stock subdued.