New Delhi: Unitech Ltd and Norway’s Telenor ASA are locked in a bitter dispute over a proposed Rs 8,000 crore rights offer by their joint venture Uninor. The Norwegian company will look for a third party to take up the slack if Unitech, hurting because of the probe into telecom spectrum allocation and a slump in real estate, won’t agree to pick up its share of the rights offer.
“We cannot go above 74% (holding in the venture), and if they still are unwilling to participate, then we will be forced to go to another Indian partner,” Sigve Brekke, managing director of Uninor, said in an interview. “The shareholders’ agreement is clear and detailed on this. At the end of the day, we need to provide long-term funding to the company.”
Still interested: Uninor managing director Sigve Brekke has ruled out an exit from India.
Telenor, which holds a 67.25% stake, has also applied to the Foreign Investment Promotion Board (FIPB) to be allowed to raise its stake to 74% limit allowed for overseas holdings in telecom.
Unitech refuted Telenor’s contention that debt funding for telecom has dried up.
Sigve Brekke, MD of Uninor, talks about the company’s tussle with Unitech and why he isn’t too concerned about not entering the data market at this stage
“The proposed rights issue is being forced by Telenor on Uninor, wrongly and illegally, at a time when the company does not require it,” Unitech said. “As per the shareholding agreement signed between the two partners, a rights issue is the last option to be explored in absence of any other mode of funding. Uninor had Rs 9,500 crore funding available from SBI (State Bank of India), which, after initial interest, Telenor arbitrarily declined.”
Telenor said debt funding had dried up after the second-generation telecom spectrum scam broke in October 2010.
“Discussions with banks for the sector just stopped,” Brekke said. “No debt was available in India, so we had to look at other options.”
Brekke said Telenor entered the venture by investing Rs 6,100 crore that was used for launching services in 2009. No part of this cash went to Unitech, he said. The rights offer is needed to raise the long-term funds Uninor needs, Brekke said.
Unitech described Telenor’s stance as “frivolous”.
“This position of Telenor is proven wrong if one look at the loans availed by Uninor and other telecom companies in India post-November 2010,” Unitech said. “Recently, in November 2011, Uninor got a loan of Rs 1,000 crore for three years, which clearly contradicts the Telenor position.”
Telenor isn’t as yet talking to any third party, Brekke said.
“We assume that they will take up their rights,” Brekke said. “Both the partners should have a responsibility to find a long-term funding solution for the company, as I believe both parties have long-term ambitions for the company. There does not seem to be any other alternative to raising equity.”
Brekke said shareholder loans are not allowed for operations and the only option was a rights offer.
“The board then decided to raise Rs 8,000 crore for long-term funding needs,” he said. “All this is regulated by the shareholders’ agreement. We are also in arbitration in Singapore over this issue, and until that is concluded, we are continuing to prepare for the rights issue.”
Unitech said Uninor cannot go ahead with the rights offer because of the arbitration. It has also challenged the unilateral appointment of BNP Paribas SA as an independent valuer by Telenor.
“The Punjab and Haryana high court’s decision to allow a rights issue is also conditional on the outcome of arbitration,” Unitech said. “Any attempt by Telenor to emphasize ‘going ahead with rights issue’ is misleading and illegitimate, and will result in oppression to the minority shareholder.”
In the meantime, the telecom firm’s short-term funding needs are being met by foreign borrowings of around Rs 7,000 crore, guaranteed by Telenor, taking the Norwegian company’s exposure to more than Rs 13,000 crore, Brekke said.
Telenor intended to be present in India over the long term and will be open to acquisition opportunities.
“We will look for consolidation options but not now as we are growing organically,” Brekke said. “If we see financially attractive proposals, we will consider them.”
He also ruled out an exit from the country.
“We have a long-term ambition in India and we aim to be in operational control,” he said. “We will not be exiting through consolidation or being swallowed by a big operator and dilute ourselves to just a financial investor.”
Consolidation of the industry in India will need clarity on mergers and acquisitions (M&A) rules and spectrum policy.
“Spectrum and network presence will be the main drivers for consolidation and not customer base,” he said. “This is because churn, at more than 10% per month, makes the customer base value incomparable to other markets.”
Uninor will be Ebitda-positive by 2013, he expects. Ebitda refers to earnings before interest, taxes, depreciation and amortization.
“Despite the price war, all the regulatory challenges and all that has happened in the industry, we stand by that target,” Brekke said.
This was possible due to cost savings and steady revenue growth of around 80-90% month-on-month. If this trend continues, the target will be met in the first half of 2013, he said.
Challenges remain on the revenue side, especially on tariffs.
“As a small player, we cannot change industry tariffs. That has to be done by the incumbents first. The base price has increased from one paise per second to 1.2 paise per second and we followed that,” Brekke said. “All operators are playing with different promotions in different circles; pan-India, the base price has increased. As the incumbents continue to reduce free minutes, the higher base price effect will be seen.” Uninor’s average revenue per user (Arpu), a key metric of earnings, is stable at Rs 103 for active subscribers, but this has to rise if revenue targets are to be met.
According to the Telecom Regulatory Authority of India (Trai), Arpu for GSM services was Rs 93 at the end of the September quarter. The telco will cross 36 million subscribers this month and closed last year with around Rs 2,500 crore in revenue, Brekke said.
“We entered the market as No. 13 two years ago and now we are No. 5 in revenue market share in three circles,” he said.
The telecom firm is fully operational in 13 circles (covering 75% of industry revenue and subscribers), while in the remaining ones, it has fulfilled rollout obligations and will pursue subscribers once spectrum is allotted, Brekke said.
There are no concrete plans on a listing. “First we have to be Ebitda-positive, then cash flow-positive (expected by 2015),” he said.
Brekke said Uninor’s lack of third-generation (3G) spectrum isn’t weighing it down. Of total revenue, around 11% comes from data, just below the industry figure of 12-13%.
Uninor estimates India mobile phone penetration at around 45%, after discounting for multiple SIM cards.
“Over time, when more people have mobile phones and there are more smartphones in the market, then people will start focusing on data,” Brekke said, adding that 3G and data will be of much more importance in two-three years.