Mumbai: In perhaps the first instance of a hedge fund—rather than a venture capital firm or a private equity fund—to incubate, own and profitably exit a business in India, the local arm of US-based Q Investments Lp. is selling Xcel Telecom Pvt. Ltd to American Tower Corp.
Unlikely role: Managing director of Q-India Pranav Parikh.
Incubation is an unlikely role for a hedge fund, which is popularly seen as trading in high-risk, high-return securities. It is seen more an area of operation for venture capital companies and private equity funds.
Q-India Investment Advisors said earlier this week that it agreed to sell Mumbai-based Xcel, a commucations towers company, which it incubated in 2006 and helped it expand to 1,700 towers across the country.
Bhavesh A. Shah, executive director of investment banking at JM Financial Consultants Pvt. Ltd, said there are some instances where fledgling businesses have been acquired by a private equity fund with plans to grow them from scratch.
“Classic private equity style investing, even for growth investing, has been similar—to create value for the investment perhaps through roll-up strategy for the portfolio company rather than make conflicting investments in the same sector,” he said.
An acquisition plan designed to acquire many small firms in a particular industry is known as a roll-up strategy.
The other way incubation happens is by setting up special purpose acquisition companies (SPACs), which are funds that focus on aggregating certain types of assets. This is a roll-up and integration strategy to create value through scale.
Therefore, while Q-India’s aggregation of telecom towers through Xcel may look like a SPAC, it really isn’t one.
“When we entered, there was nothing called the telecom tower industry. We didn’t even know whether the industry would grow,” said Pranav Parikh, managing director of Q-India. “It was in early 2006 that we started to evaluate the tower business in India. At that time, there were no independent players.”
That was the time when others companies, such as Quippo Telecom Infrastructure Ltd, which recently merged its tower business with that of Tata Teleservices Ltd, GTL Infrastructure Ltd and Essar Telecom Infrastructure Pvt. Ltd, were just beginning to plan for telecom infrastructure companies.
“At that time, even if I were to invest in any of these companies, at what valuations would I have done it?” asked Parikh.
It was only much later in 2007 that the likes of Bharti Airtel Ltd and Reliance Communications Ltd, the country’s top two mobile phone services firms, spun off their telecom towers into separate entities and divested minority stakes in favour of private equity investors.
Q-India had also approached Idea Cellular Ltd in 2006 to buy out its towers and lease it out, but Idea had thought it a preposterous idea at the time, said a person familiar with the matter, who spoke on condition of anonymity.
In September 2007, however, the Aditya Birla Group-promoted cellular services company hived off its tower business.
But having been investors in American telecom tower companies, including American Tower, the Indian arm of Texas-based Q Investments, which has $2 billion under management, took the plunge.
It entered into a joint venture with Hyderabad-based telecom tower manufacturer, Icomm Tele Ltd, and by November 2006, invested $3 million in the new company, Xcel.
“Our initial task was to hire the right people,” said Parikh. A chance meeting with Sandip Basu, former chief executive officer of BPL Mobile Communications Ltd (now Loop Mobile India Ltd), got Parikh the man for the top job.
In the next two years, the team was built and $40 million (Rs200 crore at current rates) invested in phases. Speculative towers, or towers set up in the hope that a mobile operator would lease it if it was there, were a strict no-no.
Only after customers were signed up did Xcel build towers.
At the time of exiting, Q-India got Rs800 crore from American Tower, half of which went to creditors, leaving it with a neat 100% profit on its initial investment, a person familiar with the sale said.
Parikh declined to divulge the details of the transaction.
The value per tower works out to Rs47 lakh, which is considerably less than as much as Rs1.6 crore per tower that Bharti Infratel Ltd and Reliance Infratel Ltd got when they divested stake to some private equity investors in 2007.
The difference in valuation, though, is largely because of the timing and scale, according to an investment banker who said that the valuation game has changed. “When all the big players sold stake, it was a time when you could sell your stories, but was that the right value? I don’t know. Besides, scale always commands a premium,” he said, but declined being named.
When Bharti Infratel sold a stake to private equity investors in December 2007, it owned 20,000 towers and an additional 70,000 through Indus Towers Ltd, the three-way joint venture between Bharti Airtel, Reliance Communication and Vodafone Group Plc. By contrast, Xcel only had 1,700 towers at the time of sale.
On whether Q-India would incubate other businesses in India, Parikh said that he is open to the idea.
“However, such successfully implementable ideas are hard to come by and cannot be timed,” he said. “Such ideas or investments are not meant to replace the traditional investment opportunities available in the market, but we don’t mind investing time and effort apart from capital in such ideas as it allows for a better risk to reward ratio.”