Subex remains on the edge even after selling activation business

Subex remains on the edge even after selling activation business

Bangalore-based telecom software maker Subex Ltd has rid itself of a large part of its disastrous Syndesis acquisition, which had almost tipped it into bankruptcy. It announced late on Monday that it has reached an agreement with NetCracker Technology Corp., a subsidiary of NEC Corp., to sell what was previously the Syndesis business covering the provisioning and activation domains.

But the exuberance may well be short-lived. The company’s chairman and managing director Subash Menon told CNBC-TV18 that the deal could be potentially neutral as far as its profit and loss statement is concerned. In other words, the consideration for the sale will not be very different from the carrying value of the Syndesis assets. While these assets were acquired for 775 crore, Subex has since provided twice for the diminution in the value of these assets, writing it down to just 125 crore as on 31 March.

This will help the company pay only a portion of its debt and it will still have to rely on regulatory approval as well its lenders’ consent to extend the March 2012 deadline for a large chunk of its debt repayment. Subex has two tranches of foreign currency convertible bonds (FCCBs) that are redeemable in March 2012, with a cumulative outstanding value of $68 million (Rs 328 crore today). This is just the face value, and the total outstanding will be higher after including the redemption premium on the bonds. The bonds are unlikely to get converted into shares, given the large difference in its current share price (Rs 48.75) and the conversion price of its FCCBs (Rs 80.31).

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The company’s total debt stood at $111 million as of June. In other words, the sale to NetCracker will only help the company pay a small portion of its debt burden.

One positive aspect of the sale is that it is likely to lift the firm’s overall profitability, since the business operated at very low margins. But the company needs more than a just a lift in profitability. Its shares had fallen by as much as 30% in 10 trading sessions after it announced its lacklustre June quarter results. What’s more, the larger problem of its debt burden remains after the sale to NetCracker. Subex may have averted bankruptcy, but it’s still living on the edge.

Graphics by Yogesh Kumar/Mint

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