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Spice Group - Consolidating its businesses to take on competition

February 15, 2010
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The Spice Group, promoted by its chairman Dr B.K. Modi, is proposing to consolidate its telecom ventures. It plans to merge its two subsidiaries –­ the listed Spice Mobiles and the unlisted Spice Televentures Private Limited (STPL) –­ to form a new entity, Spice Mobility. In this, the promoter is planning to pump in Rs 10 billion over the next two years. The respective boards of STPL and Spice Mobiles met recently to approve the merger of the two companies, which, of course, would be contingent on receiving the necessary governmental clearances.

This decision comes nearly 18 months after the Modis sold their telecom service business to Idea Cellular for over Rs 25 billion. Explaining the rationale for the merger, Modi states, "The merger of the two companies will create one of the largest listed mobile technology companies in India, apart from creating greater financial depth and the ability to raise capital, thereby fuelling accelerated growth. The new entity will also benefit from the resident strength and expertise of technology, retail and distribution available through a combined manpower pool of 2,000 people, 200 million direct and indirect customers, and 100,000 retail outlets."

BSR & Company has valued Spice Mobiles at Rs 109 per share and STPL at Rs 862 per share. Though the details of the merger are still being worked on, it appears that the boards of the two companies have accepted a swap ratio of 7.91 shares held in Spice Mobiles for each share held in STPL. As a result, on approval of the scheme by the shareholders and relevant authorities, 163.4 million equity shares will be issued to the shareholders of STPL. The existing shares of Spice Mobiles held by STPL will be extinguished. The equity capital of the company post-completion of this action will comprise 190.9 million shares of Rs 3 each.

Spice Mobiles
Spice Mobiles, the mobile handset company of the Spice Group, has established a substantial presence in India, Nepal, and Bangladesh. It is the second largest mobile handset manufacturer in many parts of northern India, selling nearly 1.5 million handsets in the quarter ended December 2009, up from 0.9 million in the previous quarter. This can be largely attributed to the ramping up of its distribution network from 40,000 to nearly 50,000 outlets over the past year. The company has invested significantly in channel development and has worked on a detailed strategy across all markets to further expand its retail distribution network to over 100,000 counters over the next two years.

Spice Mobiles has been fairly innovative in its range of mobile handset offerings. It has, in fact, pioneered the dual-SIM, flexidual, multi-SIM and mutli-SIM-Windows OS handsets in the telecom industry. According to Modi, the company is planning to increase its handsets "from 20-25 to more than 100 in the future".

The company has done well financially. It has posted healthy results for the nine-month period ended December 2009. Revenues have increased to Rs 7.02 billion from Rs 3.74 billion during the same period in the previous fiscal year. Net profits stood at Rs 475 million against a loss of Rs 68 million during April-December 2008.

Spice Televentures
STPL is the holding company for the Spice Group's $2 billion telecom businesses. Its subsidiaries include Spice Digital, the mobile value-added service business through which it offers internet solutions to nearly all operators in the country; Spice Retail, which sells mobile phones and accessories under the HotSpot brand; Bharat BPO Services, a joint venture between STPL and Spanco Telesystems, which operates the 139 integrated train enquiry systems for the Indian Railways; and Spice Labs, which works on the development of mobile internet platforms as well as in the application development space.

The company plans to increase its retail outlets from the existing 600 to about 5,000 in the next three years.

Looking ahead
The merged entity is expecting to tap the high growth potential of the telecom industry. In fact, the decision to merge, according to senior Spice officials, is aimed at gearing up to take advantage of the expected growth in the lucrative and fast growing telecom business. Says Modi, "Currently, we do business of about Rs 20 billion through both the companies, and we hope to grow this to Rs 50 billion over the next three years."

The company is betting high on the growth in the handset segment. According to Kunal Ahooja, chief executive officer of Spice Mobile, "As there has been a huge influx of new operators in the market, which is driving down tariff, consumers tend to carry more than one connection to avail of the best deals. This is triggering the growth of dual-SIM handsets. About 95 per cent of the handsets sold by Spice are dual-SIM phones."

Over the year, the group is looking to raise funds for expansion through qualified institutional placements that may also include bringing in a strategic investor for a new technology or product. The promoters have more than 85 per cent holding in the new company, which can be easily diluted by another 20 per cent.

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