Unitech’s Sanjay Chandra says people have got the math all wrong
Unitech, India’s second-biggest realtor, was among the many companies to be issued 2G telecom licences early this year on a first-come-first-serve basis.
While an auction process for issuing telecom licences and spectrum would have earned the government much greater revenues, the first-come-first-serve formula meant just a licence fee of Rs 1,651 crore for pan-India operation plus an annual charge for spectrum usage.
Communications minister Andimuthu Raja has been under fire for causing significant loss to the national exchequer for issuing several licences to non-telecom players without going for an auction. The controversy got even bigger when Unitech Wireless, an arm of Unitech, sold 60% stake to Norway’s Telenor for Rs 6,124 crore.
That meant a valuation of Rs 11,000 crore for Unitech Wireless, which till now has only spectrum and no telecom infrastructure or subscriber to call its own. Therefore, the question that followed was, why should the government get only Rs 1,651 crore from Unitech Wireless as licence fee (with bundled spectrum), when its valuation was many times more?
Unitech managing director Sanjay Chandra spoke to DNA Money’s Raj Nambisan & Vivek Seal on the controversy and more. Excerpts:
Can you come clear on the Telenor controversy?
They say government should get Rs 11,200 crore instead of Rs 1,651 crore from the telecom deal. Now, what we got for Rs 1,651 crore was the licence and the spectrum. Over and above that, we gave Rs 882 crore as bank guarantees. That is also money.
All this was given in January. There is interest cost to it, a business opportunity risk, then there is a collateral of other assets to secure this — we put in collateral of about Rs 1,200 crore.
So my exposure in a way is Rs 3,773 crore, without counting in the interest cost, which, on 1,651 crore would be around Rs 200 crore for almost a year, so the total comes to nearly Rs 4,000 crore.
Now, Rs 11,200 crore is the enterprise value of the company. How is this amount arrived at? It is the value of the licence, spectrum, our things, which include the organisation built-up, which include the 300 people that we have hired in the last 7 months, the offices we have opened in 8 circles out of the 13… We got staff everywhere, radio planning has been done for 13 circles now, tenders were floated… all that add to the value.
Secondly, we have signed a binding contract with Telenor, giving them access to all our customer base; as a sole provider to our facilities, they have access to our
relationships. More than that, this Rs 11,200 crore valuation includes this Rs 6,124 crore coming from Telenor. So, there is also the cash which these guys will bring in — the government is not giving me that.
Now, without Telenor’s money, the valuation is much less — around Rs 5,000 crore. Out of that, we have already put in nearly Rs 4,000 crore, and none of that has been encashed.
I am surprised and shocked that esteemed business dailies have mentioned to the effect that Rs 6,124 crore is in our bank account and this value is created. Remember, this money would come till September 2009 in tranches, as per business plans. For Telenor, to spend Rs 6,124 crore will take 8-10 months, and the value for Unitech Wireless would only be created if this money comes in.
How much money would come in the first tranche?
The first tranche would be about $250 million, which we would receive in the next couple of weeks.
What is your idea behind the telecom entry? You can’t be dead serious…
When we went for it, we were very serious, but did not know much about the business. And then when we started working towards it, we hired McKinsey & Co to advise us on planning, etc, we realised that we needed a partner to do well in this business.
So we found a good partner and that process lasted a few months. We started to look for partners from the middle of June this year. Our first meeting with Telenor was on August 27, 2008, and we closed the deal in 66 days from that first meeting.
In them, we have found a partner who has worked in emerging markets (Telenor operates in Bangladesh). No point in just getting a partner from the US who has not done emerging markets and has not seen low-ARPU customers. They would find it difficult to operate.
So we thought, with Telenor, we have the connect.
Earlier, we were looking at more of a minority stake to dilute, with them as the strategic partner and us as Indian partner that is operationally involved. After getting feedback from Telenor and a couple of other bidders… Telenor said they would put in this type of money if they are in control because they were not sure if we would be able to do the business as we are not in telecom.
You would surely be selling this business down the road…
We will stay invested. Let them manage. The business is sufficiently covered from capex side with infusion of Telenor capital and debt is available for at least two and a half years. Telenor has publicly stated that it aims for operational break-even in three years with outsourcing, etc.
The advantage is Telenor is a long-term player. They went into Bangladesh in 1997, when India was just launching its first cellular service, and remember, Bangladesh is a much poorer country. They are still operating there, so they have not been frustrated in 11 years.
How is the management structured?
The Unitech Wireless board will have four members from their side, three from our side and day-to-day management is theirs; chairman is ours but the chairman is non-executive. Any major investment will need our approval. By the way, even when they bring in any internal candidate, they want us to approve them, because they want to understand if this person would be able to work in India or not.
We have given them one full-time senior person from our side to act as a bridge.
When did you sign the deal?
We signed the binding agreement with them on Diwali day. The integration team came in early to help the organisation, so the talks right now are on how an expat organisation works in conjunction with the Indian set-up. Unlike most of the western world, our Indian telecom professionals are on a par with anyone else in the world. Interestingly, the other thing that surprised me is that salaries in Indian telecom industry are higher than many places abroad.
For example, Telenor’s global CEO’s salary would be less than Bharti Airtel’s number three in India. Their staff in Ukraine is 7,000 people, in India it would be 2,500 people.
That’s because in India, everyone in telecom works on the outsourcing model — outsource IT, outsource managed services… So you actually are a sales and marketing organisation.
That’s true of all telcos…
Yeah, but earlier telcos had to do everything, so we have an advantage over that. And secondly, we do not have to make an effort to put up the infrastructure. The real problem is to get approvals for towers and without having all the towers in place, your radio planning is not perfect.
There were reports that you would not be bidding for 3G?
Media reports were taken out of the context. Our comment was that what we are doing now is progressing on our 2G plans and we are studying 3G to see what should be our bidding strategy.
Do you the think the 3G technology would work? Is it feasible?
3G in long term would work because in India, if broadband penetration has to increase, mobile would be the cheapest device, which can be accessed by the masses compared with laptops and PCs. But initially, most of the incumbents would be looking at 3G for a different reason — for extra voice spectrum/ capacity. So in circles where spectrum is limited, some of them would be willing to pay higher than us. Telenor says 3G is a good business. They operate it in five countries. Remember, when the auctions happened in Europe for 3G, every telecom company went bankrupt following the bids. We at Unitech do not know much about telecom, we believe in their (Telenor’s) words and that makes more sense.
How long will it take to commoditise 3G?
Depends on how much you take, like in a circle where there are 8 or 9 slots available for 3G, then it could work, but in the end consolidation has to happen.