Russian Billionaire Fights to Recoup Investment: Corporate India

Russian Billionaire Fights to Recoup Investment
A man checks his mobile phone in Kolkata, India. With 13 operators offering services to 906 million connections in the world’s second-most populous nation, price wars have forced voice rates down to as low as 50 paise (0.9 cent) from as high as 16 rupees in 1995. Photographer: Brent Lewin/Bloomberg

Billionaire Vladimir Evtushenkov, who has plowed $3.2 billion into a phone venture in India since 2008, is poised to invest billions more as his company fights to recover mobile licenses scrapped by the nation’s top court.

The outcome of a petition filed against the cancellation will determine acquisition and expansion plans of Evtushenkov’s AFK Sistema in the world’s second-biggest wireless market, Sergey Savchenko, chief financial officer of its Indian unit, said in an interview. The Moscow-based company, which wrote off $700 million of its India investment, isn’t leaving the South Asian country yet, he said.

“We have a saying in Russia: once you’ve burnt your hand in hot water, you’ll start to blow at cold water too,” Savchenko said in New Delhi. “We are prepared to spend billions this year for organic and inorganic growth if the government ensures security of our investment.”

The Supreme Court’s February decision to cancel 122 permits prompted Prime Minister Manmohan Singh’s government to alter airwave policy, requiring operators to bid at auctions that sought to charge CDMA operators as much as 12 times the original price of spectrum four years ago. Should Sistema lose its legal appeal, the company may have to either exit or will need to win licenses back by purchasing airwaves at a higher cost.

‘Money Power’

The Russian company is among operators including Norway’s Telenor ASA, Emirates Telecommunications Corp., or Etisalat, and Indian billionaire Kumar Mangalam Birla’s Idea Cellular Ltd. that lost their permits this year. India’s top court ruled in February that a 2008 sale of licenses was corrupted by “money power” and some buyers’ “ability to manipulate the system,” and ordered the government to auction airwaves.

While Etisalat wound up its operations in India, Telenor and Idea bid at an auction last week to reclaim some of their zones by paying almost nine times their original price for the same GSM spectrum. Sistema stayed away from the auction and said in a statement yesterday that if its permits aren’t restored, all possible legal actions will be taken to hold the Indian government responsible for compensating losses.

The company has cited government protection through Russia’s bilateral investment treaty with India to recover lost airwaves, instead of investing in new spectrum or buying one of its competitors. Subscriber services are scheduled to end on Jan. 18 because of the court order, and the company expects its petition to be resolved by then, Savchenko said.

Jump in Profit

Sistema shares fell 1.2 percent today, ending a five-day rally, to 23.62 rubles as of 2:16 p.m. in Moscow, according to data compiled by Bloomberg. They have declined 21 percent from this year’s high of 29.99 rubles reached on March 16, according to data compiled by Bloomberg. The company yesterday said group profit in the three months to Sept. 30 rose 67 percent from a year earlier to $532 million, after reporting losses in two of the previous three quarters.

The company could’ve invested the money elsewhere in Russia or paid dividends to shareholders, said Anna Kurbatova, an analyst at Moscow-based BCS Financial Group. The management will recommend a higher payout to lure investors, Chief Executive Officer Mikhail Shamolin said yesterday in Moscow.

“Any further spending by Sistema in India would be negatively perceived by investors,” Kurbatova said. “India with over 1 billion people may seem attractive, while tough competition there is curbing revenue-per-user growth for market participants.”

Price Wars

With 13 operators offering services to 906 million connections in the world’s second-most populous nation, price wars have forced voice rates down to as low as 50 paise (0.9 cent) from as high as 16 rupees in 1995. China Unicom Ltd. charges about 0.1 yuan (1.6 cents) for pre-paid local calls, according to its website.

Profit at Bharti Airtel Ltd., which operates India’s biggest network, shrank for two consecutive years as rising costs and call-rate reductions squeezed margins. Shares of the company controlled by billionaire Sunil Bharti Mittal have declined 19 percent in the past year, compared with a 15 percent gain in the benchmark Sensitive Index.

Billionaire Anil Ambani’s Reliance Communications Ltd., the third-biggest carrier in the country, said this month that net income fell 60 percent in the quarter ended Sept. 30.

The Russian company may study acquisitions in India only after resolving its regulatory issues, Shamolin said yesterday. After the latest round of spectrum auctions, India may be left with as few as five operators, allowing call rates to increase, he said.

‘Can’t Ignore’

“We can’t ignore the market with 1.3 billion users,” he told reporters. “The question is whether we could operate profitably in this market.”

Sistema is set to buy Aircel Cellular Ltd., a unit of Malaysia’s Maxis Communications Bhd, for $3 billion, the Economic Times newspaper reported on Sept. 14, citing people it didn’t identify.

“We generally welcome the company’s decision not to participate in any M&A deals, including Aircel which has about 5 percent of the Indian mobile market, making this a massive investment in India,” Russia’s Alfa Bank wrote in a research note dated Nov. 20.

Sistema had less than 2 percent of India’s voice market, with 16.6 million active numbers, while Bharti controlled 21 percent with 186 million. The company’s failure to expand its market share is because of policy “hindrance,” said Sistema Shyam TeleServices Ltd.’s CFO Savchenko.

Too High

India’s government is counting on spectrum auctions and sales of stakes in state-owned companies to narrow its budget deficit and avert a junk rating.

The auction last week raised less than 25 percent of Finance Minister Palaniappan Chidambaram’s target of 400 billion rupees ($7.3 billion) after the airwaves were priced higher. The reserve price was too high and needs to be reviewed, Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, told reporters in New Delhi yesterday.

The government may consider revising the price of unsold airwaves, including the 800 MHz spectrum Sistema is vying for, before conducting another auction before the end of the March, Chidambaram said on Nov. 16.

The government has also told operators that buyers of existing airwaves will need to pay the difference between the most-recent price realized at the auction and the 2008 sale, a rule that may discourage acquisitions, Sistema Shyam’s Chief Executive Officer Vsevolod Rozanov said on Nov. 19.

A scheduled visit by Russia’s President Vladimir Putin to India next month may help untangle the canceled licenses, said Ivan Kim, an analyst at Moscow-based VTB Capital ZAO. The Russian state owns 17 percent of the Indian unit.

“India won’t mind getting Sistema’s billions, but they have to tread carefully and avoid further regulatory traps by restoring just one company’s licenses,” said Jagannadham Thunuguntla, chief strategist with New Delhi-based SMC Global Securities Ltd. “It seems Sistema is keen to stay, so they may find a way to remain in the business either way.”

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