Collapse of Loop deal is a lucky escape for Bharti Airtel

The collapse of Bharti Airtel’s Rs 700 crore deal to purchase struggling Loop Mobile , announced yesterday (5 November) has two consequences: it is good for Bharti, which needed Loop’s faltering operations like a hole in the head, and bad for Loop’s promoters, the Khaitans, who will now get even less value for their asset they created.

Loop runs mobile services in the lucrative Mumbai circle, but this licence is about to run out this year. Its assets don’t include any spectrum.

The collapse of the deal also tells a sorry tale about how slow regulatory approvals can knock the stuffing out of promising M&A deals. Between the time Bharti signed up with Loop in February this year and now, the latter has lost two million subscribers to competitors. What’s left is about a million jittery subscribers, who will surely desert at the first chance. What killed the deal was apparently the Telecom Regulatory Authority of India’s insistence that it can approve the deal only if Loop’s subscribers were given the option to port to any operator of their choice, and not directly to Airtel. The point is: the value of the deal lay in the customer base, not the cell towers or hardware.

The delay, however, gave Bharti a good reason to back out - which is the reason it communicated to the stock exchanges. However, this is just a figleaf. If two-thirds of your future customers have already deserted ship, Bharti would essentially have been buying an empty shell if it had gone ahead.

The headline price tag of Rs 700 crore is also misleading. Only Rs 300 crore would have gone out as cash, the rest being debt. Loop’s owners, the Khaitan family, which has ties through marriage to the Ruias of Essar, would have got only Rs 300 crore from the sale; now they will get even less, as only the physical assets - like 2,000-and-odd cell sites and towers, some exchange equipment, and office spaces in Mumbai - will be valued. It is not clear if they will be enough to cover the loans received from banks.

When the deal was first announced, the valuation was considered a steal for Airtel as it would be getting around 3.2 million customers for Rs 300 crore - when building this base from scratch may have cost it one-and-a-half times as much.

For Airtel, the exit will bring some relief for two reasons: what was a steal in February is now a burden due to the loss of customers; and, more importantly, because it does not have to grapple with yet another troublesome M&A.

Airtel, India’s largest telecom company with nearly Rs 16,000 crore in quarterly revenues (in July-September 2014), has had an unhappy experience with all its overseas acquisitions and forays.

Its purchase of Zain’s Africa operations in 2010 for over $10 billion brought it nothing but headache and huge debts. Its operations in Bangladesh and Sri Lanka also bleed it substantially.

In the latest quarter, Bharti reported a rise in profits after 15 consecutive quarters of net profit declines. What has been happening is clear: the profits it makes in India are seriously dented by the losses of its overseas operations.

According to Business Standard, in the latest quarter (July-September), “India alone has generated a net profit (before exceptional items) of Rs 2,449 crore; however, it had a loss of Rs 753 crore in Africa and Rs 153 crore in Bangladesh and Lanka. The corresponding figures for these regions last year were a loss in Africa at Rs 288 crore and one of Rs 133 crore in Bangladesh and Lanka.”

Put another way, even as Bharti’s ops in India are improving, its ops abroad are doing more badly.

In this scenario, taking on another bleeding operation from Loop was the last thing Bharti needed.

For Loop, the collapse of the deal is a significant setback primarily because the customer assets left over are too small to make a big gain from.

Loop was doing fine, and even got an allotment of 20 circles all over India from A Raja in 2008. But once the 2G scam broke cover, Loop got into trouble over suspicions that the Ruias had managed to buy yet another telecom operation (they already had one with Hutchison, which was sold to Vodafone) through the backdoor. Holding two competing operating licences in the same circles is illegal.

As Raman Kirpal wrote in Firstpost in 2011, “Kiran Khaitan, sister of Shashi and Ravi Ruia of the Essar Group, and her husband IP Khaitan are the promoters of Santa Trading Pvt Ltd, which in turns has majority stakes in Loop Telecom.”

The CBI, which was inquiring into whether the Ruias were indirect owners of Loop, believed that “the Ruias invested Rs 1,592 crore in the non-convertible debentures of Santa Trading. Santa Trading, in turn, invested this amount to promote Loop Telecom Pvt Ltd. A Raja had allotted UASL (unified access service licence) to Loop Telecom in 21 circles on 10 January 2008. In other words, Essar money was invested in acquiring all these 21 licences.”

Either way, whether the money flowing in from the Ruias was an inter-corporate loan or an indirect investment, the fact is the Khaitans are paying the price for this arrangement. They are now going to get very little of the money invested in Loop back. Fate has intervened.