26 June 2008

Not another ‘fantastic’ non-compete fee

In the Idea – Spice deal, announced yesterday in the media, Idea is expected to pay Rs. 543 crores (Rs. 5.43 billion) as non-compete fees to promoters of Spice.

This works out to the suspicious number of 24.99%, the maximum allowed by SEBI regulations.

An interview of Kumar Mangalam Birla (of Idea) in the Business Standard states:

Isn't the non-compete fees of Rs 544 crore to BK Modi a bit high?

The non-compete fees is nothing unusual and we believe that it is very much in line with the industry and Sebi norms. The debt of Spice Communications, which is around Rs 1,000 crore, is also coming to Idea Cellular's books.

I would think the price would be lower if a large debt is assigned to the acquirer, not higher or selectively higher. Also SEBI regulations put a cap on the non-compete fees – it should not be seen as a permission to exchange favours in the guise of non-compete so as to short change other shareholders. In fact SEBI has over the past year or more rejected most of the non-compete payments (most of which are suspiciously 24.99% exactly), or rather asked the acquirer to pay the same to other shareholders as well.

Spice is not a profitable company, it seems to have made some odd non-operating profits out of "Profit on Sale of Passive

Infrastructure" in 2007. The notes to the accounts available on the company website do not explain what this fantastic profit is. Excluding the extraordinary profit, the company is consistently making large losses. It only operates in two circles, and even in Punjab, where it has a higher share it only controls 23% of the market. In the other circle, Karnataka, it controls 10% of the market. While the company is optimistic (and has got some other circles) about a pan-India presence, the spectrum scarcity means that it is nearly impossible for a new player to get such a presence. Clearly, this does not even offer any remote competition in the future to the big players (including Idea), particularly with the entry barriers of the industry. The brand name 'Spice' is being phased out as well according to media reports.

Clearly, the 'non-compete' fee is being paid for some reasons other than buying off future competition. SEBI should clearly mandate the acquirer to pay the same per share price to the other shareholders. It is also time the Board repeals this exemption which is being misused 90% of the times.

No comments: