MUMBAI (NewsRise) -- Idea Cellular's board of directors approved a plan to raise funds through a share sale to its founding group, as India's third-largest mobile phone operator seeks to pare its massive debt and fund network expansion.
The company, a part of the Aditya Birla conglomerate, aims to raise as much as 32.5 billion rupees ($512 million) through the shale sale, it said in a statement Thursday. Idea will issue up to 327 million shares at 99.50 rupees apiece. After the transaction, the founding group's interest in the firm will increase to 47.2% from 42.4%.
Idea also said it formed a panel of board members to evaluate raising an additional 35 billion rupees on a preferential basis or through a rights issue, or a qualified institutional placement.
The fund raising comes at a time when India's telecom market is roiled by a bleeding price war triggered by the entry of billionaire Mukesh Ambani's Reliance Jio Infocomm. Ever since it entered the market in September last year, Jio has been pursuing a strategy of cutting prices to lure customers. Its offers of free voice calls and data plans, which continued for months, eroded the revenue and profits of competitors such as Idea.
The twin costs of spectrum and soaring capital expenditure, amid declining profitability, saddled India's telecom industry with a gargantuan debt totaling about 4.92 trillion rupees. Further, the cutthroat competition and ballooning debt have hastened the process of consolidation, pushing many smaller operators to merge with larger players.
Last month, debt-ridden Reliance Communications, owned by billionaire Anil Ambani, sold its wireless assets to Jio, owned by his elder brother Mukesh's Reliance Industries.
In March, Idea said it agreed to merge with larger rival Vodafone India in $23 billion deal that would allow the combined entity to leapfrog market leader Bharti Airtel. The companies are awaiting the final regulatory approval to complete the merger this year.
"Fresh equity funding would allow Idea to better defend its revenues and market share based on a hike in fourth generation fiber roll out capital expenditure, or help reduce its surging leverage ratio," J.M. Financial said in a report on Tuesday.
At the end of the September quarter, Idea's net debt stood at 541 billion rupees.
According to J.M. Financial, the fund-raising has been driven more by its merger conditions with Vodafone than any immediate cash crunch or covenant breach.
Idea and Vodafone India had in November agreed to sell their mobile phone tower units to American Tower Corp. for an enterprise value of 78.5 billion rupees, of which 50% accrues to the Indian company. Idea is also proposing to sell its 11% stake in Indus Tower, a tower company jointly owned by Bharti Airtel, Idea and Vodafone India.
Apart from that, Idea can fund its capital expenditure for the second half of this fiscal year from its cash balance of 28 billion rupees, as well as cash flow of 3 billion to 4 billion rupees a quarter, say analysts.
To be sure, the sector's financial stress is likely to exacerbate in the coming months, as a 57% cut in mobile termination rate starting October is set to crimp revenues of established operators. Kotak Institutional Equities expects Idea's third-quarter wireless operating profit to shrink 11% from a year earlier on account of the cut in the termination rate.
Shares of Idea Cellular closed 1.9% higher in Mumbai trading on Thursday, while the benchmark S&P BSE Sensex gained 0.5%.
--Dhanya Ann Thoppil