Idea Cellular, the Aditya Birla group firm that is on the verge of taking over Spice Communications by buying out B K Modi's 41 per cent stake, is sounding out its bankers to raise funds to upgrade in the struggling telecom operator's network and technology.
"Initially it was a big surprise for us that the company was losing money in this market when the EBITDA (earnings before interest, tax, depreciation and amortisation) for its peers was as high as 30 per cent," a source close to the development.
The official said Spice, which operates in the Punjab and Karnataka service areas, would need at least Rs 100 crore to Rs 200 crore to upgrade its network to compete with large incumbents like Bharti Airtel, Reliance, and Vodafone.
Spice Communications posted net losses of Rs 36 crore and Rs 6 crore during the quarters ended September 2007 and March 2008, respectively. It showed a net profit of Rs 40 crore in the December quarter by selling its tower business for Rs 600 crore.
Idea closed in on Spice to fill a hole in Idea's network. "Though we had footprint in the whole of north India, we were losing customers in Punjab who were going there from the neighbouring states," an official said, requesting anonymity.
"We could have set up Karnataka in a few months but could not do the same in Punjab due to the delay in spectrum allocation as the state is considered `sensitive' by the defence," the sources pointed out.
Spectrum, the radio frequencies that enable wireless communications, is allocated to telecom operators by the government.
Even if Idea Cellular were to be awarded spectrum, setting up a network and infrastructure in these two circles would have taken another 18 to 24 months. Making profits from this sector would have taken another year after the services were roll-out.
Spice has signed licence agreements with the Department of Telecommunications to start GSM mobile operations in four more circles -- Delhi, Haryana, Maharashtra and Andhra Pradesh.
The source said B K Modi first offered to sell his share to the Birla group 12 months ago as his partner Telekom Malaysia was not satisfied with the company's performance. "We have been negotiating on the price since then," he said.
On Tuesday, Spice Telecom's shares closed at Rs 55.40, up 4.14 per cent. Idea Cellular was down 2 per cent to Rs 99.65 on the Bombay Stock Exchange.