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New telcos face hard reality, valuations slump

Valuations of new telecom companies have plunged by more than 20% in last one month, thanks to the economic slowdown and adverse market conditions. Manoj Gairola reports.

business Updated: Oct 21, 2008 20:40 IST
Manoj Gairola

Valuations of new telecom companies, which acquired service licences in the latest round of licence allotment, have plunged by more than 20 per cent in last one month, thanks to the economic slowdown and adverse market conditions.

Sources close to the development said one new operator had nearly finalised a deal with a Europe-based telecom major at a valuation of about $1.5 billion to sell 51 per cent of the company. However, the deal got delayed on some technical grounds.

Now, the operator has made a new offer at $1.2 billion for the same stake, but the European firm has declined the offer as it is negotiating with another new operator.

“If the two partners in the domestic telecom operator were not fighting with each other in public, the deal could have been easily clinched at $1.5 billion value for 51 per cent equity,” said a source.

The majority partner could not bring documented evidence showing that all the disputes had been settled between the domestic and foreign partners.

“For new players the market is not as good as it was, let us say a month ago,” said independent industry consultant Mahesh Uppal, "Moreover, many regulatory issues are yet to be resolved. This has impacted valuations of companies."

The story involving the European buyer is representative of the new market reality.

Recently, Swan Telecom sold a 45 per cent stake to UAE operator Etisalat for $1.1 billion. The company has permission to offer services in 13 states, while the European deal was for 22 telecom circles. Besides, a 51 per cent stake goes with management control, which itself gets a premium.

Market analysts say Swan was lucky – and its valuation would have reduced if it had waited for a better price.

Interestingly, Etisalat was also in talks with the domestic player which was negotiating with the European major – for a higher valuation that did not materialise.