Aircel finds the going tough after its debt burden soars
ET : Deepali Gupta :chennai :17 June 2013
For all its recent parleys on radical options to get back on track - relief on debt repayments, sale of some assets, sale of everything - Aircel is back to square one, where everyone who has something to do with it does not want to do anything more with it than they absolutely have to.
The glimmer of hope arising from the multitude of talks took another beating on June 13, when India's top investigating agency announced it had moved forward in a corruption probe involving Aircel's Malaysian promoter Maxis and its owner T Ananda Krishnan. And India's seventh-largest telecom company, which was once gunning for top-three status, was pushed back into the vicious circle of cash and credibility it has been ensnared in for the past two-and-a-half years.
After a building spree that went awry and burdened it with 24,000-crore of debt, Aircel needs, according to a banker who is clued into the company's workings but did not want to be named, at least 6,000 crore to start firing again. This could be capital from promoters, new loans from banks or proceeds from an asset sale. But the corruption probe has damaged the company's credibility, and no one wants to commit more.
Meanwhile, desperation is written all over Aircel's operations and choices. Aircel declined to participate in this story, but a company official who did not want to be named says that, even with 61 million subscribers, its network is running 60% empty. Further, he adds, at its current rate of growth, it will take five years for the company to fill its network. The past few months, Aircel has been selling minutes on its network in Mumbai to rival Reliance Communications at one-third the going market rate. Employees are edgy, the management unsure and the promoters distant.
A person familiar with the company's financials says Aircel is losing around 1,680 crore annually at the operating level. On top of this, it has to pay interest on its debt and, come January, will also have to start repaying principal. And the root of all its troubles is a case linked to Maxis' entry into Aircel and an unbridled expansion.
Other People's Money
In 2005, Maxis, along with a 26% partner in the Reddy family that runs the Apollo Hospital group, bought Aircel from serial entrepreneur C Sivasankaran for $800 million (about 4,390 crore). A year later, it received licences for 14 more circles, besides the eight it had, giving it a pan-India presence.
Aircel received 2G spectrum, or radiowaves, in 2008-09, along with a few new players such as Unitech and Sistema. "There was an urgency for a full rollout to beat others," says a former official who was part of the Aircel management team, on the condition of anonymity.
The management drew up a $3.5 billion-expansion plan, of which $1.5 billion was to come in as promoter equity. "It went through without too many questions," recalls a second former official from Aircel's management team, who too spoke on the condition of anonymity. "The guys (at Maxis) were on top of what we were doing."
But the equity infusion kept getting deferred and much of the capital expenditure at the time was built on vendor credit, largely from Chinese suppliers ZTE and Huawei. At a meeting of the management team held in Gurgaon, the promoters said the additional equity would come after the 3G auction, scheduled in mid-2010. "We decided to live short term and thought we will finalise the financial structure with 3G and 4G bidding," says the first ex-management team official quoted above. "So, the company had put in $3-3.5 billion of investment without a single dollar of equity investment."
It started coming back to haunt Aircel. "The (telecom) industry is a long-term play," says Hemant Joshi, partner at DeloitteHaskins & Sells, a consulting and accountancy firm. "Only long-term funds should be used for long-term purposes because it takes huge time for it (telecom business) to mature. In the Companies Act, there is a provision asking auditors to check whether a company has used short-term funds for long-term purposes."
To generate funds for 3G bids, the management suggested hiving off its tower business. So, it sold its 17,500 towers to GTL Infrastructure for about 8,000 crore, and spent 9,900 crore to buy 3G and BWA airwaves. "3G was the smartest bid because it covered 95% of our revenues," says the first management team official quoted earlier. "It was the additional 4Gspend, prompted by promoters that was unwarranted. There was also no separate strategy for 4G. We took the 3G strategy and also used it for 4G, which shows."
Call Drops
According to this official, till this point, the promoters were "very sincere" about India and "committed" to Aircel. The call dropped when what is now called the 2G case, related to the 2008 licence awards, started unravelling. It claimed a former telecom minister, company promoters and executives, and bureaucrats.
As the scope of the investigation widened, Sivasankaran told the CBI that the then telecom minister Dayanadhi Maran delayed clearances to the company and compelled him to sell it to Maxis; further, as a quid pro quo, Maxis invested 550 crore in Sun TV, the direct-to-home (DTH) company belonging to the Maran family. The CBI, in October 2011, filed a case against T Ananda Krishnan, who controls Maxis, Ralph Marshall, a non-executive director at Maxis, and the Marans. All of them have denied any wrongdoing.
"That was the turning point," says the first management team official. "The promoters could not come to India. They kept sending people who did not know the Indian market. Decisions taken would be reversed soon after. They lost complete control."
This drift affected Aircel's 2G operations, and it started losing momentum. Elsewhere, 3G, on which it had spent a pile, was not taking off. "When you have made the capital expense and revenues are not coming, you bleed badly," says the former employee. "Decision-making became a monthly thing, from being a quarterly affair. Everyone came out of those meetings (with Maxis) frustrated."
Starved of cash, credibility and commitment,Aircel started cutting its losses. It shut operations in five unprofitable circles: Gujarat, Haryana, UP-West, MadhyaPradesh and Kerala. "It was short-sighted," says a former senior Aircel official, not wanting to be named. "Once you shut operations in parts, you start getting seen as a regional player. It creates disorder among ranks, staff and customers." By January 2013, its customer base had shrunk to 61 million, against 66 million a year earlier.
A fallout between Aircel and GTL over the tower deal added to the bleeding. Aircel had promised GTL it would expand to 60,000 towers, which did not happen. Aircel agreed to refund 1,600 crore to GTL by June 2012, and paid 200 crore and issued a bank guarantee of around 1,000 crore. It has struggled to pay the remainder. The latest is that GTL has claimed 2,000 crore from Aircel, which has, in turn, challenged GTL's service quality and is seeking damages.
An analyst who did not wish to be named sums up Aircel's woes in four points: it remained unprofitable in all new circles and never passed the mid-sized category; it splurged to acquire customers, who left before it could generate a profit on their connection; it stepped back when competitors were adding subscribers, opening up a gap; and poor execution.
"The promoters took good long-term decisions. Only it was with other people's money," says the first former Aircel management team official quoted earlier. BK Syngal, the former head of VSNL and now a consultant, terms this a "systemic problem". "How was the money lent? Who checked what the borrowed funds were used for? Now, they are refusing to put in money and the problem lies on the banks' head," says Syngal, senior principal, Dua Consulting, a telecom consultancy firm.
Aircel recently initiated informal talks with lenders to restructure its 24,000-crore debt. Banks - not wanting to set a precedent for the telecom sector, to which they have loaned 92,000 crore - have asked Aircel's promoters to put in more money. "Operational excellence cannot turn it around," says the first former Aircel management team official. "Only an equity infusion to retire high debt can."
Maxis raised $3.3 billion in its IPO in 2009, but it has been reluctant to channel this into India while the future of Aircel is inextricably woven with a legal case. Its 26% partner, Saudi Telecom, has dissented from further fund infusion into Aircel.
Many solutions have reportedly been discussed at the behest of various stakeholders: outright sale to Sistema, merger with Tata Teleservices and the sale of its BWA spectrum for $800-900 million. But ultimately, each comes down to credibility and an assurance that the company's legal woes won't trip such corporate actions. And, today, Aircel and its promoter are in no position to give that.
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