Idea Cellular and Spice Communications are again talking merger.   ET   has learnt that two options are being considered. The first, the Modis may sell their 40% stake in the company to Idea before the merger.

Telekom Malaysia (TM), which has a 39% stake in Spice, will then get a stake in Idea post-merger. The second, Telekom Malaysia will first buy the Modis' stake in Spice and the company will merge with Idea later. In such a scenario, too, TM will end up being a shareholder in Idea.

 Spice Communications chairman BK Modi today confirmed ET's report last week which said he was looking at a stake sale. He did not mention Ideas name but said that Etisalat of UAE and Japans NTT DoCoMo could be interested parties, and added that he was open to Telekom Malaysia increasing its stake to 74% in the company.

TM partners Etisalat and NTT DoCoMo in some markets. If they want to bring them in as part of the deal (for taking stake to 74%), we are open to that, Mr Modi said.

However, a senior source told ET that Idea Cellular may be closest to the deal. Idea Cellular MD Sanjeev Aga could not be contacted despite repeated attempts. But another Idea executive confirmed, on condition of anonymity, that talks have taken place between the two companies. It has been happening on and off; talks are being held at the promoter level. There has been no final decision on the issue yet, the source added.

In June last year, merger talks between the two companies broke down over valuation differences. According to a source, Idea had put the enterprise value of Spice at $700 million and was willing to go up to $1 billion but Spice wanted the value to be upped to $1.3 billion.

The AV Birla group-controlled Idea may be keen on Spice now largely due to the latters presence in the Punjab and Karnataka circles where its not present. While Idea has been allotted spectrum to roll out operations in these two circles, a full-fledged roll-out will take more than six months. On the other hand, a merger will give Idea a strong foothold in the two circles, which also boasts of high average revenue per user.

The merged entity will become the fifth largest telecom company in terms of mobile subscribers (28.5 million-plus) after Bharti, RCom, Vodafone and BSNL and move ahead of Tata Teleservices, which have 25 million subscribers. Idea has been allotted spectrum in the 11 circles where it does not operate, and is readying plans to roll out mobile services in them. It is set to become a pan-India operator by 2009.

The reason why the Modis may want to exit Spice is due to its inability to become a pan-India player, which is crucial for profitability in the worlds most competitive telecom market. DoT had recently rejected Spices application for a pan-India licence citing the companys poor net worth, and instead awarded its licences for just four more circles Andhra Pradesh, Haryana, Delhi and Maharashtra.

However, even in these, Spices expansion plans are yet to be finalised since TM has refused to pump in the requisite resources. The Malaysian telco is known to share a frosty relationship with the Modis, sources added.

Spice has just under 4.5 million of Indias over 269 million mobile users a market share of a mere 1.6% and is 39.2% owned by Malaysias state-controlled Telekom Malaysia (TM). The BK Modi family has a 40.8% stake through Modi Wellvest, while the remaining 20% is held by the public and financial institutions. The company posted a loss of Rs 36.50 crore for the quarter ended March 2008 and a loss of Rs 14.66 crore in the corresponding period last year.