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When a mega merger runs into rough weather
August, 10th 2006
The mega-merger in telecom, as it was once called, has now morphed into a petition for arbitration in the civil jurisdiction. Marriages, they say, are made in heaven. As a corollary, break-ups are the handiwork of earthlings. Not rules that apply to the corporate world, you may say. Yet, a parallel between life and business is that any heavenly deliverance the unhappily engaged may look forward to doesn't usually come without the purgatory of courtroom battles. Take the case of Hutchinson Essar Ltd vs BPL Communications, before the Bombay High Court. The deal came unstuck, after a much-hyped coming together, but before the eagerly awaited exchange of vows and eventual consummation. The mega-merger, as it was once called, has now morphed into a petition for arbitration in the civil jurisdiction, running to about a hundred pages, filed by Christopher J. Foll, Chief Financial Officer of Hutch. Facts, as narrated by the petitioners, make an interesting read for professional accountants who would like to study merger mechanics. Dramatis personae Hutch, the petitioner, is a Mumbai-registered company, engaged in providing cellular phone services in the city. Earlier, it was known as Hutchinson Max Telecom Ltd. Its Indian presence is from 1994, states "Operations in 16 circles accounting for 70 per cent of India's mobile subscriber base... 16.67 million subscribers... " The site tells us that Hutchison Telecom is a part of the multinational conglomerate Hutchison Whampoa, which has its origins dating back to 1828 in Hong Kong. "The Group operates five core businesses in 42 countries across the world, of which Hutchison Telecom has been one of the pioneers in mobile multimedia communication and spans five continents." The respondents in the case are many. First, the target of takeover, BPL Mobile Communications Ltd, a closely-held company based in Kochi. Don't be baffled if you come across the name of the company without `Mobile', and abbreviated as BPL Com. The stakeholders of this company are the other characters in the story. Such as, Essar Teleholdings Ltd (ETHL), a Chennai-based company, with a 10 per cent holding. This company is part of the Essar Group (, which has `an asset base of over Rs 20,000 crore'. Capital Global Ltd (CGL), a Mauritius company, has a 16 per cent stake. And a big chunk, 6.4 crore shares or 74 per cent, is in the hands of BPL Communications, a Bangalore-based partnership firm. The documents also make a mention of BCL or BPL Mobile Cellular Ltd, "a company engaged in the provision of cellular mobile telephone services in Maharashtra, Tamil Nadu and Kerala." In November 2005, Hutch executed a share purchase agreement (SPA) with BPL Com for buying out about 13 crore equity shares of BCL. The list of personae is not over. We'll meet more players later in the story. The plot Two days before Christmas last year, Hutch entered into an agreement with the three key shareholders of the target company, BPL Com. The 33-page SPA defines words and phrases such as IFRS (International Financial Reporting Standards), Indian GAAP (Generally Accepted Accounting Principles in India), and also `long stop date' (June 30, by when everything was to be a done deal). The date got extended by a month, when the parties to the agreement worked out an amendment at the end of March this year. Apart from the extension of time there were two important aspects in the amendment. One, Essar and BPL Com had formed a partnership in January. "As part of their respective capital contributions, ETHL and BPL Com transferred the ETHL shares and BPL Com shares to the partnership firm... However, pursuant to the provisions of the Companies Act, though the legal and beneficial interest of the ETHL shares and the BPL Com shares have been sold to the partnership firm, the relevant shares continue to be recorded in the names of the partners," one learns from Hutch's petition papers. If you find the names confusing, you may not be alone. "For convenience, any reference to ETHL and BPL Com herein below (as the context may admit) be construed as reference to Respondent 1 (the partnership firm) and vice versa." The second change in the amended SPA was the hike in the purchase consideration, from Rs 1,440 crore to Rs 1,663 crore. (You may remember that in July 2005, the all-cash deal was said to have an enterprise valuation of over $1 billion or Rs 4,400 crore.) While on changes in valuation there could be eternal debates, as one saw in a recent instance of airline merger, an unusual point in the Hutch deal was about `adjustment amount'. This was to be $6.2 million, "being the amount equal to the difference between $21.4 million and $27.6 million actually paid for the purchase of the shares of BPL Com from Aidtel Holdings (Mauritius) Inc and Inditel Holdings." The deal envisaged a stiff penalty of Rs 78 lakh per month for delayed payment of the purchase consideration. A page of detailed workings from Hutch shows that it paid Rs 1,585 crore out of Rs 1,663 crore by February this year. After adjusting further payments and interest owing, Hutch said it still had to pay Rs 49 crore to square off by July 31. More players The plot thickens when you come across more players, as promised earlier. Santa Trading P Ltd and Deccan Asian Infrastructure (Mauritius) Inc make their appearance in a section that deals with `security interest shares'; 770 million ordinary shares of BPL Com held by Santa and another 110 million by Deccan, say the documents. Are you losing count of shares already? The KSIDC or the Kerala State Industrial Development Corporation Ltd is a small character in the whole episode. It has 2,000 equity shares of 10 each in the target company. "The Vendors undertake to use their best endeavours to purchase or procure the purchase, as soon as reasonably practicable, of the KSIDC shares, and promptly transfer them to the Purchaser free from encumbrance and at no further cost to the Purchaser." A freebie, in short. ICICI Trusteeship Services Ltd figures as a pledgee for 6.3 crore shares under a corporate debt restructuring scheme of April 2004. The avid may explore the Net for CGL and stumble upon a 19-page circular about Hutchison Telecommunications International Ltd (incorporated in the Cayman Islands with limited liability), as perhaps a filing with the Stock Exchange of Hong Kong Ltd. "Acquisition of 99.998% of the issued share capital in BPL Mobile Communications Limited and the entire issued share capital in BPL Mobile Cellular Limited: discloseable transaction," reads the headline. Among the definitions in the document is `Karthik', explained as `Karthik Financial Services Limited, a subsidiary of ETH and a Spacetel Vendor'. Also present is `Spacetel', short for Essar Spacetel Ltd, `a subsidiary of ETH, and the applicant for UAS Licences in the Additional 7 Circles'. Worth studying is the 20-F filing with the SEC (Securities and Exchange Commission) as `foreign private issuer' where `subsidiary information' may be `not applicable'. A case that can walk you through laws on arbitration, contracts, and specific performance. D. Murali
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