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Why They Can’t See Eye To Eye

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Today, just about the only thing that the people from both sides — Unitech and Telenor — agree on is that in 2008, the partnership had seemed a good idea.

As Unitech and Telenor fight a bitter battle across various arenas — in the Uninor boardroom, in various courts across India, in an arbitration court in Singapore, and in the media — there is not much else that the two partners can agree upon. They cannot agree on the best way to raise money. They cannot agree on the way forward for the partnership.

Most importantly, they cannot agree on what Uninor — the telecom joint venture in which Unitech holds 32.75 per cent and Telenor 67.25 per cent — is worth. Unitech thinks that after more than Rs 6,000 crore have been spent in rolling out operations, and with the business picking up in many circles, it should be worth at least Rs 12,000 crore, if not more.

Telenor holds that all troubles of the past year — especially the 2G scandal — have eroded the value of the company and it is worth just about Rs 400 crore (at the start of the venture the valuation was Rs 9,100 crore).

The past 12 months have been one of the worst ever for both Sanjay Chandra and Sigve Brekke, who represent the two warring partners. Chandra, chairman of Uninor until he had to step down, spent much of the last year in Tihar Jail, while the 2G licence scam was being probed. The architect of realty major Unitech's diversification into telecom, Chandra is battling to prove both his innocence as well as protect his company's current shareholding in Uninor.

TOUGH: Nirjhar Goel, vice-president of corporate strategy, Unitech (BW pic by Tribhuwan Sharma)

Meanwhile, Brekke, current managing director of Uninor, who was flown in to take charge of the company in 2010, is struggling to raise money needed for operations and expansion of the business with the threat of a license cancellation over his head. Brekke, who was heading Telenor's operations in south east Asia until he came to India, is also trying to justify the huge sum of money that Telenor has sunk in the India operations. Just three years ago, things were completely different.

The Partners
In 2008, soon after Unitech obtained its 2G license, the company started scouting around for partners who could help with money and expertise. Unitech had no experience in telecommunications — it had only been in the realty business till then. More importantly, it knew that it needed a partner who could help in the huge capital infusion that would be required to start up and run the business. It did not want to put in any more money beyond the initial investment on procuring the licence and in setting up some bare-bone operations.

Meanwhile, Telenor, the Norwegian telecom major, was also looking at an entry into the Indian market — one of the fastest growing and biggest in the world. It had missed out in the first two rounds of telecom liberalisation and wanted to make up for lost time.

By March 2009, after flirting with various potential partners, the two companies decided to tie the knot. An agreement was signed and an initial pre-cash valuation of Rs 3,000 crore was agreed on. After final negotiations, Telenor agreed to bring in Rs 6,100 crore for its 67.25 per cent stake — which meant that the total enterprise was valued at Rs 9,100 crore or so.

By the time Unitech had signed the final agreement, people close to the events say that the company was quite desperate. This was for two reasons. One, the roll out was getting delayed. Second, the company had a lot of debt on its balance sheet. "Do not forget that with the signing of the deal, Unitech transferred almost Rs 1,100 crore of debt to the books of Uninor. That is why the shareholder agreement is pretty one sided. The Norwegians bargained hard and were able to get almost everything they would want," says an executive who was close to the deal.

Telenor got a majority in the Uninor board and a near complete control of the management. Unitech was, however, allowed to nominate the chairman of the board.

One of the points of the shareholder agreement was that as soon as the deal would be signed, the management would initiate ways to raise project financing. Though almost the entire Rs 6,100 crore brought in by Telenor was going into the company's operations, it was estimated that Uninor would need Rs 8,000 or 9,000 crore more to set up a robust business.

As luck was to have it, this exercise was delayed. "Only in late 2009 did we start discussing the project financing and it was agreed we would go in for a bridge loan till the exercise was completed," says Nirjhar Goel, vice president, corporate strategy for Unitech and the company's nominee on the board of Uninor.

In May 2009, Uninor had already launched its services, but things were not going according to plan. Expenses ballooned, while revenues remained below the business plan projections and the subscriber base remained low. A Unitech executive says Telenor had sent in a number of high-cost expatriates who did not seem to have a grip on the situation.

Holds 32.75 per cent stake in Uninor. It claims the business is worth at least Rs 12,000 crore as over Rs 6,000 crore went into the initial phase

Holds 67.25 per cent stake in Uninor. Says the business is now valued at just about Rs 400 crore as the 2G scam eroded brand value

It was not as if the Telenor management did not know that they had a problem on their hands. India was a very big bet — the biggest it had taken in Asia. Most analysts tracking Telenor in Europe did not think its entry to the country at such a huge expense was justified — because it was coming in very late after six players were already in the market and another five (apart from Unitech) had just been given licences. The day Telenor announced its decision to invest into India, the stock of the company fell 20 per cent. One telecom analyst says that even the Telenor board had been divided on the India investment — and that it finally went through only because Brekke and Telenor CEO Jon Fredrich Baksaas championed the idea strongly.

Meanwhile, in June 2010, worried that operationally things were not going as planned, Unitech hired PwC to do a special audit of Uninor's operations. The audit came to the conclusion that on every parameter Uninor was spending more than any of its competitors. These issues were raised at a board meeting by the Unitech representatives.

It was at this stage that Brekke, as the head of Asia, decided to take matters in his own hands. He arrived in India to take charge himself. "Brekke got rid of the previous management team and decided to come in here himself. As one of the people who pushed hard for Telenor's entry into India, this was one of his biggest bets," says a source close to the developments.

Brekke had told BW in an earlier interview: "This (his coming to take charge) was purely operational. We were unhappy with the subscriber offtake, revenues and the way the business was growing. So rather than sitting in Bangkok and screaming about it as head of the Asian operations, I decided "let me try myself."

In fact sources say that Brekke now has a lot riding on the success of the Indian venture. He can well succeed Baksaas as Telenor CEO when the latter retires, if India is a success. If it is a failure, his career will suffer a setback.

CHARGE BY UNITECH The company failed to obtain project finance for the joint venture when it was available

TELENOR REPLIES Project finance was not available at any stage and by any banks in accordance with the terms specified in the shareholder's agreement

CHARGE BY UNITECH The company proceeded with the proposal and approved the rights issue in direct violation of the hierarchy of funding in its articles of association

TELENOR REPLIES The company and the board proceeded with the rights issue only after all other options of raising money had been explored and proved unviable

CHARGE BY UNITECH The company has approved and adopted a 10-year business plan which is outright unilateral, mala fide, self serving, premature and aimed at artificially depressing the value of the company

TELENOR REPLIES The business plan is based on the market realities today which are significantly different from when the company started operations and even from last year. A number of negatives have crept in which need to be taken into account

In late 2009, Uninor had finally started working on raising funds and had approached many banks with its business plan. After protracted negotiations, on 14 August 2010, State Bank of India offered to underwrite a rupee term loan of Rs 9,475 crore, of which Rs 2,850 crore would be provided by SBI itself (A copy of the letter is with BW). The remaining amount of Rs 6,625 crore was to be syndicated by SBI Caps from other banks and financial institutions.

In early November 2010, however, just before the 2G scam broke, Telenor wrote to Uninor that it could not support the loan the company had been offered by SBI since the term sheet was not in "accordance with what was specified in the shareholder's agreement".

Although Brekke refuses to say exactly which clause of the agreement was being violated, sources say that the problem was in the guarantees SBI was seeking. What the term sheet said was that in case there is a cost overrun, it would have to be financed by equity and that undertaking would have to be given by the majority partner. In other words, although Telenor held only 67.25 per cent of the company, the company would have to be responsible for 100 per cent of any cost overruns. "This clause alarmed the Norwegians and they backed out," says a source, on the condition of anonymity.

According to him, the decision to back out of the SBI debt facility may also have had something to do with the fact that back home in Norway, Telenor had a new chief financial officer Richard Olav Aa (who replaced Trond Westlie, who was the CFO when the deal was signed). Olav had started looking closely at the whole Indian operation and he did not necessarily like everything he saw.
Unitech agrees that may partly explain why it took the company months to realise that the funding on offer was not suitable. In any case, with the refusal of the SBI syndicated loan, Uninor needed to explore fresh options for raising money.

Even as Telenor refused the loan, the CAG report on the 2G scam hit the headlines. Sources say that Telenor's unease with this single clause and subsequent refusal to avail of the facility turned out to be a massive stroke of good luck for SBI — and the bone of all contention between the partners.

"As soon as the CAG report hit, all banks refused to lend any money to the 2G licensees especially since there was a question mark even over the continuance of the license. Therefore, SBI must have been thanking their lucky stars that Telenor refused the loan," says a senior finance ministry official.

Uninor's board meeting on 23 November 2010 was stormy, according to people close to the developments. Telenor representatives on the board had many questions in the wake of the 2G scam (although no one imagined that it would lead to the arrest of the company's chairman Sanjay Chandra at that time). The Uninor management produced the letter, which said that it had refused the loan and said that it would try and put in more money through external commercial borrowings (ECBs) but might need to go for a rights issue as well. Unitech for its part said that it was unsure whether it could put in the required funds at all.

Unitech says this was a "rude shock" for them — and this refusal was to come back to haunt them as it finally led to Telenor insisting on a rights issue. Unitech also maintains that it had helped in negotiating the SBI loan. It was at this point that Telenor also came up with a new valuation of the company and said that in light of various market developments, the valuation of Uninor's business was down to Rs 2,000 crore.

"I remember Chandra at the meeting asking whether what they were saying is that in eight months, they have managed to fritter away almost Rs 6,100 crore of cash!" says a person present at the meeting.

CHARGE BY TELENOR Unitech has put in no real cash. It claims it has lost out as the valuation is down, but its real exposure is very low

UNITECH REPLIES Spent Rs 1,658 crore for license, pre-operating costs, interest costs and Rs 882 crore in bank guarantee

CHARGE BY TELENOR Unitech has accused Uninor of mismanagement. But numbers show otherwise and Uninor's roll-out is far more successful than competitors

UNITECH REPLIES Telenor says Uninor has leadership in 13 circles. If the valuation is of Rs 400 crore, it must have fallen 90 per cent. This can only be due to mismanagement

CHARGE BY TELENOR Unitech has not put forward any credible alternative funding plan at board level

UNITECH REPLIES We had suggested vendor financing to save on capex. We also proposed alternative plans, including operating the company on short-mid term debt and funding through NCDs

CHARGE BY TELENOR There have been informal offers to buy out the firm. If they have cash, why not buy their portion of the rights?

UNITECH REPLIES We made this offer in the CLB petition. Telenor wants us to invest Rs 2,500 crore, but it values Uninor at Rs 400 crore

Unitech argued that it did not agree with Telenor's valuation and asked how its partner intended to fund the rest of the requirements. At this point Telenor suggested that Unitech be a nominee in the process, and a structure be worked out where Unitech would be a nominee for the funds being raised. Unitech felt that Telenor's suggestion was not legally viable and    the November meeting ended in a deadlock. All of December also went by with no resolution in sight.

Meanwhile, the 2G investigation had started in full earnest and began to take a toll on Uninor's senior management's time. "Around this time, Telenor began to realise the full gravity of the situation. The parent company was also extremely unhappy to be dragged into a corruption scandal since it claims to be a zero corruption tolerance company globally," says a source. Also, more and more time and energy was being spent on the investigation and employees were beginning to get jittery (and there were some exits at middle and junior management levels). In other words, the Unitech tag was getting to be a drag for Uninor.

In January 2011, Telenor moved for the board to clear a rights issue of Rs 8,000 crore. Unitech representatives objected strongly to the proposal saying that a rights issue was to be explored only after all other options had been tried out first, but were overruled by the Telenor majority and the rights issue was cleared. Telenor also said that it would introduce a new business plan in the next meeting for the board to clear. At least one source says — and Unitech does not deny — that Telenor pushed for the rights issue as it realised that its partner did not have the money to put in. On the other hand, Telenor was a cash-rich company (some of which was lying idle) and could happily bring in more money and take its stake up to 74 per cent.

Kapil Sibal had, around this time, taken charge as telecom minister and there was some talk of a new mergers and acquisition guideline for the sector. One analyst says that Unitech was not averse to exiting the sector but wanted a good valuation. "I think the idea was to delay matters somewhat, wait for the new M&A guidelines to come in, tariffs to pick up and therefore reach a better valuation," he says.

But the relationship between Unitech and Telenor had soured completely by this time. Between, January and April 2011, some board and other meetings were held but there was no substantial progress on the impasse. Unitech took the matter to the Gurgaon court (Telenor had filed around 60 caveats across the country, but had for some reason left the Gurgaon court out) and was able to secure a stay on the board meeting and on the actions coming out of the meeting. As a result, this latest business plan could not be considered.

Telenor tried to get the stay lifted and the stay was relaxed but the court said that while board meetings could be held, none of the actions or resolutions arising from the board meetings can be given effect. In June 2011 — by now Sanjay Chandra had stepped down as the chairman of Uninor and was, in fact, in jail — the board meeting was held and the business plan was approved after heated exchanges. In May 2011 — while the two sides were brawling in the board room — Unitech went ahead and filed for arbitration in Singapore (a three judge panel will arbitrate). The company argued that the business plan and rights issue were both approved despite "vehement objections" and were a "sheer abuse of majority".

On 4 October 2011, Unitech received a letter from Telenor Asia where the latter said that in its view the company was now valued at Rs 400 crore (Rs 28 per share as on 30 September 2011), a valuation Unitech officials termed "ridiculous". The Unitech side maintains that the valuation is, in fact, higher than when they started at around Rs 11,000-12,000 crore.
In October 2011, Unitech also filed a petition with the Company Law board (a copy of which is available with BW) arguing the actions of the Uninor management have been "oppressive and mala fide" and that they have displayed "gross mismanagement in running of the company". It is further argued that the business plan approved and adopted is "outright unilateral, mala fide, self-serving, premature and aimed at artificially depressing the valuation of the company".

The petition resulted in a CLB officer being present at board meetings to make sure that proper notes were taken. Says Goel :"There is a fundamental issue with this proposal. How can Telenor justify asking Unitech to invest more than Rs 2,500 crore in a business that its management claims is valued at less than 16 per cent of this investment? In fact, if Telenor has destroyed the value to this extent, which investor will pick up stake in the venture."

On the other hand, Telenor executives point out that the valuation is based on the fact that the company has considerable accumulated losses. Also, that market conditions at the time of signing the agreement are vastly different (see interview on page 36) from what they are now. The valuation, says Brekke, has nothing to do with the fundamentals of the business plan — which is still sound. (Surprisingly, Unitech officials agree that the business is progressing in the right direction and that Brekke is an excellent managing director who understands operations intimately.) Brekke points out that Reliance Communications was valued at Rs 1,69,320 crore in January 2008, and is now valued at Rs 19,866 crore — an 88 per cent drop in value — despite subscriber base and revenues going up. Since December end and this January, the fight between the two partners has got increasingly ugly. A report in a national newspaper said that Brekke was being investigated as a potential "security threat" by FIPB because of his earlier stint as a director in the Telenor operations in Pakistan.

Brekke says that when Unitech and Telenor tied up, the Pakistan operations and its details were well known. And since it was Unitech that made that application, "I assume they put in all the information. It was no secret that Telenor had a Pakistani operation", he says. Brekke says that he stepped down from the board of the company in Pakistan within five days of taking over as Uninor managing director in India. He subsequently applied for security clearance from DoT and got it.

He says he has not even visited Pakistan since then. "You need to ask whoever may be behind all this. It is one thing to have a fight but to accuse one in matters of such sensitivity is hitting below the belt," he says.

One reason why no holds are barred in this fight is because Telenor has applied to increase its stake to 74 per cent and its application needs FIPB clearance. The Cabinet Committee on Economic Affairs (CCEA) will consider the application soon.

But Brekke says that whether the FIPB clearance comes through or it does not, Uninor will proceed with its rights issue. "If both parties take up their rights, Telenor will take 67.25 per cent of the Rs 8,000 crore and Unitech will take 32.75 per cent. There will be no change in the shareholding," says Brekke. "But let me be very clear about this, even if the FIPB approval does not come through, that does not stop the rights issue." He stays silent on the question of whether Telenor wants a new partner to replace Unitech, something that the latter suspects.

It seems nothing will stop the rights issue — unless the arbitration panel in Singapore rules against it. And till then, both sides continue to snipe against each other.

With inputs from Rajeev Dubey


(This story was published in Businessworld Issue Dated 06-02-2012)