2G Spectrum: UAE's telecom operator Etisalat to shut down India joint venture

ET Bureau Feb 23, 2012, 04.28AM IST United Arab Emirates' telecom operator Etisalat on Wednesday said it would shut down its India joint venture, making it the second foreign company after Bahrain Telecom to exit the country following the Supreme Court's decision early this month to cancel 122 telecom licences issued by government of India in 2008. While the decision will impact about 1.7 million customers, who have time till June to migrate to a new operator, over 2,000 employees would also be laid off. Etisalat were shutting down operations in India. The cancellation of licences also resulted in Bahrain Telecommunications exiting India by selling its 43% stake in mobile phone company S Tel back to its Indian affiliate. Etisalat owns 45% stake in Swan Telecom, which has been renamed as Etisalat DB. It is learnt that both Etisalat and S Tel plan to claim damages from the government on the grounds that they had invested in mobile permits granted by the Centre as per the existing policy and also that they entered this market only after the licences had been awarded. Earlier this month, Etisalat said it was taking $829-million hit on its Indian earning after the Supreme Court had cancelled 122 licences, including 15 permits held by the Gulf carrier's JV. The telco said it will take a call on coming back in the Indian market when it sees clarity on the auction process, stable policy, legal and regulatory framework in the telecoms sector. Etisalat DB's services had collapsed in most parts of the country last month, after it company failed to clear its due to Reliance Communications (RCOM), with which it has an infrastructure sharing arrangement, and so far it had not revived operations. In a related development, Reliance Infratel, the infrastructure arm of RCOM, has approached the telecoms tribunal on Wednesday to recover 1,200 crore from Etisalat DB that had taken its telecom towers on lease in a 10-year deal. The tribunal is expected to hear the matter on Thursday. The Arab world's second largest telecom company by market value said its board had 'unanimously resolved' on Wednesday evening to reduce operating costs and suspend services. "The decision has been taken in order to protect the interests of all stakeholders and to avoid incurring further costs at this time of rapid change and continued uncertainty in the Indian telecommunications sector," the telco said in a statement. The telco shelved its expansion plans after DB Realty's promoters were arrested in the 2G spectrum allocation scam in February last year.

The CBI in its chargesheet said that Swan Telecom was a front for Reliance Telecom, a subsidiary of Reliance Communications owned by the Reliance ADA Group. The probe agency said that Tiger Traders held a majority stake in Swan and was an 'associate' company of Reliance ADA Group. This was a violation of telecom rules that do not allow a company to own more than 10% stake in two telcos operating in the same circle.

n the late 1990s, Arun Firodia, chairman of the Kinetic Group, was reportedly made an offer by Honda Motor Company to buy

its 51 per cent stake in the troubled joint venture company, Kinetic Honda Motors. By September 1998, the Pune-based two-wheeler company finalised plans of buying the Japanese company's stake for Rs 35 crore (Rs 350 million), much to the surprise of most automotive enthusiasts and industry big-wigs. It held just 19 per cent in the company. The JV company faced trouble, locally, as it tried to sell scooters in a market, which was fast progressing to easy-on-pocket high mileage motorcycles. This was around the same time when Bajaj's famed geared scooter Chetak witnessed a downtrend.

Similar to the Kinetic Honda story, India has seen multiple instances of termination of agreements in joint venture contracts,
most of which were formed in the early 1980's (see table). While some agreements were signed to form joint venture companies, others were formed for arrangement of a technical alliance. One of the main reasons why joint ventures haven't been able to sustain itself for as long as Hero Honda (26 years), say experts, is because of lack of a strong foothold in the Indian market due to weaker brands, which in turn lead to financial losses. "While BMW's launch of the superbike in 1995-96 was considered by many as a product much ahead of its time, some other products had to be killed because of heavy competition. The RX 100 by Yamaha was low on mileage and a polluting motorcycle. Demand started to fall drastically when there were better options available," said an automotive expert attached with a consultancy firm.

Other JVs that failed Joint Venture Hero-BMW Models F650 Fiero, Max 100, Shogun, Shaolin RD 350, RX 100 RX 135, Reason for break-up Poor consumer response

Suzuki-TVS

Ownership issues

Yamaha-Escorts

Falling demand

Kinetic-Honda Kinetic-Hyosung LML-Piaggio

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Kinetic buys partner's stake Steep pricing LML bought partner's stake

While in the case of Kinetic Honda, the Japanese company appeared not so keen on growing the JV business as the India
company wasn't allowed to manufacture most type of two-wheelers except mopeds, Suzuki wished to have complete management control of Chennai-based TVS Motors much to the reluctance of the India company's promoters. Venu Srinivasan, chairman and managing director, TVS Motors, had built the company from scratch with an able research and development wing. TVS Motors launched indigenously built products while simultaneously launching models developed jointly by the joint venture. The two companies finally parted ways in September 2001 where a TVS Group promoter company bought Suzuki Motor Corporation's stake for Rs 15 per share, while the share price of TVS-Suzuki closed at Rs 87 per share on the Bombay Stock Exchange on the day of terminating the JV

V G Ramakrishnan, senior director, Frost & Sullivan said, "There is no reason for companies to form joint ventures
internationally as they have a brand presence there. The emergence of the new markets like China and India has happened only in the last decade. The only way to enter these markets was through a joint venture because of government policies." "Most international companies want to have management control in their respective joint ventures. Once a substantial amount of business was generated there was no longer any need to continue with the operation," he said.

Kinetic Motors did try to develop products on its own after the break-up with a few launches in the motorcycle segment.
However, the company which once had a leadership position in the ungeared scooter segment, lost out to competition in the bike segment. Kinetic later tried for an association with Italian and Taiwanese companies and had successfully brought their foreign bikes and scooters to the Indian market. However, due to poor response for its offering, even these associations was called off. The company's brand name and its assets were eventually sold to Mumbai-based conglomerate Mahindra & Mahindra for Rs 110 crore (Rs 1.1 billion). M&M later renamed it Mahindra Two Wheelers.

Hero, Honda split terms finalized

Pankaj Doval, TNN Dec 16, 2010, 05.52am IST Tags: NEW DELHI: It's finally splitsville for Hero Honda, one of corporate India's oldest and most successful joint ventures , with the two founding partnersIndia's Munjal family and Japan's Honda Motor Corpagreeing to part ways and terminate the 26-year-old relationship due to unresolved differences and ambitious independent plans. Sources in the know said most of the terms of the deal, which will see Honda selling its 26% stake to the Munjal family, have been finalized and the matter will now be taken up by Hero Honda's board on Thursday. Top officials of Honda are arriving here to attend the board meeting , a source said.

The sources added that the Japanese auto major will exit the JV through a series of offmarket transactions by giving the Munjal familythat currently holds 26% stake in the company an additional 26%. Honda, which also has an independent fully-owned twowheeler subsidiaryHonda Motorcycle and Scooter India (HMSI)will exit Hero Honda at a discount and get over $1 billion for its stake. The discount will be between 30% and 50% to the current value of Honda's stake as per the price of the stock after the market closed on Wednesday. The Munjal family plans to compensate Honda through high royalty payouts, which could double to nearly 6% of net sales. However, key financial institutions have objected to this move, saying that the deal could favour the Munjals but be detrimental to other shareholders. Spokespersons for Hero Honda and the Munjal family refused to comment on the development . Sources said as per the arrangement , it will be a two-leg deal. In the first part, the Munjal family, led by Brijmohan Lal Munjal group, will form an overseas-incorporated special purpose vehicle (SPV) to buy out Honda's entire stake, which will be backed by bridge loans. This SPV would eventually be thrown open for private equity participation and those in the fray include Warburg Pincus, Kohlberg Kravis & Roberts ( KKR), TPG, Bain Capital and Carlyle. "The PEs will take between 50-60 % stake in this entity , giving them just under 15% stake in the main company Hero Honda, which would soon sport a new name," the sources said. Hero Honda, credited with putting the Indian middleclass on wheels, defied its humble beginnings to quickly emerge as the world's biggest two-wheeler maker, also ending the stronghold of Bajaj scooters in the country. Tech, spares major irritants

Hero Honda's lowcost and highly-fuel efficient bikes (remember the classic 'Fill it, Shut it, Forget it' campaign ) quickly emerged as the most-popular and convenient mode of transport, catapulting the company into the global league of two-wheeler biggies. However, it was the rising differences between the two partners that gradually emerged as an irritant. Differences had been brewing for the last many years over a variety of issues, ranging from Honda's reluctance to fully and freely share technology with Hero (despite a 10year technology tie-up that expires in 2014) as well as Indian partner's uneasiness over high royalty payouts to the Japanese company. Another major irritant for Honda was the refusal of Hero Honda (mainly managed by the Munjal family) to merge the company's spare parts business with Honda's new fully-owned subsidiary Honda Motors India (HMI). Sources said a large number of people from the Munjal clan are also suppliers to Hero Honda, giving undue advantage and benefit to the Indian promoter. But to the discomfiture of the Munjals, Honda wanted a more competitive approach to component procurement , that may have seen the end of many of these suppliers.

"The differences became too big to allow a harmonious existence," the sources said. Simultaneously , Honda's ambitious plans for its two-wheeler subsidiary HMSI also gave the confidence to the company to go it alone. HMSI has singlehandedly revived the scooter market in India and has been gradually gaining ground in motorcycles as well. A bullish Honda wanted a solo say in the running of its business, and HMSI's success gave it the confidence to go for a split. HMSI has seen sales growing 42% in April-November this fiscal and it is setting up a second plant-with a peak capacity of 1.2 million unitsto boost operations. Its plant at Manesar has a capacity of 1.6 million units. Honda is expected to launch a slew of new models, including lowpriced bikes to challenge Hero Honda and other competitors . The exit of Honda has, however, beaten the Hero Honda scrip as investors feel that it may not have the wherewithal to independently provide technology support.

A 26-year-old partnership between Japans Honda Motor and Indias Hero Group ended on Thursday. Announcing the break-up of joint venture company Hero 19Share Honda Motors Ltd (HHML), Pawan Munjal cited changing market dynamics coupled with ambitions of growing beyond India as the two compelling reasons for the split.

+ Under the present agreement, HHML was not permitted to tap overseas markets, seek technology from any other company and even participate in large scale Related links exports. Terming the deal as beneficial to all stakeholders, including small shareholders, Munjal, CEO and managing director (MD) of HHML, said the Hero Group will buy Two-wheelers seen running out of gas, too out Hondas 26% stake in the company by raising debt initially. He did not disclose the price at which Honda has agreed to sell its shares. As per the current Piaggio to roll out Vespa by March share price, Hondas stake is valued at close to $2 billion. Reports have for the third time suggested that the Japanese are willing to sell out at 30-33% discount.

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Munjal declined to confirm if there was a lump sum royalty payment. He said

Heros royalty payment to Honda would start declining from next year, adding that Forbes list: Mukesh Ambani richest media reports saying royalty payments could go up significantly after the termination of the joint venture were incorrect. Munjal also clarified that the deal Indian, Anil biggest loser envisages a new technical agreement, which will cover existing as well as new Gallery products till 2014. For the company and for me personally, this is one of the most important announcements I have made in the last 25 years... through the new arrangement, Hero will be free to launch its own products, get its own R&D capability. Munjal said. The new licensing pact will provide us not only new products, but also new platforms... there couldnt have been a better deal than this for all stakeholders, Munjal said. We are not selling off our stake in HHML to make money. We realised that Hero has its own vision and Honda, its own... when the joint venture was inked over two decades back, it was a totally different world... we had to respect their vision and had to unwind our holdings, explained Fumihiko Ike, Hondas MD and COO for regional operations (Asia and Oceania). Munjal said a definitive agreement will be signed over the next few weeks and the actual buyout of Hondas stake should be completed by next year.

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Reliance Communications Forms Rural JV With Kribhco

By Nikhil Pahwa on Jun 10th, 2009 | Reactions
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Government promoted co-operative society Krishak Bharati Cooperative Limited (Kribhco), has formed a joint venture with Reliance Communications for retailing customised telecom products and farmer specific value added services in rural India. The joint venture company is called Kribhco Reliance Kisan Ltd, according to the co-operatives 2008-2009 highlights report. Business Standard adds that Kribhco will hold 60 percent in the company, while Reliance ADA Group will

hold 40 percent.

While services will initially focus on RCOM, but could be expanded to include other Reliance ADA group companies like Reliance Capital, Reliance Entertainment and BIG TV, RCOM President (Wireless) S.P. Shukla told Business Standard. Kribhco manufactures fertilizer, and has a large distribution channel for retailing telecom services. The urban centres metros, B & C class towns are fast becoming saturated, and telecom operators are looking for ways and means of providing telecom services to rural markets in India, which remain largely underpenetrated. Kribhco will provide RCOm with a distribution channel of around 25,000 cooperatives. This deal mirrors another rural joint venture formed between Bharti Airtel and IFFCO for rural services. In case of the Airtel-IFFCO joint venture, IFFCO also retained a majority stake at 50 percent, while Bharti Airtel and Star Global kept 25 percent each. Services they offered include voice updates on mandi prices, farming techniques, weather forecasts, as well as the marketing of IFFCO fertilizer availability to the farmers,