Some insights into the Unitech Telenor transaction

At a first glance when I looked at the transaction, I thought Unitech made a killing in the transaction, however taking a dip into the transaction reveals a different story. Below are a few reasons why I think that the transaction was a very desperate move by the real estate company to lower it debt in this tight market condition.
1. Comparable Valuation

Above is a list of transactions that have happened in the telecom sector recently with the valuation multiples. There are a few other transactions for which we do not have the valuation multiples, but the press notes say that all of these transactions in the telecom space attracted rich valuation multiples.
According to industry sources (Economic times), Unitech got a valuation of 7x of what it paid for acquiring the telecom business. However the valuation of 7x is superficial. It doesn’t factor in the un-accounted money Unitech must have paid to get the telecom license.
How can I say that there is an un-accounted component?

a. Companies were chosen on a first come first served basis to allocate spectrum. No auction process was held, even though Prime Minister Manmohan Singh publicly stated his preference for an auction process.
b. The cut off date for applications was preponed leaving a window of only few hours to receive fresh application.
c. The spectrum was given away at throw away prices.

Thus it is anybody’s guess that the actual valuation multiple that Unitech received for its telecom business was much below the 7x multiple quoted. To read more on this please refer to http://www.business-standard.com/india/storypage.php?autono=339837http://www.business-standard.com/india/storypage.php?autono=338815

The table above shows that mean valuation multiple for telecom business in India is 5x. With one of the lowest level of telecom penetration levels among the emerging countries, telecom sector attracts huge multiples.
Looking at the market multiples, It is evident that Telenor struck a good deal.

2. Statement by Unitech ManagementAt the time of acquisition of the telecom spectrum, the Unitech management had clearly mentioned that the wireless business would be an integral part of the company’s operation.

3. Debt scenarioPlease read my last post on Unitech’s sale of the telecom business.Thus the sale of wireless business by Unitech was a calculated and a desperate move.