Wednesday, May 30, 2007

Can Subhash Menon be cool with this ?

Subhash Menon must have found it overvalued if he didn’t say “Oops, I missed it” ! Or has he had his fill with Azure and Syndesis under his belt ?
I was a bit surprised to see him letting go off Cibernet to PE firm Warburg Pincus. Who am I to guess ? It could even be that he felt SubexAzure’s leadership in telecom OSS space is so formidable that the solutions portfolio offered by Cibernet [of financial settlement of voice, data, and m-commerce transactions, inter-company billing protocols, roaming administration tools and financial settlement programs] looked just plain vanilla.

Taking a close look at the services provided by Cibernet to over 300 wireless operators across the globe, SubexAzure will have to go some length before it can be the Full Monty in this space. Subhash may keep his nose to the grindstone, but the kind of revenues, customer portfolio and market share presented on a platter by Cibernet is alluring. Fresh from the acquisition and integration of Syndesis, he could be excused for feeling pleasantly weary if not suffering from acquisition fatigue.

It’s a dog-eat-dog world out there. No room for let ups.

I'm just a freelance I-Banker and a blogger. Subhash should know better.

Tuesday, May 29, 2007

Ruias could use some sleep, badly !

Ruias must have been losing sleep ever since the Vodafone deal.

Good reason to think so since the Ruias are getting ready to *monetize* 33% that they hold in HutchEssar (now Vodafone Essar) – apparently to raise around $4.5 billion debt for overseas acquisitions (of non telcos).

“The fund-raising proposal will put the financing at a loan-to-value ratio of 82 per cent, which is quite high for a deal backed by shareholding in an unlisted company,” a banker reportedly said.
That's it...Ruias could use a safety valve. The deal is all about an unlisted company, valuation on paper, futuristic…ah, ever so many strings. Even as the deal was underway, several eyebrows have been raised over the stratospheric valuations offered to [HutchEssar] the unlisted, loss making telco having negative cash flows – purely on the basis of 22 m subscribers [ cost of acquisition = $ 852 per subscriber].

While there could be the buffered comfort of that put option, [which allows the Ruias to sell their 33 per cent stake in the company over the next 3-4 years in the open market at a minimum benchmark price] in the dog-eat-dog corporate world, you can’t sleep in peace unless you cash it all in – which Ruias are yet to - especially when the fortune has been a chance event, happened by bid frenzy instead of sweat and toil.

Is it blind leading the blind or a house divided against itself that hurried Ruias to monetize ?
Ruias could use some sleep, badly.

Monday, May 28, 2007

Between an SEZ here and an SEZ there…in China

When the people of Uttar Pradesh elected Mayawati’s BSP with a thumping majority (overthrowing Mulayam Singh’s Samajwadi Party), her first item in the agenda for governance was a given – review all SEZ cleared by the Mulayam Singh, the former Chief Minister of the State.

In one of its most significant decisions since assuming power, the Mayawati government in UP has announced its intention to refer the allotment of 1,200 acres of land to Reliance Anil Dhirubhai Ambani Group for setting up an SEZ, to the Union government for review.

I also had a lookback at Nandigram riots in West Bengal (over Tata's SEZ) where the Left rules – for several decades now.

I was reading Vinnie's post on instant Chinese cities (Thanks Vinnie, for the pointer) and felt a bit wistful. How long would it take for our people to learn from our enterprising neighbors?

Excerpts from NatGeo article -

“In 23 minutes, they designed an office, a hallway, and three living rooms for factory managers. On the top floor, the workers' dormitories required another 14 minutes. All told, they had mapped out a 21,500-square-foot (2,000 square meters) factory, from bottom to top, in one hour and four minutes. Boss Gao handed the scrap of paper to the contractor. The man asked when they wanted the estimate."How about this afternoon?"

The contractor looked at his watch.

It was 3:48 p.m.

"I can't do it that fast!"

"Well, then tell me early in the morning."

That’s how they do it in China. We bloody well understand and fast…

Tuesday, May 22, 2007

Communism in China ? Are you kidding ?

The turn of events in China clearly shows that capitalism doesn’t need democracy. Capitalism’s wide diffusion of economic power offers enough incentive for investors to take risks with their money. But capitalism doesn’t necessarily provide enough protection for individuals to take risks with their opinions.

But that’s old news. The latest is that the Chinese are ready to walk the extra mile and do the unthinkable – To let private equity manage a piece of their huge forex kitty, shaming even the most capitalist of countries that view private equity with skepticism. In one final fling, Chinese are ready to consign to hell the Mao Zedong brand of philosophy that shunned private enterprise. I like that gutsy bit - no place for anything that stands in the way of progress – not even venerated ideology.

As per plans, the Chinese government would acquire a $3 billion stake in the Blackstone Group, the private equity firm, in the country’s first effort to diversify its $1.2 trillion in foreign-exchange reserves beyond US treasury bills and into commercial enterprise.

An investment agency modeled after Temasek (the investment arm of the Singapore government and owned 100% by the Ministry of Finance) in China would effectively create the world’s largest hedge fund – voila ! Some analysts say that the China fund’s investment of billions of dollars in the global financial markets could push global asset prices higher, affecting American and European stocks, bonds and interest rates, as well as the value of energy and natural resources in Africa and the Middle East.

Full story here.
Dr.Manmohan Singh, Mr.P.Chidambaram and Guv Y.V.Reddy- even you are having problems with the surge of $$ inflows, aren't you ?...and you wrung your hands in despair while letting the Rupee appreciate...look at your smart neighbour and take a leaf or two - NOW...!

Tuesday, May 15, 2007

Yet another gatecrasher…!

If you believe in something, go for it. This is the only way to really find out. Mathematically, the naysayers are right 95% of the time, but believing you’re in the 5% is what makes VCs they are.

Just as Ankur Srivastava, MD of DTZ brings out this report which talks about oversupply of commercial office space (in Chennai, it’s excess by 200% as they say) in Indian cities, Oak Investment Partners, the US based VC fund is setting up a Real Estate VC fund in India with a $ 200 m corpus. Can we call it the Symposium effect ?

Normally if you enter in an oversupply situation, the downward price pressure (or rental pressure, we are talking about real estate here) would take a long time to stabilize. That’s when leveraged investors (who have mortgaged the properties to Banks to fund their buys) begin to get margin calls from Banks and feel squished. Warren Buffet, the legendary investor's saying “the markets can remain irrational longer than you can stay solvent” comes to my mind.

I have often wondered why the Bubble horn is still not blowing. Aside of occasional rants by Deepak Parikh, Chairman, HDFC Ltd., India’s leading player in real estate and housing finance, not many seemed really concerned. [“How many malls can afford to pay Rs 100-150 or Rs 200 per sq foot? Look what happened to Crossroads (India's first mall). Only restaurants are left because food sells and the Piramals have sold out. The same thing is going to happen to other malls. There are many international brands, but they too cannot afford to be present in every mall”...Mr.Parikh squeals]

If you are riding the wave, why rock the boat....Welcome to party, Mr. Jerry Gallagher and prov'em all wrong !

Friday, May 11, 2007

Happy flippin' ...Renuka !

Ever tried turning an ocean liner like you do a speed boat ?
Nah… When you want to turn a speedboat, you turn the wheel. For an ocean liner, you have to plan two days ahead. RMS Titanic couldn’t swerve the iceberg because of it. The only tribe that seems to have managed it so well is Private Equity managers. The ocean liner metaphor here is to a Public company and the speed boat is what it becomes in the hands of private equity. I am referring to the art of buying out companies, sprucing them up and staging lucrative exits. It calls for a lot of guts.

I really wish the trend to pick up in India. Like many firsts to its credit, ICICI Venture can deservedly bag this too – why not…when it’s slogan is “fueling your aspirations”. If she can pull it off, Renuka Ramnath, CEO will surely be tap dancing her way to office soon after laughing her way to the bank.

As per this report, ICICI Venture, the country's largest venture capital firm, is likely to make a return of four times on its cost of acquisition. It had acquired the refractories business from ACC for about Rs 250 crore in 2005. Of that roughly 40% (Rs 100 crore) was equity and the balance was debt. ICICI Venture expects the prospective buyer to shell out Rs 550 crore. Taking out the debt portion of Rs 150 crore, the return on its investment will be Rs 400 crore, equalling four times returns.
UBS Securities is believed to be advisor to ICICI Venture for the sale of ACE. If ICICI Venture is successful in selling ACE, it would be its first exit from a company, in which it has made a complete buyout. Other companies where it has gone in for a buyout include Infomedia India (formerly, Tata Infomedia) and VA-Tech India (engineering services firm).

The ease with which you flip, is a function of timing and discretion. The next opportunity that’s lying in wait often prods it and the cycle rides on. Too bad these guys not being at the wheel of the Titanic on that fateful night…!

Happy flippin’….Renuka !

Tuesday, May 08, 2007

If you can't score, try shifting the goal post

Steve Pavlina says the best way to “win” an argument is to go for an entirely different goal than trying to prove the other wrong.

This also seems to be the strategy of Rajeev Chandrasekhar, [currently VC with Bangalore based Jupiter Capital as well as a Rajya Sabha M.P] who seem to be fairly upset about the recent stamp of approval given by FIPB to Vodafone-HutchEssar deal. Rajeev was previously the majority shareholder and head of BPL Mobile before it was sold to Essar Teleholdings in a deal valued over $1 billion. He is outraged since the Foreign Direct Investment (FDI) policy of the Government stipulates a maximum 74% ceiling for FDI in Indian Telecom sector, HutchEssar deal managed to slip through the policy net (by recognizing the 15% proxy holdings of two individuals as "resident holdings" - who were clearly surrogate stand ins for the foreign owners).

The background. In February, Vodafone had acquired Hutchison Telecommunications International Limited's (HTIL) 52 percent holding in the Indian company Hutchison-Essar, in which the Ruia-controlled Essar group is the junior partner with a 33 percent stake, 22 percent through a foreign holding firm. The remaining 15% is *ostensibly* held between Hutch CEO Asim Ghosh and Analjit Singh, MD of Max India, both reportedly Indian residents. Technically therefore the FDI sectoral caps have not been violated by HutchEssar by virtue of 26% stake is still held by Indian nationals (11% Essar, 15% Asim-Analjit joint holding). Smart move indeed.

Rajeev wants to know "is it the case of the government that where there is sectoral cap, any Indian citizen (or entity) standing proxy for foreign source of capital is enough to satisfy our requirement of being an Indian investor," in his letter questioning this model that is rampantly finding favor in the country.

"The question is not attempting to target any one company, but rather I am raising this issue as an issue of principle to start a debate about our country's approach towards foreign investment, the loopholes in our approach and the disrespect of the laws of our country by a few foreign investors. I have posed similar questions recently pertaining to foreign investment in Land on coastal areas," he groans.

Reasons for his carping are not hard to seek. BPL's Investment Bankers and Lawyers (hired by Rajeev for BPL-Essar deal) were not so ingenious in putting together a deal structure which technically could pass muster before FIPB and stay well within the FDI sectoral restrictions. Instead they just threw the rule book at him without much thought – the 74% sectoral caps for FDI investments in Indian Telecom sector had restricted his options and made him sell to another Indian Telco leaving no scope for fuelling a bidding frenzy as happened in Vodafone-HutchEssar deal. While HTIL, by smartly categorizing the 15% holding as stake held by residents, managed to pull it off at a stratospheric valuation of $11.1 billion for the 52% stake in HutchEssar. By this yardstick ($852 per subscriber), BPL divestment should have yielded much, much more than what Rajeev got from Essar. It’s an open secret that both Asim Ghosh and Analjit Singh stood proxy for HTIL, the holding company of Hutch and have several restrictions which forbids them from divesting it on their own to any other third party.

Now you know why I felt Rajeev is going for a different goal (newfound patriotism which urges him to raise the issue of disrespect for Indian laws and even threat to national security since it's too late to wreck the deal) instead of trying to be right !
What do you think ?

Thursday, May 03, 2007

2 and 20 has now become 3 and 50 !

Warren Buffet called them “2 and 20 managers” [Hedge Funds that charge 2% of funds managed as fees and 20% of profits as carry] and said this much – “when a man with the money meets the man with the experience, the man with the experience ends up with the money and the man with the money ends up with the experience”.

Call it the Groucho Marx problem: Of late Investors trying to put money into hedge funds frequently find that the managers they want do not want their cash.

Just as Groucho complained that he would not join any club that would accept him as a member, even very wealthy investors can find themselves faced only with hedge funds they do not want to invest with. As a result, some investors are resorting to devious tactics to get stakes in the best hedge funds.

Perhaps Mr.Buffet has been na├»ve to the latest phenomenon of mismatch of supply and demand that has given rise to the tendency of successful fund managers to jack up their fees — to 3% a year and 50% of profit in the case of SAC Capital — and impose long lock-ins, preventing customers from getting their money back for as long as five years. He might now call them “3 and 50 managers” – so long as they stick with those numbers.

Many of the industry's biggest names — Steven Cohen of SAC Capital, Paul Tudor Jones of Tudor Investment, Louis Bacon of Moore Capital, Steve Mandel of Lone Pine Capital and others — do not need to expand existing funds further and often believe that more cash would hurt their returns. Even when they find they have the capacity to take more money, they typically turn to their existing investors first.

But investors who know the tricks of the industry might be able to find cracks in the door. The most obvious way to get into a closed hedge fund might appeal to Groucho, but most people would shy away from it: Simply send your money to the fund's depository bank and rely on the fund's automatically issuing units, as LAtimes reports here.

Tuesday, May 01, 2007

ARC or debt collectors ?

The activities of Asset Reconstruction Companies (ARCs) finally seem to have picked up in India. Using the topicality of the subject, I had made an earlier post here. The pace of reforms in this billion $ industry was somehow slackening. To enthusiasts like me, it used to be more exciting to watch the paint dry or the grass grow. Ah, but then they do give some mild surprises like what I found in The Financial Express here.

I somehow keep asking myself this question. Our Banking system itself has been subjected to a fairly high level of oversight by both RBI and Finance Ministry. They have to maintain a 9% Capital Adequacy Ratio (CAR), SLR, CRR requirements imposed by RBI through its annual credit policy besides the regulations flowing from Banking Companies (Regulation) Act. Despite such elaborate supervision, Banks have managed to create a mountain of overdue loans or non-performing assets (“NPA”).

If it happens despite regulations, may be it’s time to relax them. Something similar is brewing in the US over Sarbanes Oxley Act, where there is a mounting pressure to loosen the strings by the Government. Otherwise ARCs merely end up being debt collection agents of the Banks rather than resuscitators of ailing businesses or turnaround artists. Vulture funds or Private Equity model should work fine, though with some brutal maneuvers deservedly on borrowers who dodged repayments, that led to the NPA creation in the first place.