Spice Mobile, led by industrialist BK Modi has consolidated its group’s telecom businesses into a single entity to be called Spice Mobility, effective January 1, 2010. The company’s board of directors approved the amalgamation of BSE and NSE listed Spice Mobiles (SPICEMOBIL), the handset manufacturing division, with Spice Televentures – whose subsidiaries included distribution arm Spice Retail, VAS firm Spice Digital (formerly Cellebrum), Bharat BPO and Spice Labs.  The merger is expected to take 4 to 6 months to complete.

Spice Televentures was launched in 2002 to buy ILD licenses. The company in April had made an open offer for shares in handset vendor Spice Mobiles, taking its stake to 63.25 percent.

Details: Conference Call Transcript | Presentation on the amalgamation (zip file)

The New Entity, Synergies

Dilip Modi, Chairman, Spice Mobiles said during the conference call, “Spice Mobility will bring together a combined manpower of 4,000 people, over 50 million users of our services and products and over 50,000 retail outlets.” Spice Mobility will therefore span across products, services, retail and distribution:

Spice Digital – VAS, most recently launched Mobstore for Idea Cellular, m-gov app in HP. The company claims that it registered revenues close to Rs. 1.35 billion with an EBITDA margin of around 30% in the first 9 months of this current financial year – April 2009 to December 2009. The valuation of the company is believed to be around Rs. 8 billion.

During the conference call, Spice Digital CEO Saket Agarwal said that growth for the company has been around music, claiming that the company is the market leader in Mobile Radio. Agarwal said that “there has been a consistent rationalization on the revenue shares which have not tended to be in favor of value-added service provider and there has been margin squeeze on that front too. So while overall numbers have moved up, the content cost and revenue shares has kind of got us to a reasonably good profitable numbers than something which was more like a blip in the initial phase.” The company claims a subscriber base of 31 million subscribers.

Spice Retail – chain of 700 handset stores. It recently took over Global Access, a local handset retail chain in Karnataka, and prior to that, the Indian operations of Cellucom. Spice Retail CEO Sanjeev Mahajan said that “The Cellucom stores are still at the stage where they have to achieve breakeven though we have achieved significant progress in the last eight months that we have worked on them. The gross margins have gone up in excess of at least 6% points from the time we took over to now. If you are talking specifically about Cellucom setup stores, they will add another 3% to 4% gross margins in the next two quarters and we will get the stores to breakeven.”

The company has noted in its earnings call that it intends to remain opportunistically open to acquire more regional chains in the near future. In the last quarter ending December 209 the business turned EBITDA positive at the store level, revenues stood at Rs. 4.75 billion and EBITDA losses at Rs. 340 million.

Spice Labs – applications incubator; it launched an app development platform called Mitr, a Sudoku app by Spice Labs, available on the Airtel App store and the Nokia Ovi store. As an incubator, Spice Labs itself is currently at an incubation stage.

Bharat BPO – JV between Spice & BSE listed Spanco Telesystems, employs 250 to manage Indian Railways’ 139 enquiry service; claims to answer 0.7 million calls per day. This division contributes Rs. 40 million to revenues. The contract with the Railways is for 10 years, begun 18 months ago.

Spice Mobiles – the handset manufacturing division. It currently has 4% market share of all handsets sales in India, including gray market sales. Revenues of Rs. 7 billion and an EBITDA of Rs. 740 million. In the December 2009 quarter, it sold 1.5 million handsets.

Note that in September last year, the Spice Group had also acquired MediaRing, now called Spice i2i.

What’s Driving the Consolidation? Challenges

According to Spice, the consolidation is being driven the growth of the Mobile Internet, and the blurring boundaries between devices and services (or as Nokia refers to the combo – Solutions). We wonder if Spice is actually complicating things by interlinking devices, VAS and Retail: the solutions business has been tricky for Nokia to switch to, and it’s likely that while the consolidated entity will be (obviously) larger, it will continue to operate in silos. I’m not a fan of linking services to specific handsets or platforms, and hope Spice Digital and Spice Labs aren’t limited to Spice Mobile devices, or for that matter, retailing only at Spice Retail. Independent units are more likely to scale than interdependent ones.

Raising Funds

Along with the wider scale this consolidation brings, the entity will also have more flexibility to raise funds. CFO of Spice Televentures, Subramanian Murali, said the company is planning to raise funds within the next 2 to 3 quarters and dilute the equity to below 75%, but plans are still not finalised.

The subsidiaries will continue to exist as separate legal entities but the company will now have a consolidated balance sheet under Spice Mobility.

Plans

It plans to expand to Africa, following the lead by Comviva, inMobi and OnMobile, and Israel-to-Indonesia to power growth beyond India. It also plans to set up an independent app store called FunSpice – we have contacted Spice to learn more about this and will write more soon. The new entity is betting on the rise of Mobile Internet (GPRS) in the country and app stores. Spice Mobility also intends to cash in on cross selling opportunities between the subsidiaries and take another look at the telecom market.

Terms Of Consolidation

The directors approved a swap ratio of 7.91 equity shares of Spice Televentures for every equity share held in STPL; so 16.34 crore equity shares will be issued to the shareholders of STPL and the existing equity shares will be extinguished. The equity capital of the company post completion of this action will be 19.09 crore equity shares of Rs. 3 each.

BSR & Co., Chartered Accountants have valued Spice Televentures’ shares at Rs. 109 per equity share and STPL’s shares have been valued at Rs. 862 per equity share.