Mukesh Ambani buys Infotel and re-enters telecom business

Billionaire Mukesh Ambani's Reliance Industries Limited (RIL) made a dramatic return to the telecom sector, agreeing to buy Infotel Broadband, which was the only company to win a national licence in India's broadband wireless spectrum auction.

Infotel's offer of $2.75 billion for the licence topped forecasts while US chipmaker Qualcomm and India's biggest mobile operator, Bharti Airtel, also won spectrum in parts of India in an auction that saw some of the biggest players in Indian telecom return empty-handed.

Soon after the winners were announced, conglomerate Reliance Industries, India's biggest company by market capitalisation, said it would acquire unlisted Infotel, paying about Rs4,800 crore ($1.02 billion) for fresh equity in the firm to get a 95% stake.

A source with direct knowledge of the matter said Reliance Industries would also pay New Delhi-based Infotel's spectrum licence fee.

Mukesh Ambani, the world's fourth richest man, was freed to enter the telecom sector last month when he ended a pact with his long-estranged brother Anil Ambani that prevented them from competing on each other's turf.

When the brothers split up the family empire in 2005, Anil Ambani got control of Reliance Communications, India's second-biggest mobile phone operator.

Mukesh Ambani, who ran Reliance Comm before the split, had been widely expected to return to the telecom market.

"Telecom has always been Mukesh's baby, but he had to give it up five years back," said Arun Kejriwal, strategist at research firm KRIS.

Infotel's controlling shareholder said costly bidding had compelled it to find a partner.

"When the bid prices started becoming high, we realised that we need to talk to a strategic partner. So we were talking to Reliance somewhere in between the auction. So it's not something which has happened in one day," Anant Nahata, who controls Infotel, told CNBC TV18, according to a transcript on its website.

Mukesh Ambani's return threatens to make the crowded Indian telecom sector even more competitive.

"Reliance's move into broadband will only result in more jostling, as existing players will have to deal with another large, local player with deep pockets," said Ambareesh Baliga, vice-president at Karvy Stock Broking.

Anil Ambani's Reliance ADA Group said in a statement that it welcomed RIL's entry into the broadband market and said it was looking forward to providing services to it and other broadband service providers.

Vodafone's India unit, Reliance Communications, and Idea Cellular , three of the country's biggest cellular operators, did not get any broadband spectrum.

Vodafone said it decided to step away from the broadband auction as bid prices went beyond rational levels, while debt-laden Reliance Comm, which is looking to sell a stake of up to 26% in itself, exited the auction a week ago as bid prices exceeded its business case estimates.

The government issued three broadband wireless licences for all of the country's 22 zones. Besides Infotel's full licence, two government carriers split one licence and six private-sector firms — including Qualcomm, Bharti Airtel and Aircel — divided up the third.

Cellular market leader Bharti Airtel said the scarcity of slots and the auction format resulted in extremely high prices. Bharti will pay Rs3,314 crore for the spectrum it won.

Qualcomm is paying a little more than $1 billion for the spectrum it won in four of India's 22 zones, including the lucrative Delhi and Mumbai zones.

Last month's third-generation (3G) spectrum auction also saw bidding far exceed expectations. Bharti, Vodafone, and Reliance Comm paid about $7 billion in total for 3G spectrum in that auction.

India's broadband and 3G spectrum sales were among the biggest such auctions globally in recent years.

India will earn Rs38,540 crore from selling the three all-India broadband wireless licences and, together, revenue from the two auctions will touch Rs1,06,000 crore, about three times New Delhi's initial estimates.

It is a welcome windfall for the deficit-strapped government, with some analysts saying the spectrum bonanza could cut the country's deficit to 4.5% of its gross domestic product (GDP) from a projected 5.5% for fiscal year 2010-11.

News that Reliance Industries would acquire Infotel came after the stock market closed, but RIL shares closed up 3% after speculation that the announcement would be made.