Difficult to see who would like to buy TataTele
Given TataTele’s negative net worth of R1,863 crore, and the manner in which the business has been going south—FY13’s net loss of R4,858 crore was higher than FY12’s R4,228 crore—it was never clear why the Tatas were hanging on to the business. Certainly, the customers weren’t hanging on, which is why the telco’s subscriber base has been shrinking; even the average revenues per user—primarily from the data dongle business—are around a fifth lower than those of rivals like Bharti Airtel. Whatever the reason, what will help concentrate the group’s mind is that its Japanese partner NTT DOCOMO has finally decided to exercise its options to get out of the company. Since the agreement mandates the Tatas to buy out DOCOMO at half the price it had paid if TataTele fails to meet certain performance targets—or a fair market price, whichever is higher—this means the Tatas will have to pay DOCOMO R7,250 crore in the next month or two, according to a DOCOMO press statement. RBI restrictions on pre-determined pricing for options will, though, complicate the exit.
One option, available in the past, may have been to try to hawk off DOCOMO’s stake to another firm, either an existing player or a new one. An existing player, however, can’t buy a stake in the firm in the new M&A rules—yet to be notified—so will have to buy out the entire company. The telco’s 63 million subscribers may not be worth too much, though the spectrum holdings would be worth a lot more. Tata Tele has 5 MHz of 3G spectrum in 9 circles and 4.4 MHz of 1800MHz spectrum in 18 circles—while the 3G spectrum attracts no extra charges, a regularisation charge will have to be paid for the 2G spectrum since it was not bought at the market price. The spectrum was bought in 2008, so has around 14 years of residual life. Based on the current price, this means whoever buys Tata Tele will have to pay around R4,000-4,500 crore to the government for the residual life of the 2G spectrum. Given the 2G spectrum is only 4.4MHz, and not 5 MHz, it doesn’t lend itself to being used to provide data services either—were a Vodafone to buy out TataTele, this would be an important pre-requisite. Even if you add another R5,000 crore for the 3G spectrum, this has to be contrasted with telco’s R23,491 crore of debt at the end of FY13. It would be far more advantageous for an existing telco to buy new spectrum when it is available.
Given the way the business has fared, the way rivals are gaining market share, and the impending entry of Reliance Jio which will further depress tariffs to gain market share, the Tata’s need to seriously consider getting out of the business. Since that will involve taking a big hit on the debt, for now, perhaps the group’s best bet is to wait for the spectrum trading rules which will allow it to sell its spectrum holdings without a prospective buyer having to take on the associated debt. At some point, though, the Tatas will have to take the hit, and dial out of the business.
The front page story ....
While NTT DoCoMo on Friday announced its decision to sell its 26.5% stake in Tata Teleservices (TTSL) back to the Tata Group, the transaction will need to be structured carefully keeping in mind the Reserve Bank of India’s (RBI) restrictions on the pricing of call and put options.
Although NTT DoCoMo put out a press note announcing that as part of their original agreement the Tatas would pay them a minimum of R7,250 crore — half the investment it has made since March 2009 — RBI rules do not permit put and call options to be exercised at a predetermined price.
“The RBI valuation requirement for a put option will be one that is based on a return-on-equity parameter. Any valuation that does not conform to this will require specific approval from the regulator,” Akash Gupt, executive director, tax and regulatory services, PwC India, told FE. Since TTSL is in the red — losses in FY13 were R4,858 crore, an RoE-based valuation would not be possible.
While market buzz is that a solution could be found if Vodafone picks up the DoCoMo stake in TTSL — this would help it consolidate its position in the Indian market — the M&A rules do not permit this. At the moment, a telecom company can buy up to 10% of the equity in a rival telco but the new rules — expected to be notified soon — do not allow this. In which case, a Vodafone would need to buy out the entire 100% equity in TTSL. TTSL owns 3G spectrum worth around R5,000 crore in nine circles and 2G GSM spectrum in 18 circles valued R8,500 crore based on the latest auction.
For most GSM players, the CDMA spectrum TTSL owns would be of little value. Under the rules, if another player is to buy TTSL, it will need to pay a one-time market-related charge to the government for the 2G GSM spectrum. Given the licence’s residual life of 14 years as well as the amount that TTSL paid in 2008, any buyer would have to pay the government around Rs 4,500 crore.
Getting 2G and 3G spectrum worth Rs 13,500 crore may still be worth it but in this case it comes with a debt of 23,491 crore, TTSL’s outstanding debt at the end of FY13. More important, since the 1800 GSM spectrum is only 4.4 MHz, it will not be possible for any buyer to use this for providing data services, for which there is a spectrum shortage. Theoretically, a Vodafone can combine its 2G spectrum in the 1800 MHz band with that of TTSL but unless this is “harmonised” it may not get the contiguous 5 MHz band required for providing data services.
TTSL’s 60-plus million subscribers, analysts estimate, would not be worth more than a few hundred crores, but much of TTSL’s revenues are earned from the CDMA dongles — a GSM player like Vodafone would find it difficult to service both a CDMA and a GSM network simultaneously.
Tata Sons said in a press release that “TTSL continues to be an integral part of the Tata group”. The release added that, “As also stated by NTT DoCoMo, it is not possible to predict how events will unfold; however, Tata Sons is cognizant of its responsibilities, and will act keeping in mind the interests of all stakeholders and in accordance with law. Tata Sons, NTT DoCoMo and Tata Teleservices had entered into a shareholders agreement (SHA) dated March 25, 2009.”