New Delhi: The merger announcement between Tata Teleservices and Bharti Airtel is good news for both the parties involved, as also for India’s hyper competitive telecom industry. It saves Tatas the blushes, since the only other option would have been to wind down the loss making, debt laden business, something the Tata group has never done in its 150-year existence. The deal is a thumbs up for the Tata legacy. For Bharti, it is a Diwali gift since the acquisition brings with it added revenue market share at virtually no cost.
As someone pointed out after the deal was announced, Bharti has bought the Tatas’ business “for free” and perhaps made some money also in the process! As for the telecom market, stakeholders will probably heave a sigh of relief since the deal means there will only be three serious players left in a hyper competitive market – Bharti Airtel, the Vodafon-Idea combine and Reliance Jio Infocomm – which should mean reduced competitive activity and better revenue generation in the long run.
India’s telecom market has been losing revenue these last few quarters, with intense fare wars, and consolidation was the only viable option. In a furious though unprecedented wave of consolidation, the smaller telecom operators are being bought over by the biggies. In the end, perhaps only three or four big operators will survive but then, that is a good sign since this has been the norm in most mature markets.
This piece in NDTV quotes data from TRAI to say that Tata Teleservices was ranked ninth among 11 operators, with a market share of 3.55 percent as of July. The top three telecom operators -- Bharti, Vodafone India and Idea Cellular -- control almost 60 percent of the market. Reliance Jio now has about 11 percent of the market, ranking it fourth. Consolidation is the only sensible and indeed viable way to remain in business.
It seems talks between the top honchos of the Tata group and Bharti were initiated sometime in August this year, but then got stalled as Tata Sons’ Chairman N Chandrasekharan perhaps did not want to risk all by selling the telecom business so quickly into his new role. The talks revived again last month, after Chandra had found firm footing in the hot seat and probably came around to the view that selling off the business at no gain was a better proposition than winding it down. Besides, within this time gap, the fractious issue of the Japanese partner NTT DoCoMo and its exit was also resolved through some deft negotiations by Chandra, clearing a big hurdle in any imminent deal for the telecom business.
The deal contours, as announced yesterday, are rather interesting. As per a statement from Tata Sons, the Tata Consumer Business (Tata Teleservices and Tata Teleservices Maharashtra) will merge with Bharti Airtel, with over 40 million customers of TCB joining the Bharti network. Tata will retain its stake in Viom Networks, a tower company and the group is exploring merging its enterprise business with Tata Communications. The merger with Bharti is on a cash free, debt free basis and all past liabilities will be settled by Tata. Bharti will take on a “small” portion of the unpaid spectrum liability.
While the statement does not quantify this liability, sources tell us as much as Rs 8,000 crore will be paid by the Tatas while Bharti will pay only Rs 1,500-1,700 crore as spectrum liability. What did we say about Bharti getting the additional subscribers for free? Remember, when Bharti had, earlier this year, similarly bought another small player Telenor, it had taken on deferred liability of tower plus spectrum but in the Tata deal, 80 percent of this liability is being paid by the seller.
Another perk of the merger: Bharti’s revenue market share will go up to a little over 40 percent. Not only would this mean four in ten subscribers will be on Bharti’s network, it also gives Bharti heft in dealing with the Vodafone-Idea combined entity, which should also have a close enough revenue market share after it comes into existence. As of now, Bharti is the market leader by subscriber numbers (a little over 380 million) but has about 34 percent revenue market share; it will gain 2 percent after the merger with Telenor becomes effective by the year end; the Tata buy will add another about 4.5 percent to this.
Analysts at Kotak Institutional Equities said in a note to clients this morning that the combined net debt of seller entity (TTSL and TTML) stood at nearly Rs 40,000 crore by March 2017. Of the total net debt, deferred spectrum liabilities stood at roughly Rs 8,500 crore. The combined spectrum holdings of of TTSL and TTML stand at 178.5 MHz (all in 800 mhz, 1800 mhz and 2100 mhz) of which 71.25 MHz is liberalised – 45 MHz across nine circles in the 2100 mhz band, 15 MHz across three circles in the 1800 band and 11.25 MHz across five circles in the 800 band.
“We believe Bharti is likely to surrender a bulk of the 107.25 MHz administered (non-liberalised) spectrum. Keeping this spectrum would require Bharti to pay an MTM liberalisation fee. Press release suggests that Bharti would take over a ‘small’ portion of the deferred spectrum liabilities. Of the total Rs 8,500 crore, we believe Bharti will take over around 30-35 percent or Rs 2,500-3,000 crore and certain operating leases (towers etc.); we expect lease cancellation costs of around Rs 1,000-1,500 crore.
All in, cost of acquisition works out to around Rs 4,000 crore for Bharti. For an acquisition cost of Rs 4,000 crore, Bharti gets (1) access to spectrum worth Rs 15,000 crore in MTM value and (2) opportunity for some revenue and EBITDA accretion. We believe the current quarterly annualised wireless revenues of TTSL and TTML are around Rs 7,000 crore.”
Tata Teleservices was a money-losing business for the Tata group. According to earlier reports, TTSL has seen its net worth fall by over Rs 11,600 crore in FY17 and losses increase from Rs 2,409 crore to Rs 4,617 crore year-on-year. Revenues, meanwhile, were down 10 percent to under Rs 10,000 crore. Under the deal with Bharti, the acquirer not only gains spectrum at little additional cost, it also gets to absorb a minimal of the 5,000 employees of TTSL.
(Disclosure - Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd)
Updated Date: Oct 13, 2017 12:42 PM