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Vodafone eyes takeover of Tata Teleservices

May become India's largest telco, but valuation remains a hurdle

Vodafone is in early talks with the Tata Group to buy its controlling stake in Tata Teleservices to create India's largest telco by subscribers.

"Discussions are at an early stage. It is difficult at this stage to say what the outcome of these talks will be," said a person aware of the development. The right of first refusal (RoFR) to the Tatas' 59.45% stake in Tata Teleservices rests with its Japanese partner NTT Do-CoMo, which owns a little over one-fourth of the telecom company.

But if the Japanese company refuses to buy out the Tatas, the Indian partner has the right to exercise its 'drag along' rights and force NTT DoCoMo to sell its shares to the buyer of its choice, said two persons familiar with the development.

According to the shareholders agreement between Tata Sons and NTT DoCoMo, if certain performance parameters and other conditions are not met by March 31, 2014, and the Japanese partner decides to exit, Tata Sons is obligated to find a buyer for its shares. If it fails to find another buyer, Tata Sons would have to acquire NTT DoCoMo's stake.

But it is not clear if the performance parameters built into the agreement between Tatas and the Japanese company have been triggered yet.

One of the persons familiar with the development said Vodafone, which recently sold its 45% stake in Verizon Wireless for $130 billion, wants to buy out the entire company. "Apart from the Tatas and DoCoMo, Vodafone will also look to make an offer to other shareholders," he said.

In case Vodafone manages to consummate this deal, it will mark a dramatic change in the pecking order of India's largest telcos. Traditionally, Bharti Airtel has been India's largest operator by subscribers, followed by Vodafone.

If the transaction happens, the Vodafone-Tata Teleservices combine, as per November 2013 figures, will become the country's No. 1 player in terms of subscribers with 248 million customers, overtaking Airtel's 196 million users.

In addition to taking pole position in the Indian market, Vodafone's data business will also get a significant boost through Tata's 'Photon' brand and would help the firm ramp up its 3G footprint to 15 circles, say analysts. Vodafone and Tata Teleservices have 3G spectrum in nine circles each, with Haryana, Maharashtra and Gujarat being the three states where they have overlapping airwaves. Tata Teleservices provides CDMA-based telephony services in 17 circles and GSM-based mobile telephony in 16 circles, excluding Mumbai and Maharashtra, where its associate listed company Tata Teleservices (Maharashtra) is the operator.

So far, Vodafone does not provide CDMA services and it remains to be seen whether it would nudge Tata Teleservices' voice CDMA customers to migrate to the GSM platform. The recently amended M&A guidelines for the telecom industry have raised the cap on the market share of a merged entity in a circle to 50% from 35%, potentially allowing top operators such as Vodafone India to acquire smaller rivals.

According to October data from the sector regulator, Vodafone India had a 17.90% share of users pan-India while Tata Teleservices has a 7.25% share. Any merger would fall well within the market share limits. The combination wouldn't fall foul of rules even when circle-wise market shares are taken into account. Acouple of months ago, Vodafone India CEO Martin Pieters had said his company was a 'natural consolidator', but there had to be a business reason for it. But an investment banker said the transaction could get stuck over valuation.

"Specific to this deal, when you compare the debt of the company to its assets, it looks a difficult one. The entire net worth is actually negative. The question is whether Vodafone or any other buyer would make an offer that is attractive to the seller," he said. Tata Teleservices has a total debt of Rs 23,491 crore. It reported a net loss of Rs 4,858 crore and a turnover of Rs 10,859 crore in last fiscal ended March 2013.

In the past three years, its combined loss amounted to Rs 12,594 crore. As a result, its net worth has eroded completely and turned negative at Rs 1,863 crore at the end of last fiscal. The investment banker added that the new M&A guidelines make it mandatory for the buyer to purchase the seller's airwaves at market rates, thereby substantially pushing up the cost of the acquisition.

The Tatas had recently given their Japanese partner the option of buying their entire holding, but NTT DoCoMo has so far not taken any call on whether to increase its stake or exit the business. "NTT DoCoMo might take a decision after Vodafone makes an offer. If it finds Vodafone's offer attractive, it might decide to sell along with the Tatas. But if the Vodafone offer is conservative, it might exercise its RoFR over the Tata shares," said one of the persons quoted above.

In March 2009, NTT DoCoMo acquired 26.5% stake in the company for Rs 12,735 crore. In the past, Tata Teleservices has been linked to other suitors, including Sistema JSFC of Russia.

From Times of India

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