Telenor, Tata in alliance move

Last Updated: Wed, May 08, 2013 04:07 hrs

The Tata group and Norwegian telecom major Telenor have appointed merchant bankers to advise them on a possible strategic alliance that could include merger or sale of equity in Tata Teleservices.

While Telenor has appointed Citibank, the Tatas have roped in Lazard to study all options for their telecom business. The move comes even as the government is expected to liberalise the current rules for mergers and acquisitions in the telecom sector while finalising the new policy. If the deal goes through, this would be the first major decision of the Tata group's new chairman, Cyrus Mistry, for the telecom business, which has been in losses.

The Tatas own 59.5 per cent stake in Tata Teleservices, the unlisted holding company, and 27.9 per cent in the listed Tata Teleservices Maharashtra. Japanese telecom major Docomo owns 26 per cent in Tata Teleservices, while the remaining equity is held by minority investors, including the Sivasankaran group.

Telenor, which has set up a new firm for its telecom business following a battle with the Unitech group, its former partner, has brought in Sun Pharma CFO Sudhir Valia as Indian partner with a 26 per cent stake in his personal capacity. Telenor holds the balance stake in Telewings Communications, which bagged spectrum in six circles in November last year.

When contacted, a Tata spokesperson said: "The query raised is speculative and Tata Teleservices, as a policy, does not comment on speculation." A Telenor spokesperson said the company would not comment on rumours and speculation, adding: "What the group has said is that it is not compelled to participate in any merger or acquisition, seeing that its current six-circle footprint allows it to serve every second person in India. At the same time, it will evaluate any such opportunities, should those become available and make business sense."

A Citibank official said the bank did to comment on confidential client mandates, while Lazard declined to comment on the issue.

Through Unitech Wireless, Telenor had 31.7 million customers till February-end. Tata Tele, which has 66.9 million subscribers, is reducing its exposure in the CDMA business and, as a sign of protest, has decided to return in 13 circles the spectrum it holds beyond 2.5 MHz. It is now focusing more on the GSM business.

The two companies would together command 11.46 per cent share of the mobile market in terms of subscriber base. This would help the two close in on the large gap they have with their rivals Idea Cellular (13.84 per cent), Reliance Communications (13.92 per cent) and BSNL (11.65 per cent). It could also give Telenor a pan-Indian footprint.

In the past five years, the Tata group has put in equity capital of around Rs 3,250 crore in Tata Teleservices.

Tata Teleservices also derives technological support from Docomo, which, according to the terms of its agreement, has the option to exit by March 31, 2014. The Japanese company, which did not exercise the option of increasing its shareholding earlier, has hinted at divesting its stake. However, under the agreement, the Tatas are obligated to acquire the shareholding. That would require a lot of cash. Therefore, analysts say getting a partner would make immense sense.

Tata Teleservices has an average revenue per user (arpu) of Rs 136 a month, compared with the industry average of Rs 140 a month. On the other hand, Unitech Wireless has an arpu of Rs 97.

For the nine months ended December 2012, Tata Tele reported an operating loss of Rs 190 crore (operating loss margin of two per cent), compared with Rs 247 crore (margin of three per cent) in the same period the previous year.

At the same time, Tata Tele remains highly leveraged even after the Rs 2,550-crore equity infusion in March 2011 and May 2011 from its shareholders (Tata group entities and Docomo) through rights issue.

Tata Tele had a total debt of Rs 29,300 crore as on December 31, 2012. It has, in the past, undertaken a large, debt-funded capex to launch and expand its GSM services. Also, it has funded the licence fees of Rs 5,864 crore for 3G spectrum blocks in nine circles through debt.

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