BackNTT Docomo to sell 26.5% stake in Tata Teleservices
NTT DoCoMo to sell its 26.5% stake in TTSL, says Tata would have to buy stake if another buyer is not found
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Mumbai: NTT DoCoMo Inc. of Japan has decided to sell its entire 26.5% stake in loss-making Tata Teleservices Ltd (TTSL), likely at a big discount, and withdraw from cellphone operations in India after a five-year struggle that highlights the challenges in the domestic market.
The company did not specify details about potential buyers, but said the Tata group would be required to buy the stake if another buyer was not found, at half the acquisition price or a fair market price.
Japan’s largest communications services provider entered India in March 2009 by acquiring the stake in TTSL for $2.7 billion (around ₹ 16,500 crore today) after the Indian telco got a dual-technology licence that allowed CDMA-based operators to offer rival GSM-based services as well.
The proposed pullout by NTT DoCoMo heralds a potential shake-out in India’s telecom services sector, which has 13 operators competing for a share of a market worth $40 billion in annual revenue. Few make a profit and experts say the expected wave of consolidation over the next 18 months to two years will leave only a handful of survivors.
“DoCoMo’s exit signifies continued headwinds being faced by the challengers in the Indian telecom market. With huge investments required by operators towards renewal and data services spectrum, the consolidation process is expected to accelerate," said Shobhit Khare, vice-president (research) at Motilal Oswal Securities Ltd.
The deal with NTT DoCoMo required certain performance targets to be met at the end of every fiscal year, which TTSL has struggled to keep up with as competition heated up in the world’s second largest telecom market.
NTT DoCoMo said on Friday it had planned to sell its stake in June 2014 or before if TTSL failed to achieve these performance targets by the fiscal year ended 31 March 2014. It didn’t specify what these targets were.
Analysts say the biggest impact of DoCoMo’s exit will be on the brand name TTSL was using: Tata DoCoMo. The DoCoMo brand became so strong that TTSL had to sideline its own Indicom brand in most parts of the country and rename it Tata DoCoMo CDMA.
“It is a huge setback, especially after investing so much in a brand that becomes the face of the company," said Santosh Desai, managing director and chief executive officer of Future Brands Ltd, a branding consultant. “With DoCoMo, they got some stability and were able to build a business. Now they will have to weigh their options and look into whether they should build a new brand, which will require a significant investment."
TTSL had a total debt of ₹ 23,491.49 crore as of March 2013. It made a net loss of ₹ 4,858.41 crore in the year ended March 2013. The company, however, was Ebitda-positive and cash-positive.
Ebitda stands for earnings before interest, tax, depreciation and amortization.
“Under the agreement, DoCoMo holds the right to require that its TTSL shares be acquired for 50% of the acquisition price, which amounts to ₹ 7,250 crore or a fair market price, whichever is higher, in the event that TTSL fails to achieve certain specified performance targets," DoCoMo said in a statement.
“DoCoMo expects to sell its TTSL shares in accordance with the agreement. It is uncertain how the option will be performed, however, and DoCoMo is not able to predict how events will unfold. The effect on DoCoMo’s corporate earnings for the fiscal year ending 31 March 2015 cannot be forecast at this time due to these uncertainties," the company added.
According to senior executives with knowledge of the original deal, the targets set for TTSL were initially based on volume-based metrics such as the number of towers added, increase in the number of subscribers, and the number of circles, or operating areas, where it was able to roll out the new brand.
TTSL launched its Tata DoCoMo brand of GSM services first in Chennai, with the now infamous paisa-per-second plan. This led to the most debilitating tariff war to hit the Indian telecom sector, but enabled Tata DoCoMo to gain the highest number of new subscribers and meet its targets for the first two fiscal years.
But the targets were changed to become more specific, in terms of the quality of subscribers being added and those staying with the network, and Tata DoCoMo was unable to meet these targets.
The Japanese company had the option of raising its stake to 33% from its current 26.5% in TTSL after three years, but decided not to after the Tata group company failed to hit the targets from the third year onward. If NTT DoCoMo had exercised this option, then it would have had the option of further increasing this stake to 49% after five years, on 31 March 2014.
“We can only say that if TTSL fails to achieve the performance targets set for FY2014 (fiscal year 2014), we will exercise our option to sell entire stake in TTSL," DoCoMo spokesperson Takuya Ori said in a email reply on Friday.
“...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. TTSL continues to be an integral part of the Tata group," Tata Sons Ltd, the holding company of the Tata group, said in a statement.
Singapore’s state-owned investment firm Temasek Holdings Pte Ltd and businessman C. Sivasankaran also own small stakes in TTSL.
Under Indian rules, a telecom company cannot hold economic interests in another telco under the new unified licences. Many telcos still operating under the old universal access services licence can only hold less than a 10% stake in a rival telco. This means NTT DoCoMo cannot sell its stake to another telco. The Tatas can, however, sell the whole company to another telco.
A Mumbai-based telecom analyst with a multinational brokerage firm said the biggest problem for TTSL will be in selling its dual-technology services. Other telcos would be ready to buy the GSM business due to its strong network of towers and access to Tata Communications Ltd’s optical fibre assets, but the loss-making CDMA services will prove to be a problem in turning around the business.
The analyst did not want to be identified as his organization does not authorize him to speak to the media.
TTSL ended February with 63.14 million subscribers, according to the latest numbers from the Telecom Regulatory Authority of India. This is nearly 50,000 less than in the previous month.
“The exit of DoCoMo implies that the Indian telecom market is getting extremely challenging... New entrants including Reliance Industries Ltd’s telecom operating company Reliance Jio Infocomm Ltd will also face challenges to gain a foothold in the Indian market," said Alok Shende, a principal analyst at Ascentius Consulting.
Shende said the exit also sends out a depressing message that investors’ patience is running out and that the Indian telecom sector continues to be challenging in terms of profitability and competitiveness.
TTSL was also affected by the 2 February 2012 Supreme Court verdict that cancelled 122 telecom licences and spectrum allocated to nine companies. The company lost its licences in Assam, Jammu and Kashmir, and the North-East.
DoCoMo’s decision to exit India also comes a little after another Japanese company Daiichi Sankyo Co. Ltd agreed to sell its stake in Ranbaxy Laboratories Ltd to Sun Pharmaceutical Industries Ltd in an all-stock deal worth $3.2 billion earlier this month. Last year, Berkshire Hathaway Inc. decided to give up on India’s insurance market after just two years. Wal-Mart Stores Inc., ArcelorMittal SA and Posco, too, decided last year to pull back on investments in India that they had announced with fanfare.
Amrit Raj in New Delhi contributed to this story.
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