Tata should take a leaf out of SoftBank’s book while negotiating with Airtel
The Tata group and Bharti Enterprises have held exploratory talks to consider an alliance involving their telecom and related businesses, The Economic Times has reported.
The Tata Teleservices mobile business is in ruins and hardly makes any sense for Bharti Airtel; it isn’t surprising that better-performing assets such as fibre and direct-to-home TV are being thrown into the mix to lure an investment.
But the Tatas need to do more. They can take a leaf from the book of SoftBank Group Corp., which is pushing for a merger between investee company Snapdeal and its far bigger rival Flipkart Ltd. According to news reports, SoftBank is not only willing to take a huge write-off on its Snapdeal investment, but also invest in Flipkart once the merger with Snapdeal is done. In fact, the funding from SoftBank seems to be the only reason Flipkart is in talks with Snapdeal in the first place.
In the case of Tata Teleservices, it’s evident that the Tatas need Airtel more rather than vice-versa.
Since Reliance Jio’s launch, Tata Teleservices’ revenues have fallen nearly 24% to Rs2,452 crore in the March quarter, according to data reported by the company to Telecom Regulatory Authority of India (Trai). Small telcos were already running high losses due to poor economies of scale, and with nearly a fourth of revenues having disappeared, cash burn will now be far worse. It will far better for the Tatas to invest in Airtel than pointlessly continue to fund the cash burn of their telecom business.
As this newspaper has pointed out earlier this year, the writing has been on the wall for small telcos for some time. They should take what they get and exit while they can. When Airtel decided to take over Telenor ASA’s India business, it was on the condition that the Norwegian company service the outstanding debt of its Indian subsidiary before the handover, leave alone receiving any value for its equity.
Needless to say, Tata Teleservices’ huge debt and the group’s liability to NTT DoCoMo are matters that need to be resolved by Tata Sons. But even without these problems, it is unlikely Airtel may take the bait. As far as spectrum assets go, which is normally a key attraction in such deals, it’s important to note that Airtel has acquired so much spectrum in recent years that this is not a critical area where it has gaps. In fact, in some markets, it may not be very far from peak limits prescribed by the regulator for spectrum holdings. A merger with Tata may well result in a breach in spectrum caps in some markets.
Tata Teleservices’ low-value subscriber base may not hold much of an attraction either. It’s true that some other assets such as fibre and DTH are attractive, although if Bharti buys these on a piecemeal basis, it won’t solve the Tata group’s main problem.
The Tatas should propose a sizeable investment in Airtel, just as SoftBank has reportedly done with Flipkart, and in the process it can still have skin in the game as far as telecom goes. While Airtel is sitting pretty with adequate spectrum assets and generates sufficient cash to service its debt, it may not sneeze at a sizeable investment at this point, especially with Reliance Industries Ltd lavishly funding its telecom venture.
If, in the process, the Tatas get a graceful exit from the misadventure called Tata Teleservices, it will look like a match made in heaven.