Airtel is acquiring the assets on a debt-free, cash-free basis, except for it assuming a fraction of the unpaid spectrum fees that the Tata group owes to the department of telecommunications (DoT), the companies said in a joint statement on Thursday.
The telecom industry, particularly smaller operators such as Tata Teleservices Ltd, has been hobbled by a crippling price war after the entry of Reliance Jio Infocomm Ltd, backed by India’s richest man Mukesh Ambani.
This has triggered a wave of consolidation in the industry, including a merger between the nation’s second largest operator Vodafone India Ltd and No. 3 Idea Cellular Ltd to create a company that will be bigger than Airtel. Airtel’s acquisition of the Tata Teleservices assets will help narrow the gap between it and the Vodafone-Idea combine, once the merger is completed.
Bharti Airtel will assume Rs2,000 crore of the Rs10,000 crore that the Tata group companies owe DoT, according to a person with direct knowledge of the matter.
All other liabilities and dues will be settled by the Tata group, the statement said.
The merger is subject to requisite approvals and involves two of the Tata group companies—Tata Teleservices Ltd and Tata Teleservices (Maharashtra) Ltd (TTML).
Airtel will absorb Tata’s mobile phone operations across the country in 19 circles (17 under Tata Teleservices and two under TTML). These circles represent the bulk of India’s population and mobile customer base.
Tata Teleservices had a subscriber base of 44 million and revenue market share (RMS) of 5% at the end of the June quarter, according to Goldman Sachs. With the merger, Airtel’s overall subscriber base is now expected to increase to as much as 351 million as against the combined Vodafone-Idea’s projected 391 million consumer base.
Airtel’s RMS will also rise to more than 40% from 35.6% in September, a tad short of the combined 42% RMS of Vodafone-Idea. Tata’s average revenue per user stood at Rs159/month, lower than that of Airtel and Vodafone, but higher than Idea’s.
The acquisition will also bolster Airtel’s position vis-a-vis Reliance Jio, as Airtel will get access to 178.5 megahertz (MHz) spectrum (of which 71.3MHz is liberalized or free to trade) in the 850MHz , 1,800MHz and 2,100MHz bands, and help it strengthen its 4G coverage.
“The acquisition of additional spectrum made an attractive business proposition. It will further strengthen our already solid portfolio and create substantial long-term value for our shareholders given the significant synergies," Sunil Bharti Mittal, chairman of Airtel, said in the statement.
“On completion, the proposed acquisition will undergo seamless integration, both on the customer as well as the network side, and further strengthen our market position in several key circles," Mittal added.
For Tata Sons chairman N. Chandrasekaran, the deal is in line with his strategy to do away with businesses which are a drag on group profitability.
“We believe today’s agreement is the best and most optimal solution for the Tata group and its stakeholders. Finding the right home for our long-standing customers and our employees has been the priority for us. We have evaluated multiple options and are pleased to have this agreement with Bharti," said Chandrasekaran.
The employees of Tata Teleservices and TTML will be divided on the lines of the two businesses i.e. CMB (consumer mobile business) and EFL (Enterprise and Fixed Line and Broadband), and, post an optimal manpower planning, will be moved accordingly.
Tata Sons is also in initial stages of exploring a combination of the enterprise business with Tata Communications Ltd and its retail fixed line and broadband business with Tata Sky. Any such transaction will be subject to respective boards and other requisite approvals, the companies said in a statement.
“Tata and Bharti Airtel will work together to further explore other mutual areas of cooperation, that will be value-accretive for both the Groups," the firms said in the statement.
Tata will retain its stake in Viom Networks and take care of the liabilities associated with it. Viom, a joint venture between Tata Teleservices and SREI Infrastructure, is India’s largest independent telecommunications infrastructure company.
The transaction will also give Airtel an indefeasible right to use part of the existing fibre network of the Tata companies.
The Indian telecom sector has been hit hard by the twin troubles of exorbitant spectrum costs over the last five years and intense pricing pressures led by Reliance Jio in last 12 months. Smaller telecom operators have been hit harder, with these registering a 430 basis points RMS loss and 30% decline in revenues since Q2 FY17, according to CLSA.
Shares of Bharti Airtel Ltd closed 1.17% lower at Rs398.70 on Thursday, on a day the benchmark Sensex rose 1.09%, or 348.23 points, to end the day at 32,182.22 points. Shares of Tata Teleservices (Maharashtra) Ltd rose 9.95%, or Rs0.40, to Rs4.42.