Merger talks between Tata Teleservices and Russia’sSistema , NTT DoCoMo looking to exit

Merger talks between Tata Teleservices and Russia’s Sistema have advancedsubstantially, with negotiations centered on a deal that transfers NTT DoCoMo’s stakeas well as part of the Tata Group’s holding to Sistema, giving it a substantialshareholding, said two people familiar with negotiations.

The two companies have appointed bankers — Rothschild for Sistema, which operatesunder the MTS brand, and Standard Chartered Bank for the Tata Group — said one ofthe two people.

However, the transaction will be held up till a new merger and acquisition policy isannounced for the telecom sector. A senior official in the department oftelecommunications, asking not to be named, said the policy is likely to be announced inthree months.

Current M&A norms are not conducive for the deal as they may require MTS to eithersurrender or pay the market price to retain the airwaves held by Tata Tele.In an emailed response, MTS said, “The immediate focus of the company is toefficiently run its 9 circle operations and turn OIBDA (operating earnings beforedepreciation and amortization) positive by end of 2014.”

A questionnaire sent to the Tata Group went unanswered. The two people quotedearlier said the Tata Group plans to reduce exposure to the telecom sector to a minoritystake. As a result of the deal that is in the works, MTS would take a majority stake in thecompany.

Japan’s NTT DoCoMo had bought 26% stake in Tata Teleservices in November 2008for around Rs.13,000 crore, valuing the company at over Rs. 50,000 crore, or over $8billion, according to current exchange rates.

The company, however, is saddled with a debt of nearly Rs. 22,000 crore and apartfrom ballooning interest charges, it may even find it challenging to re- amount when thePeople involved say the Tata Group has withdrawn funding for the telecom venture,resulting in operations being shut in three service areas and partial closure in anotherfive. The company has entered into intra-circle roaming agreements with Aircel to coverthe gaps in its network.

Tata Tele has Little ReservesFurther, Tata Teleservices is making losses and has little by way of reserves andsurplus. The company, which operates under the DoCoMo brand, has also let go ofmore than 10 million customers since last year. Its customer base stood at 66.9 millionas of February 2013, compared with 80.2 million at the end of June 2012.

The Tata Group also surrendered CDMA spectrum beyond 2.5 Mhz in all circles barringMumbai and Delhi to avoid paying a one-time charge of more than Rs 1152.7 crore.MTS, which had been scouting the market and had serious talks with Aircel, may havefound a better strategic fit in Tata Teleservices.

MTS has chosen CDMA as its mobile operations technology, in which only TataTeleservices and Reliance Communications have all-India operations. MTS requiresadditional airwaves to launch faster broadband services, an all-India footprint and a biguser base — something a deal with the Tata Group can offer.

Investment bankers active in the telecom sector said MTS is the only player that has themoney and is willing to acquire a telecom company in India. Sistema, which recentlyappointed a new chief executive for India in Dmitry Shukov, has challenged the

Supreme Court’s decision to overturn licences under a bilateral trade agreement.

STRATEGY FAILEDFollowing DoCoMo’s entry in 2008, the Tata Group’s telecom arm launched servicesbased on GSM technology under the brand name Tata DoCoMo. It entered the marketas a price warrior by introducing per-second billing at 1 paisa per second, almost halfthe prevailing tariffs.

But Tata Teleservices has failed to accumulate momentum. It is currently India’ssixthlargest operator by number of subscribers. NTT DoCoMo had planned to investfurther to raise its stake in Tata Teleservices in 2010, but the 2G spectrum scam forcedit to hold back. The subsequent cancellation of licences, which came as part of aSupreme Court judgement in February 2012, resulted in loss of valuation for the entiresector. Tata Teleservices, which badly needed funds at that time, had to go for tworounds of rights issues to sustain capital expenditure. NTT Do-CoMo, which has theright to sell back its shares to the Tata Group, is currently looking for exit options.

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