Docomo exit from Tata venture likely at lower valuation

Tatas may convert Tata Tele CCPSes into shares at below Price Waterhouse's fair price of Rs 23 apiece

Tata Sons, the holding company of the Tata group, could convert its compulsorily convertible non-cumulative preference shares (CCPSes) in Tata Teleservices before the company’s planned merger with Telenor. The conversion is likely to be below Rs 23.34 a share, as valued by Price Waterhouse in December, and will play an important role as the Tatas negotiate NTT Docomo’s exit from the company.

Docomo and the Tatas are currently engaged in an arbitration in London over the Japanese company’s exit price for its 26 per cent stake. If the CCPSes issued to Tata Sons are converted at a price below the fair market one, it might force Docomo to exit at a lower valuation.

TATA TELE FAIR VALUATION

• Tata Sons’ compulsorily convertible non-cumulative preference shares (CCPS) to be converted by Jan 2016
• CCPS to be converted at fair price
• Price Waterhouse values Tata Tele shares at Rs 23.34 a share

Bankers said Tata Tele had issued 248 million CCPSes of Rs 100 each, aggregating Rs 2,480 crore on a rights basis to all shareholders. Tata Sons had to subscribe to the entire issue of CCPSes, including additional shares, as other shareholders such as NTT Docomo stayed away from investing more money. With the CCPS issue, Tata Teleservices’ paid-up capital increased by Rs 2,480 crore to Rs 7,192 crore, according to Tata Tele’s 2014 annual report.

A Tata Sons spokesperson said in the past and from time to time, the company has been infusing capital into Tata Tele to support aspects of its business and operations. “Different tranches of CCPSes have been issued at different points of time, with different conversion prices. No conversion of CCPSes has taken place so far,” said the spokesperson.

Both Tata Sons and Telenor have not announced the merger till now. But bankers said both were waiting for the government to announce guidelines for mergers and acquisitions in the telecom sector.

According to the terms of the CCPS transaction, each CCPS is to be compulsorily converted into an equity share at the end of 24 months from the date of allotment, January 6, 2016. The CCPS can also be converted earlier or if any effective date of an event of merger of Tata Tele with any other entity or restructuring pursuant to a scheme of arrangement is announced.

According to the terms, each CCPS is to be compulsorily converted into such number of equity shares (with face value Rs 10 apiece) at the higher of the fair market value determined as on the date of conversion or that prevailing on the date of the issue of CCPS or Rs 10 an equity share being the face value of shares. The conversion can take the Tatas’ stake to around 90 per cent from 58 per cent.

On December 22, Reserve Bank of India (RBI) informed the finance ministry the Tatas had hired Price Waterhouse to determine the fair value of the shares of Tata Teleservices. This was after Docomo expressed an interest to exit the company in April last year and asked the Tatas to buy back its shares at half of its acquisition price, Rs 58 a share, or find new buyers at the same price.  RBI said the Tatas agreed to buy back the shares at Rs 58 a share and had sought the central bank’s permission for the transaction, as the price to be paid was higher than the fair-price valuation. The finance ministry and RBI rejected the Tatas’ proposal saying India did not allow pre-valuation of shares.  According to Price Waterhouse, Docomo’s 26 per cent stake was valued at Rs 2,915 crore, against the Rs 7,250 crore sought by the Japanese company, according to its 2009 agreement with the Tatas. Due to massive losses, the entire valuation of Tata Teleservices, according to Price Waterhouse, was only Rs 11,000 crore, against the pre-agreed valuation of Rs 27,000 crore.