Japanese telecom giant NTT Docomo on Friday decided to exercise the option to sell its 26.5 per cent stake in Tata Teleservices. NTT Docomo would complete the exercise by June this year, the company said in a statement.
The decision by NTT Docomo could add a substantial burden on Tata group companies, which have sunk Rs 25,947 crore in Tata Teleservices, apart from its huge debt burden of Rs 26,000 crore. Unless, of course, the Tatas find a new partner or buyer.
NTT Docomo has the right to sell its stake in Tata Teleservices for 50 per cent of the acquisition price, or a “fair market price”, whichever is higher, if the company fails to achieve specified performance targets. Docomo had paid $2.7 billion, or Rs 13,070 crore, in March 2009 to buy a 26.5 per cent stake in Tata Teleservices. The Tatas, according to an NTT Docomo statement, have to pay at least Rs 7,250 crore. This is over and above the Rs 2,500 crore group companies invested in Tata Teleservices through convertible preference shares this January. Bankers recently asked the group to infuse another Rs 2,000 crore equity to get the company back on the rails.
NTT Docomo will have to take an impairment of about a fourth of its net income in the 2014 financial year because of its decision to exit Tata Teleservices at 50 per cent of its original investment.
Tata Teleservices, which was set up in 2000, has about 63 million subscribers and about 7.5 per cent of the country’s cellphone user base, which it is losing to aggressive competitors. It is also saddled with both CDMA and GSM operations.
Tata Sons, which directly owns a 36.17 per cent stake in Tata Teleservices and is the holding company of other group firms that have stakes in the telecom venture, said the company would continue to be an “integral part” of the Tata group after Docomo’s exit. “Tata Sons is cognisant of its responsibilities, and will act keeping in mind the interests of all stakeholders and in accordance with the law,” it added. The Tata group holds about 58 per cent in Tata Teleservices, while 6.45 per cent is owned by Temasek Holdings Pte Ltd.
Experts, however, were surprised by the timing of Docomo’s announcement even before annual financial results were finalised by Tata Teleservices. Those in the know say the Japanese company can implement the “trigger” of the put option within 30 days of tabling of the financial results, which is expected by the end of May. After that, Tata Teleservices has 90 days to pay the Japanese company in case it does not find a buyer.
As late as this March, the Tata Teleservices management held discussions with Docomo to finalise its three-year business plan. Tata Teleservices, which has already become Ebitda positive in some circles, had committed it would become cash-positive by March 2015. “Some consolidation is to be expected in Indian telecom in the next few years. Given the growth in data (traffic), deals involving CDMA spectrum could offer advantages to operators giving mobile broadband, since the spectrum offers good data speeds,” said Mohammad Chowdhury, leader (telecom), PricewaterhouseCoopers India.
Motilal Oswal Securities’ vice-president (research), Shobhit Khare, said: “Docomo’s exit signifies continued headwinds being faced by the challengers in the Indian telecom market. With huge investments required by operators for renewal and data services spectrum, the consolidation process is expected to accelerate.”
The Japanese company has been concentrating on 4G data in a big way and has already moved out of 2G services in Japan. This is in clear contrast to Tata Teleservices, which still gets the bulk of its revenues and subscribers from 2G operations and has not bid for 4G spectrum at all.
During the first nine months ended December 2013, Tata Teleservices reported a net loss of Rs 3,485 crore on total operating income of Rs 7,895 crore, against a net loss of Rs 3,794 crore on total operating income of Rs 8,190 crore during the same period the previous year. The company’s net worth eroded in 2012-13 by Rs 1,860 crore.
Docomo has investments in 17 countries outside Japan, of which eight are in Asia. The investments include a 24 per cent stake in Hutchison Telecom Hong Kong, a 5.9 per cent equity holding in KT Corporation of South Korea, a 4.7 per cent in FarEasTone Telecommunications of Taiwan, and a 8.6 per cent in Philippine Long Distance Telephone.
Tata Teleservices (Maharashtra), which is the listed entity of Tata Teleservices, surged 11.93 per cent to Rs 9.01 on BSE at the end of trading hours on Friday. As on March 31, NTT Docomo held an 11.76 per cent stake in Tata Teleservices (Maharashtra).