Given TataTele?s negative net worth of R1,863 crore, and the manner in which the business has been going south?FY13?s net loss of R4,858 crore was higher than FY12?s R4,228 crore?it was never clear why the Tatas were hanging on to the business. Certainly, the customers weren?t hanging on, which is why the telco?s subscriber base has been shrinking; even the average revenues per user?primarily from the data dongle business?are around a fifth lower than those of rivals like Bharti Airtel. Whatever the reason, what will help concentrate the group?s mind is that its Japanese partner NTT DOCOMO has finally decided to exercise its options to get out of the company. Since the agreement mandates the Tatas to buy out DOCOMO at half the price it had paid if TataTele fails to meet certain performance targets?or a fair market price, whichever is higher?this means the Tatas will have to pay DOCOMO R7,250 crore in the next month or two, according to a DOCOMO press statement. RBI restrictions on pre-determined pricing for options will, though, complicate the exit.
One option, available in the past, may have been to try to hawk off DOCOMO?s stake to another firm, either an existing player or a new one. An existing player, however, can?t buy a stake in the firm in the new M&A rules?yet to be notified?so will have to buy out the entire company. The telco?s 63 million subscribers may not be worth too much, though the spectrum holdings would be worth a lot more. Tata Tele has 5 MHz of 3G spectrum in 9 circles and 4.4 MHz of 1800MHz spectrum in 18 circles?while the 3G spectrum attracts no extra charges, a regularisation charge will have to be paid for the 2G spectrum since it was not bought at the market price. The spectrum was bought in 2008, so has around 14 years of residual life. Based on the current price, this means whoever buys Tata Tele will have to pay around R4,000-4,500 crore to the government for the residual life of the 2G spectrum. Given the 2G spectrum is only 4.4MHz, and not 5 MHz, it doesn?t lend itself to being used to provide data services either?were a Vodafone to buy out TataTele, this would be an important pre-requisite. Even if you add another R5,000 crore for the 3G spectrum, this has to be contrasted with telco?s R23,491 crore of debt at the end of FY13. It would be far more advantageous for an existing telco to buy new spectrum when it is available.
Given the way the business has fared, the way rivals are gaining market share, and the impending entry of Reliance Jio which will further depress tariffs to gain market share, the Tata?s need to seriously consider getting out of the business. Since that will involve taking a big hit on the debt, for now, perhaps the group?s best bet is to wait for the spectrum trading rules which will allow it to sell its spectrum holdings without a prospective buyer having to take on the associated debt. At some point, though, the Tatas will have to take the hit, and dial out of the business.
