Three Hurdles In Potential Merger Of Tata Teleservices With Reliance Communications
Reliance Communications and TTSL Maharashtra neither confirm, nor explicitly deny merger news.
Five months after Reliance Communications Ltd. announced its merger with Aircel Ltd., the latest buzz on deal street is that Tata Teleservices Ltd. (TTSL) is looking to join hands with the merged entity.
The deal if it fructifies, will create India’s third largest telecom company after Bharti Airtel Ltd. and the potential combined entity of Vodafone India Ltd. and Idea Cellular Ltd.
Tata Teleservices’ subsidiary - listed company Tata Teleservices (Maharashtra) Ltd. (TTML) - and Reliance Communications have neither confirmed nor outright denied a report in The Economic Times published on Monday.
Reliance Communications, in its response to a clarification sought by the stock exchanges, said “the company constantly evaluates opportunities” but “as on date, to the best of the company's knowledge, no such event has occurred”.
TTML, in its response, said “the news does not mention our company, i.e., Tata Teleservices (Maharashtra) Ltd. As such, we are not in a position to offer comments thereon and we are not in possession of any unpublished price sensitive information that is required to be intimated to the Exchanges.”
However, if such a merger was indeed in the making, it would face three crucial hurdles: spectrum-related regulatory issues, the combined debt pile and the Tata Group company’s ongoing negotiations with NTT Docomo for a $1.17 billion settlement.
1. Spectrum
If the merger does take place, the combined entity will be the third largest spectrum holder in the country, with 648.6 megahertz (MHz) spread across 22 circles and in four different bands, after Sistema Shyam TeleServices Ltd. is formally merged with Reliance Communications by the middle of 2017.
According to the Department of Telecommunications’ merger and acquisition guidelines, a merged entity can hold less than 50 percent in a single spectrum band per circle and less than 25 percent of the total airwaves available to the sector.
According to the data compiled by BloombergQuint, the merged entity’s spectrum holding would be in excess of 50 percent in the 800 MHz band across five circles.
The entity would then have two options - either surrender the excess spectrum to the government or find a buyer.
Most of the airwaves owned by TTSL in the 800 MHz and 1,800 MHz bands is administered spectrum, which means it was allocated to the company outside of an auction. Government guidelines stipulate that the merged entity or a new acquirer will have to pay a liberalisation charge to use it.
TTSL’s spectrum is also set to expire over the next four to seven years.
2. Debt
One of the biggest driving factor for the Aircel-Reliance Communications merger was the lower debt-to-equity component. On September 14, 2016, Anil Ambani led-Reliance Communications had announced demerger of its wireless business into Aircel. The new entity is expected to have an asset base of Rs 65,000 crore and a debt-to-equity ratio of 0.8 times.
Management of Reliance Communications, had said in a conference call with analysts last year that the company along with Aircel will jointly pump Rs 6,600 crore into the alliance.
TTSL, by comparison, has a debt of over Rs 30,000 crore on its books, with a negative networth as of financial year (FY)2015-16. This means the telecom operator will have to trim its debt substantially for the deal to go through.
3. NTT Docomo Settlement
Besides the excess spectrum and high debt, another long-pending issue for the company is the $1.17-billion payout to Japan’s NTT Docomo as compensation for its 26.5 percent stake Tata Teleservices. In June, the London Court of International Arbitration ordered Tata Sons to pay $1.17 billion to NTT Docomo for breaching an agreement over the wireless venture. Due to the Reserve Bank of India’s (RBI) interventions, the decision is still pending.
“The three challenges mentioned are real and will undoubtedly complicate the merger. However, these problems are surmountable,” said Mahesh Uppal, a telecom analyst and director of Consultancy Firm Com First India.
While the merged entity is expected to have a pan-India revenue market share of 16 percent, it will be a market leader in only one circle — Jammu & Kashmir, with 44 percent market share. It will rank second in market share across four circles Tamil Nadu and Chennai (30 percent), Himachal Pradesh (21 percent), Orissa (22 percent) and North East (23 percent).
The Aircel-Reliance Communications-Tata Teleservices combine will have the second largest subscriber base with over 23 crore subscribers after Bharti Airtel, if the Vodafone-Idea merger does not fructify.
As these companies are not market leaders and have been struggling individually, the true outcome of this potential merger is unknown, Uppal said.
This merger is not organic. It is a response to the market environment. These companies have to combine resources given the competitive intensity in the market, but whether the combination will work, only time will tell.Mahesh Uppal, Director, Com First India