Merger talks between Tata Teleservices and MTS in advanced stage

Merger talks between Tata Teleservices and Russia’s Sistema have advanced substantially, with negotiations centered on a deal that transfers NTTDoCoMo’s stake as well as part of the Tata Group’s holding to Sistema, giving it a substantial shareholding, said two people familiar with negotiations.

The two companies have appointed bankers – Rothschild for Sistema, which operates under the MTS brand, and Standard Chartered Bank for the Tata Group – said one of the two people.

Valuations had not yet been decided, the people said. Japan’s NTT DoCoMo had bought 26% stake in Tata TeleservicesBSE -3.48 % in November 2008 for around 13,000 crore, valuing the company at over 50,000 crore, or over $8 billion, according to current exchange rates.

The company, however, is saddled with a debt of nearly 22,000 crore and apart from ballooning interest charges, it may even find it challenging to repay the principal amount when the time comes.

People involved say the Tata Group has withdrawn funding for the telecom venture, resulting in operations being shut in three service areas and partial closure in another five. The company has entered into intra-circle roaming agreements with Aircel to cover the gaps in its network.

Further, Tata Teleservices is making losses and has little by way of reserves and surplus. The company, which operates under the DoCoMo brand, has also let go of more than 10 million customers since last year. Its customer base stood at 66.9 million as 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 barring Mumbai 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 have found a better strategic fit in Tata Teleservices.
However, the transaction will be held up till a new merger and acquisition policy is announced for the telecom sector. A senior official in the department of telecommunications, asking not to be named, said the policy is likely to be announced in three months.

Current M&A norms are not conducive for the deal as they may require MTS to either surrender 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 to efficiently run its 9 circle operations and turn OIBDA (operating earnings before depreciation and amortisation) positive by end of 2014.”

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