Vodafone, Idea merger plans leave Tata Tele in a fix

Tata Teleservices was earlier in talks with the UK telecom giant for a merger

The proposed plan by British telecom major Vodafone and Aditya Birla group’s Idea Cellular to merge their operations has Tata Teleservices in the lurch. Tata Teleservices was in talks with Vodafone for a merger that would have resulted in synergy gains of Rs 10,000 crore for both players.

Last week, Vodafone confirmed that it had initiated talks with the Birlas for a merger that would create India’s biggest mobile operator with over 382 million customers. The British company walked away from merger talks with the Tatas citing its own initial public offer plans.

Insiders said while Vodafone and Idea would gain if the merger took place, Tata Teleservices would be left fighting a battle to retain its 6.5% revenue market share. With three large players Vodafone-Idea, Bharti Airtel and Reliance Jio commanding 90% market share, it will become difficult for the Tatas to keep investing in the loss-making business.

“It will be either forced to join one of the top three players or continue to remain a small player in the $26 billion industry and eventually fade out,” said a telecom analyst. In the last four years, Tata Sons, the Tata group holding company, has invested close to Rs 4,500 crore in Tata Teleservices so that it can meet its financial obligations.  

Analysts said any merger of Tata Teleservices with a rival would be possible only after Tata Sons sorted out its legal tussle with Japanese telecom major NTT Docomo, which owns a 26.5% stake in the telecom company.

According to a 2009 agreement, Docomo decided to exit Tata Teleservices by selling its stake to Tata Sons. When Tata Sons failed to buy back its stake, Docomo moved the London Court of Arbitration, which ruled in its favour. Docomo has also moved the Delhi High Court to enforce the award against the Tatas.

Former Tata group chairman Cyrus Mistry has warned if Tata Teleservices shuts operations it will still face $5 billion of liabilities.

The Tatas were among the first to enter the telecom industry in 1995 and had a joint venture with the Birlas and AT&T. The three partners parted ways with the Birlas and the Tatas running their own operations. Idea Cellular today has a market value of Rs 39,000 crore.

Analysts said despite the merger of Idea and Vodafone, competition would remain high, making players like Tata Tele insignificant. “Reliance Jio will continue to disrupt the market till it gains market share proportionate to its capacity. Due to its bundled offering, it may lead to lower realisations,” said a telecom analyst with Edelweiss.

Though the earnings before interest, tax, depreciation and amortisation of Tata Teleservices have improved in recent months, it incurred a net loss of Rs 3,386 crore on a total operating income of Rs 10,700 crore in 2015-16. In 2014-15, it had a net loss of Rs 3,846 crore on a total operating income of Rs 10,994 crore.