Merger a win-win deal for Bharti Airtel, Tata Tele

Tata Teleservices Limited (TTSL) and Tata Teleservices Maharashtra Limited (TTML) will combine their Consumer Mobile Businesses (Tata CMB) with Bharti Airtel. As per the agreement, Bharti Airtel would absorb Tata Tele’s operations across the country in 19 circles. Mayuresh Joshi, a fund manager with Angel Broking, analyses the finer points of the deal for Business Standard.

On the face of it, one can call it a sweet deal for both the parties. N Chandra always wanted to get rid of the unviable mobile telephony business and that will allow him to concentrate the Tata Group’s capital in places where it really matters. For Bharti Airtel, it gives them access to a captive client base, which is likely to increase its overall client base by 12-14 per cent without taking on too much of additional debt. But, first, let's look at the contours of the deal.

How is the deal likely to be structured?

To begin with, the detailed contours of the deal are yet to be announced but the broad contours are already available. Tata Tele currently has a portfolio consisting of consumer mobile business, enterprise business, fixed line business and the broadband business. Of these four segments, only the mobile business will go to Bharti Airtel and the other three will stay on with Tata Tele. Tata Tele currently has a debt burden of Rs 30,000 crore with an additional Rs 9,000 crore of spectrum liability. While Bharti will not be taking over Tata Tele's core debt, they will be taking over some portion of the spectrum liability. Bharti will, effectively, get a customer base of nearly 40 million customers.

What about the enterprise value?

Since Tata Tele's mobile business has a negative value after considering the losses, it will result in negative equity and will, therefore, have zero enterprise value. For the Tata Group, the question is what happens to the Rs 30,000 crore of debt in the books of Tata Tele. That will be taken over by Tata Sons. However, Tata Sons will have valuable assets left with it after the demerger of the fixed line, enterprise and broadband businesses that are still with Tata Tele. Since mobile was the major-loss making business for Tata Tele, this will allow the Tata Group to retain the more profitable businesses. It needs to be remembered that the enterprise business of Tata Tele and Tata Communications jointly has a market share of 35 per cent of the segment. Effectively, the deal will be on a debt-free and cash-free basis.

What's in it for Bharti Airtel?

For Bharti Airtel, it means the addition of 40 million customers to its existing customer base, which will increase by 12-14 per cent. Other than paying a small part for the proportionate spectrum charges, Bharti will get Tata Tele's entire mobile business without assuming any additional debt. But the big benefits could be in the form of getting Bharti Airtel’s market share and revenue share closer to that of the merged Vodafone-Idea entity. 

After the deal, Bharti Airtel's customer base will go up from 281 million to 321 million, while the revenues will go up by 10 per cent and take the combined market share up to 41.5 per cent of telecom sector revenues. This will be slightly lower than the 43 per cent market share of the combined Vodafone-Idea entity but the deals with Telenor and Tata Tele have surely taken the Bharti group closer to the largest player. It also needs to be remembered that Bharti Airtel operates on much higher ARPUs compared to Vodafone and Idea and hence the profitability is much higher.

For Bharti, there is a worry on the ARPU front as Tata Tele’s ARPU, at around Rs 164 per user, is lower than that of Bharti and substantially lower than what Jio will be able to achieve. Hence, for Bharti, the competitiveness of its ARPU vis-à-vis Jio may be an issue after the merger with Tata Tele mobile business. Tata Tele had made a loss of Rs 4,617 crore for the financial year 2016-17. But, currently, the company has accumulated losses to the tune of Rs 25,696 crore against a total asset base of Rs 30,000 crore. To that extent, this deal becomes lucrative for the Tatas and a market booster for the Bharti Airtel Group.

A lot will finally depend on how the nuances of the deal pan out. But, prima facie, the deal will give a customer boost to Bharti Airtel and bring its overall market share closer to the merged Vodafone-Idea entity. However, Tata Tele's lower ARPUs will have a downward effect on the performance of Bharti Airtel, which will have to look at larger synergies to compensate for this. 

For Tata Tele, it is an opportunity to exit the mobile telephony business, which was never profitable in the first place. With aggressive pricing by Jio, these ARPUs could only go down further. Additionally, the Tatas will benefit from a sharp focus on the enterprise business and the landline business. For the final touch, one will have to await the finer details. 

The author is a Fund Manager at Angel Broking. The views expressed are his own