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Japan’s NTT DoCoMo to retain investment in Tata telecom

The Economic Times:  April, 2014

New Delhi/Mumbai: NTT DoCoMo has decided to stay put in its telecom joint venture with the Tata Group for at least another year, people aware of the development said, giving a breather to financially stressed Tata Teleservices, which would otherwise have had to pay top dollar to buy back the stake. The Japanese company had the option of raising its stake to 33% from its current 26% in 2013, which it chose not to exercise.

Alternatively, it could have sold its stake back to the Tata Group by March 2014 at about half the nearly Rs 13,000 crore it paid to acquire the holding in 2009 if the company failed to achieve goals including subscriber numbers, making a net profit and rolling out a certain number of towers, a banker familiar with developments told ET.

NTT DoCoMo has decided not to exercise its "put option" to sell 26% in Tata Tele for at least a year, he said, adding that the intention was to give the Indian company time to find a buyer and then get a higher valuation for its holding, or even choose to retain a smaller stake in the new entity. "The extension of the put option offers some leeway to the debt-laden company," he said.

Tata Tele and NTT DoCoMo didn't respond to emails. Former is the country's seventh largest telco by subscribers and offers both GSM and CDMA services.

For NTT DoCoMo, flush with cash or cash equivalents of about $5 billion as of March 2013 and expected to have generated free cash flows worth nearly $3 billion in the year-ended March 2014, the wait won't pinch too much, more so if it were to get better returns. Many Japanese companies with abundant cash on their books are on the lookout for investment opportunities globally, more so in emerging markets.

The move contrasts with the fate of Japanese drug maker Daiichi Sankyo's investment in Indian company Ranbaxy.

NTT DoCoMo hired a leading consultancy firm to take stock of India's telecom sector and the current position of Tata Tele in the industry, according to people with knowledge of this. It's not clear whether the consultancy advised the Japanese company on its investment in Tata Tele.

Tata Tele, which had a 7% share of India's 893 million mobile phone users as of January 2014 and about 7.4% of the market by revenue as of December 2013, has been widely touted as an acquisition target. It's been linked to Vodafone India in recent times as well as reportedly being part of a three-way merger with Sistema Shyam and Aircel previously.

Years of losses owing to pressure on revenue amid intense competition, surging interest costs on account of working capital loans and limited fund infusions from the parent have wiped out the company's net worth. According to the telecom department, the net worth was a negative Rs 5,346.7 crore as of late January.

In FY13, Tata Tele reportedly incurred a net loss of Rs 4,858 crore on operating income of Rs 10,799 crore. Debt, which stood at Rs 23,491 crore in March 2013, ballooned to Rs 28,000 crore as of November on account of working capital loans. It recently got Rs 2,500 crore of fresh capital from the parent group to turn things around.

In order to reduce losses and increase revenue, the company shut base stations in around 8,000 locations over 2013 and instead lined up agreements with Aircel and RCOM to plug gaps in coverage.

The company also surrendered CDMA spectrum beyond the 2.5 MHz start-up limit in 15 regions last year, with the exception of Delhi and Mumbai, where it retains 3.75 MHz.