If They Say “We Will”: Analysing an Airtel-Tata Tele Merger
If the rumours are true…
It has not even been a full year since Jio launched its commercial services, but its presence has already spurred the entire telecom industry into a consolidation overdrive. The number of exits, mergers, and buyouts in the telecom industry over the past two years has been mind boggling. Every relatively weak private operator in the telecom industry has either merged with another competitor, sold its assets or simply left the industry. While most weak private operators were exiting the telecom industry, Tata Tele was holding out presumably because of its being backed by Tata Sons.
Tata Tele had tried to exit the telecom market earlier as well, and Tata Sons is known to have held talks with Vodafone, but an agreement did not materialize for various reasons. Now the news in the market is that Tata Sons is once again trying to get rid of Tata Tele by merging it with Airtel. Yes, all of this is still rumor and speculation at this point with neither company saying anything meaningful, but I do believe that the move is worth a closer look.
Not Just Tata Tele, also Tata Sky and Tata Communications
If rumors are to be believed, Tata Sons is not just looking to offload Tata Tele alone but wants to offload Tata Sky and Tata Communications as well. Most agree that Tata Sons is trying to sweeten the deal for Bharti by throwing Tata Sky and Tata Communications into the mix.
Tata Tele, as a standalone telecom operator, has been pretty weak financially. It has been losing subscribers for quite a few quarters and has been losing money all along. The company’s revenue for the year ended March 2017 was Rs 9,666 crores, a sharp decline from the Rs 10,708 crores it recorded a year ago. Losses have increased from Rs 2,406 crores in the year ended March 2016 to Rs 4,589 crores in the year ended March 2017. Apart from falling revenue and increasing losses, Tata Tele has a net debt of around Rs 28,000 crores, which makes its overall value negative.
It is safe to say that Tata Tele as a standalone entity is not exactly an enticing purchase and the only real value Airtel can gain from acquiring Tata Tele would be its spectrum. It is therefore hardly surprising that the Tata Sons is throwing Tata Sky and Tata Communications in the mix as well. Unlike Tata Tele, Tata Sky and Tata Communications are perceived as much better companies. Tata Communications serves various enterprises in India, and Tata Communications also owns various submarine cables that carry data all across the globe. Tata Sky is a DTH operator that is reputed to be among the leading players in the DTH segment.
The Tata Sky and Tata Communications impact
Let us first start with Tata Sky. The company is not publicly listed but according to this post on Television Post, turned in a profit in 2016. But it is not just the profit that matters here. Tata Sky is known to have one of the best subscriber bases in the country owing to its focus on urban areas. Tata Sky also has the highest number of HD and SD channels in the country, thanks in part to a dispute with ISRO which has meant that Tata Sky now has access to 828 MHz of satellite spectrum, while Dish TV (the second largest) hovers at around 648 MHz. Tata Sky is in a far better position than Airtel Digital TV. It has more subscribers, a better quality subscriber and also more spectrum. Being able to acquire Tata Sky would, therefore, be a real plus for Airtel. It would allow Airtel to become the undisputed leader in the DTH segment now that Videocon and Dish are also merging.
Then comes Tata Communications. The company provides connectivity to various enterprises in India and owns a number of submarine cables. Revenue for the year ended March 31, 2017, was Rs 5051 crores, up from Rs 5000 crores recorded a year ago. Profit for the year ended March 31, 2017, was Rs 501 crores, up from Rs 58 crores recorded a year ago. Just like Tata Sky, Tata Communications too is in good shape financially. More importantly, Tata Communications’ fixed assets can be of great use to Airtel. Tata Communications’ network spans the globe and includes more than 500,000 km of subsea fiber and more than 210,000 km of terrestrial fiber. These submarine cables and terrestrial fiber can be of great use to Airtel. With the launch of Reliance Jio and 1GB data/day becoming the new norm, a lot more traffic is going to flow in India – India already is second only to China in terms of mobile data traffic, since Reliance Jio’s launch. In such a scenario, being able to own the submarine cables that carry all this traffic to and from India can be a great strategic lever for Airtel. Similarly, Tata Communications’ vast terrestrial fiber in India would help Airtel expand its own broadband network and use it as a backhaul for its towers.
Tata Sky and Tata Communications are the real value additions for Airtel. Having both of them in its portfolio will make Airtel the undisputed leader in the fields of DTH and long haul communications. Tata Tele itself does not bring as much to the table as Tata Sky and Tata Communications do, but it does have millions of subscribers and spectrum as well.
A Matter of Spectrum
Tata does not hold any spectrum in the 2300 MHz or 2500 MHz band which can be used for deploying LTE. Neither does it hold any spectrum in the coveted 900 MHz band as well. Tata’s spectrum holdings are distributed amongst the 800 MHz, 1800 MHz, and 2100 MHz bands.
Parag Kar of Qualcomm has an excellent article detailing the spectrum holdings of Bharti Airtel and Tata Tele, which I recommend reading.
Almost all of Tata’s spectrum is un-liberalised which means Airtel cannot use it to deploy LTE unless and until it agrees to pay the Government a fee and liberalize it. But once liberalized, Tata’s spectrum can be of great use to Airtel for the next five years or so.
Firstly, the 800 MHz band would provide Airtel a great avenue for deploying LTE. In order to prevent paying spectrum usage charges (SUC), Tata had surrendered spectrum exceeding 3.75 MHz in the 800 MHz band, so Airtel can only deploy narrow band LTE if it were to liberalize Tata’s 800 MHz spectrum and deploy it for LTE. But this narrow band LTE as well would have great reach and would play a vital role in helping Airtel deploy VoLTE which requires good coverage and is known to work best on the low spectrum bands.
The 1800 MHz band if liberalized could act as a good bolster for Airtel’s LTE network and the 2100 MHz band could be used to augment the company’s 3G network. All of this depends on whether Airtel decides to liberalize Tata’s spectrum holdings or not and if so, then by how much.
The image above shows the revenue market share of all operators. Combining with Tata would improve Airtel’s position in various telecom circles. It would become No.2 in U.P West behind Idea-Vodafone, up from No.3. It would become No.2 in Maharashtra, up from No.3. It would become No.1 in Kolkata, up from No.2. It would become No.2 in Haryana and Gujarat, up from No.3. In short, Airtel’s position in various telecom circles would get a uplift revenue market share wise.
Not confirmed, but watch this space
Nothing is definitive yet. We are still in the rumor stages, and the Tata-Airtel deal could fall apart anytime or go through in a reduced manner. But if the deal does go through, then we could be in for interesting times in Indian telecom.