Over the last couple of weeks, there has been lots of news-flow about Tata Teleservices. First it was the news that NTT DoCoMo would be exiting the company in 2014 & the Tata Group will have to either buyout the former's stake or look for another partner, who can bring the capital. Tata Teleservices is the only loss-making telecom company despite being in operations for over a decade now. The company would have been profitable if the 2008 licensing fiasco had not taken place.
But thankfully things are changing for the positive for the telecom sector. The cancellation of several licences early this year has lead to reduced competition in several circles of India. This has lead to increase in revenues for all the remaining operators. But it is not all positive for all the remaining operators. The Top-3 operators: Bharti Airtel, Vodafone & Idea Cellular are all doing well on the financial front & generating reasonable amount of Cash Profits to keep their overall Debt well under control. Reliance Communications too looks to be doing fine now after a few deals being signed with Reliance Jio. RCom too is suffering from huge Debt burden, but most probably it will survive with little help from Reliance Jio.
But the remaining two large operators, Tata Teleservices & Aircel are both struggling with huge Debt & very low Cash Profits. Hence their Net Debt level is continuing to climb. In such a scenario, they both are potential candidates for merger or acquisition by another player who is wanting to have a national presence & willing to Invest more Capital. Telenor & Sistema are two such potential candidates. Earlier there were rumours that Sistema is in talks to acquire Aircel instead of bidding for spectrum in the recent auctions. At the same time, there were reports that Telenor could be looking to merge with TTSL. But both the rumours died down and now fresh rumours have surfaced that Sistema is looking to merge it's Indian operations with TTSL & Buyout NTT DoCoMo's 26% stake to take majority stake in the merged entity.
Whatever transpires, I am pretty sure that there is going to be lots of M&A activity after the Govt. announces fresh rules for Telecom M&A. Under the current rules for M&A, there is not going to be any deal. Hopefully, the new rules are in place within the next couple of quarters. By participating in the recent spectrum auctions, both Telenor & Sistema have made their intentions clear that they want to be in the Indian telecom sector for a long time. They are both currently having a much smaller licence footprint, but they certainly have the intentions to cover a much larger part of India in the coming years. The unrealistic spectrum prices forced them to curtail their Coverage, but they are both looking to pounce on a Merger &/or Acquisition opportunity as soon as the rules are relaxed.
Between TTSL & Aircel, I think TTSL has marginally stronger case for being the first target for M&A. TTSL has a stronger brand in Tata DoCoMo. It has a larger subscriber base despite having substantially cleaned up it's dud subscribers from it's CDMA network. It's Licence still has between 8 to 10 years before they come up for renewal. The recent Quarterly results of TTML, which is a listed subsidiary of TTSL and operates in the two crucial circles of Mumbai & Rest of Maharashtra, are clearly indicating a decent growth in the company's Revenues & Cash Profits. Over the last 12-18 months, TTSL & TTML are clearly focusing on retaining & growing Revenues-Earning-Customer base. ? From a Total subscriber base of nearly 90 million, TTSL & TTML's combined subscriber base is now down to about 67 million. And they still have nearly 30% dud subscribers. The simultaneous growth in revenues clearly indicates that their Revenue-Earning-Subscriber base is growing. This focus on quality of subscriber base will serve them well in the longer term. Their Operating profit margins should improve in the coming quarters.
Aircel on the other hand is struggling with a not-so-popular brand in most of the states other than the South & North-Eastern ones. Aircel too has a huge debt, which was enhanced further by the company's ambitious bidding during 3G & BWA spectrum auctions. It's exact financial condition is not exactly known, but it is estimated that the company's Interest burden is piling up & the company is under pressure to bring in fresh capital or raise capital via asset sales. In a way Aircel could be a more vulnerable target, but may not be the first choice for the suitors.
Lets just wait for the new M&A rules for the Telecom Sector to be announced. Lots of action is going to take place after that.
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