The country’s largest telecom operator, Bharti Airtel, and the loss-making, struggling Tata Teleservices (TTSL, which includes Tata Teleservices Maharashtra) said on Thursday that they have entered into an agreement by which the consumer mobile business of the latter will be merged into that of the former.

The move at one stroke gives Bharti a huge benefit in terms of expanding its pan-India footprint of spectrum in the 800 MHz band which is key to providing 4G LTE services, while providing the Tata Group the opportunity to restructure its telecom business without having to shut down the company.

The cash-free and debt-free deal would be Bharti’s seventh acquisition in the last five years to bolster its spectrum holding. In February and March this year it had acquired the spectrum of Telenor India and Tikona Digital Networks to enhance its 4G network. With the current deal the only area where Bharti lagged Reliance Jio — lack of 800 MHz spectrum — would get covered.

Though the bulk of the spectrum Bharti would get from TTSL is unliberalised — of the total 178.5 MHz spectrum TTSL has, only 71.3 MHz is liberalised — but since the bulk of the spectrum is due for renewal only around 2021-22, Bharti can liberalise it at one-third of its true value since it would have to pay only for the balance five to six years.

Since TTSL has 2.5 MHz of spectrum in the 800 MHz band in most circles, going forward Bharti can pick up additional carriers in future auctions and strengthen its holding for effectively competing with Jio by providing 4G LTE services. Though Bharti would be getting spectrum in the 1800 MHz and 2100 MHz bands as well from TTSL, the most prized possession would be of the 800 MHz band.
The merger structure is also in favour of Bharti. Apart from not taking over the `31,000-crore debt of TTSL and not paying any cash to it, it is taking only a small portion of its deferred spectrum liability.

According to sources, of the around Rs 10,000 crore of deferred spectrum dues of TTSL towards the government, only 20% would be borne by Bharti while the balance would be paid by TTSL.

The benefit for the Tata Group is that it would be able to successfully restructure its ailing telecom services business without having to close down the company. It plans to merge the enterprise business of TTSL with its other group firm Tata Communications. Similarly, the fixed line and broadband business would be merged with its another group firm, Tata Sky. Employees of TTSL would also be demerged on the lines of the two businesses, ie, consumer mobile business (CMB) and enterprise and fixed line and broadband (EFL), and after an optimal manpower planning will be moved accordingly.

TTSL’s net loss in FY16 stood at around Rs 34,000 crore on a total revenue of `10,700 crore. Its debt to equity ratio stood at 1.16 while interest coverage ratio is 0.72.

Through the deal Bharti would get the 40 million subscribers of TTSL and improve its revenue market share and subscriber market share to face the merged Vodafone-Idea entity. For instance, Bharti’s revenue market share (RMS) following the TTSL merger would increase to 40% against the current 33%. The Voda-Idea combined RMS would be 44%. Similarly, Bharti’s subscriber market share would increase to 27% from the current 23%. The Voda-Idea share would be 35%.

According to brokerage firm Edelweiss, the acquisition will be positive for Bharti as it will increase its RMS and spectrum footprint at an extremely low cost. “TTSL has high-quality subscriber base with Arpu (average revenue per user) of Rs 162 for Q1FY18 (Bharti: Rs 180, Idea: Rs 141 and Vodafone: Rs 168). At current run-rate, TTSL is earning revenue of Rs Rs 8,500 crore per annum and has spent `23,100 crore towards spectrum since 2010. Assuming Bharti manages to maintain the margin of this business to its current India mobility margins, it can potentially add Rs 2,800 crore Ebitda.”

Commenting on the deal, Bharti Airtel chairman Sunil Mittal said, “This is a significant development towards further consolidation in the Indian mobile industry and reinforces our commitment to lead India’s digital revolution by offering world-class and affordable telecom services through a robust technology and solid spectrum portfolio. On completion, the proposed acquisition will undergo seamless integration, both on the customer as well as the network side.”

On his part, Tata Son chairman N Chandrasekaran said, “We believe today’s agreement is the best and most optimal solution for the Tata Group and its stakeholders. Finding the right home for our long-standing customers and our employees has been the priority for us. We have evaluated multiple options and are pleased to have this agreement with Bharti.”

The boards of Bharti Airtel, Tata Sons, TTSL and TTML have approved this transaction, both the companies said in their respective statements.

Goldman Sachs India acted as the financial adviser to the Tata Group.