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For Tata, It Was Either Sale Or Shutdown, Says Group CFO

The merger of Tata Teleservices Ltd’s consumer mobile arm with Bharti Airtel Ltd. will ensure all stakeholders are taken care of instead of a forcible shutdown of the company, said Tata Sons Chief Financial Officer Saurabh Agarwal.

"We get to retain the business which we love," Agarwal said in an interaction with BloombergQuint. "It should be a win-win for everyone for the deal to take place," he added.

India’s largest telecom operator Bharti Airtel will take over the struggling mobile services business of the Tata Group as low tariffs and rising debt continue to drive consolidation in the sector. Bharti Airtel will get 4 crore customers and assets of Tata Group’s mobile services business as part of this “debt-free cash-free” deal, the companies said in a joint statement earlier today.

Agarwal explained that Tata Sons had an option of going with this deal, or closing down the business. “Actually, I (Tata Sons) end up saving between Rs 7,000-8,000 crore. So that’s good for me,” he said.

Here are edited excerpts from the interview.

Can you give us the structure of the deal?

We haven’t finalised the structure, that is why it is not there in the press release. The Tata Teleservices entity, Tata Tele Maharashtra comprise of multiple businesses. There is a consumer mobile business, enterprise business, fixed line and broadband business. Consumer mobile business is a part of this transition which goes to Bharti. The fiber along with the enterprise business is something we have offered to Tata Communications. So, they have to take a call whether they want it and in what form and shape and at what price. Same with Tata Sky. We have offered them wireless and the broadband business. And these are very synergistic businesses, creates one of the largest enterprise business in the country as far as Tata Communications is concerned. And Tata Sky gets them entry in the broadband and fixed line business.

So it is a scheme of arrangement which will lead to demerger of businesses from the existing companies?

We have to first arrive at transactions. Whether they will take place, with whom and the transaction structures, all that will happen over the next 5-6 months.

What happens to the shareholders of Tata Tele Maharashtra?

It’s a zero value entity.

But they are still public shareholders?

But it is a negative value. It should not be trading at the value that it is trading. It has more debt than the value of the assets. Somebody needs to put in money to pay off the liabilities which we as a group will do. Doesn’t mean that there is an equity value in the business. People took risks, calls and finally it is where it is.

How much of equity value will you be putting in? Rs 4,000 crore is what is being quoted.

I have no idea how much equity will be put in. The equity will be driven by finally what I have left with after selling the mobile business of which partial spectrum liability will go to Bharti. We have not defined what that number is. I will be left with the tower stake, enterprise business, fixed line business. Depending on whatever values come out from these different components, we don’t want to sell any of these components, but we have to value it. Once this value is decided, the rest of the debt will be taken care of by Tata Sons.

So, it will come on the books of Tata Sons?

Yes.

How much will that debt be?

I have no idea.

What is the current debt of both companies?

It is of around Rs 30,000 crore of debt and there is also spectrum liability of Rs 9,000 crore.

Some brokerages were talking that the spectrum liability of Rs 1500-2000 crores of which the Bharti will be paying.

Those are all incorrect numbers. We haven’t disclosed it. It’s some portion of the spectrum liability, that’s where I will leave it.

What sort of consideration are you getting?

The consideration we are getting is, instead of closing down the business we are taking care of every stakeholder in the business which is the most important consideration. We get to retain the businesses we love, and be able to consolidate these businesses if that’s possible and grow them significantly because that’s how value gets created. For the deal to take place it needs to be a win-win for everyone. What I am getting from this transaction is an option of closure versus this and I actually end up saving between Rs 7,000-8,000 crore. Also, I am able to provide a nest for all my stakeholders - employees, lenders, customers. That helps me to protect the value system that we have. We are taking care of all stakeholders in every form and shape.

For Bharti, it is a great transaction because it gives them a platform, spectrum and everything else. These are troubled times but it’s great that they could move ahead and do it. I am glad that our guys can use this to further strengthen their business.

What is the residual lifespan of the spectrum?

It’s enough. We still haven’t got some of the spectrum.

So Bharti will have to pay to liberalise it when the combination happens?

Starting November 1, all the economics belong to them. It will get transferred only when CCI approval comes, the transaction structure, then NCLT approval comes in. Only then will it get transferred.

How much time will this take?

My estimate is, it will take 5-6 weeks to arrive at the transaction structure in the final shareholder agreement. Post that, the NCLT process will happen in some form or shape. It’s a 6-7 month process.

What happens to unsecured lenders? Will you take the debt of secured and unsecured lenders on Tata Sons’ balance sheet?

Everyone would be paid, all stakeholders.

Will they take a haircut?

I would love to have people take haircut and go with part of the pain. Unfortunately, it doesn’t happen. We as a group never foresee it, and that’s what the group stands for.

How big is the enterprise business of Tata Teleservices?

Quite large. The combined business of Tata Communications and Tata’s enterprise business have a market share of 35 percent of the Indian market. The global market is separate.

The spectrum liabilities and all the vendor payments until November 1 will remain with Tata? And after that, it will become part of Bharti?

All the operating portion will belong to them. All the past liabilities will belong to us.

What happens to the ATC deal?

ATC is our partner. They are thrilled with the fact that we are not closing down the business. Whenever a growing business goes into another growing business, there will be some rationalisation which will take place. Both of us are very mature organisations and we are partners, and we intend to keep the stake. We will jointly figure out a solution which is beneficial to both of us.

Is an IPO of ATC on the cards? Will you exit that stake?

ATC is consolidating the market. They are the number 2 player left after Bharti. There is nobody else. We will not exit in the short term. The stake is extremely valuable and continue to grow in value. ATC is one of the leaders for that business in the world. This is the low point, overall, for the industry. My guess is as we move forward, probably all these things will become a lot more valuable.

What is the ATC stake in your balance sheet?

On a consolidated, overall operation, we have about 25 percent stake.

Will you be able to monetise the stake going forward?

Yes, at any point of time. People are queuing up to buy that stake. It is the second largest tower company. But, I don’t want to sell it and I am quite clear about it.

What about the fiber business?

Fiber is clubbed with enterprise. It will go with enterprise. If Tata Communication decides to do it, then it goes with them. Bharti will get part of the fiber. That’s part of the deal.

When did you start the conversation with Bharti?

The chairman arrived here on February 21. First, he identified the problems. The first three problems had to do with telecom. The other was Tata Steel Europe which is sorted out. Firstly, he took stock of the current situation. He said this is not sustainable and you have to do something. He engaged with each stakeholder in the industry. We got very encouraging and positive responses from them. Everybody wanted to help us out. And finally, we arrived at a deal. We think it is a win-win for the industry and for everyone.

What happens to the employees?

I think the employees are in three categories. They belong to either of those three businesses. In those respective businesses, those employees will move. In any deal, there is rationalisation which will happen. So, that will happen as part of the deal. But that’s also part of the process. For any merger which takes place, rationalisation happens. They are not that many big employee pools that people need to be worried about.

What would be the total number of employees for wireless business?

I think we are around 4000-4500 employees. Part of them will be for enterprise, part of them will be for fixed line and a large part will be for consumer business.

How many employees in the consumer business? And how much rationalisation do you see there?

It could be around 3,000. Whether rationalisation will happen or not, I don’t know. It’s too early.

Will that happen at the closure of the deal, after the approvals?

Earlier, the business was bleeding. But now with Bharti there, it won’t. It will start getting much better. That’s how you need to look at it. Employees will be required. How will you run business without employees? We have 40 million customers. It’s a great situation where everybody can have a good Diwali.

In your assessment, where did the telecom business go wrong?

This business should have been restructured long ago. We lost industry position a while ago and we never recovered. We were on a certain technology, we lost GSM later on, we didn’t invest enough. Then the 3G came, spectrum become expensive. So, it needed a lot of investments and we didn’t make those investments and we didn’t keep up with the technology. We struggled between two different technology choices that we made. We were left behind as a result. This is an industry where size and scale are everything. Without scale and size, you didn’t make money. The most profitable and dominant circles are those which make money for each of these companies. In that they make 50 percent EBITDA margins. So, wherever they have 15-17 percent share, they make 3-4 percent margin. For those with less than 10-12 percent share, everybody makes losses. So, that’s the normal telecom market situation.

The Docomo payment has been made completely?

We are almost in the final stages. We are sorting out all the problems in the next few days. It may be days or weeks before it will get resolved. It’s practically done.

Rs 30,000-40,000 crore of debt will be taken care of by Tata Sons?

I don’t think we have to take care of that much because there are valuable assets that we have. Each of these assets will give us a lot of money.

What happens to Tata Sons’ ratings?

Tata Sons will always be AAA. My value is what it is. There is zero concern about that.

Will you have to raise further debt?

Yes, we will take the near-term pain. We have decided to take the poison, finish it off and we will resolve it. There is not going to be a single instance where our rating can go down by anything. It can never happen. We are AAA, we act as AAA, we behave as AAA, and will always be AAA.

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