>DOCOMO can get controlling stake in JV if TTSL fails to meet targets

Shareholders’ Pact Requires TTSL To Meet Profit Margin & GSM Tower Targets By ’15

Rohini Singh NEW DELHI
January 29 2010

JAPANESE telecom major NTT DOCOMO could acquire a controlling stake in Tata Teleservices (TTSL) in which it has a 26% stake, if the latter is unable to meet some performance benchmarks, according to the shareholding agreement between the two, details of which are available with ET. These benchmarks may account for the aggression with which TTSL, which operates GSM services under the brandname Tata DOCOMO, has been increasing its subscriber base and market share, said an industry source. GSM is the dominant technology standard underpinning mobile telephony in India. The shareholders’ agreement gives DOCOMO the right to increase its stake in TTSL to 35% by March 2012 by infusing fresh equity at what document describes at fair market value, though without any premium to the valuation at that point in time.

By March 2015, DOCOMO can further raise its stake in TTSL to 51% and take control of the company by subscribing new shares at fair market value plus a 30% control premium. But these options get triggered only if TTSL is not able to meet the aggressive performance criteria set out in the agreement. These targets include reaching a minimum operating profit (EBIDTA) margin of 15% and rolling out 20,000 GSM towers by March 2012. By March 2015, TTSL has to increase the number of GSM towers to 26,000 and further hike its EBIDTA margin to 25%.

Currently, DOCOMO has a 26% stake in TTSL, which it bought in 2008 for $2.7 billion that valued the loss-making TTSL at over $10 billion. A Tata spokesperson responded to ET’s query by saying, “We do not comment on speculative queries or those related to our partners and shareholders.” DOCOMO also has the option of selling back its entire stake in the company to the Tatas at 50% of the value it paid to pick up the initial 26%. But this option cannot be exercised, if DOCOMO exercises the option of hiking its stake to 35% in 2012. TTSL’s operating profit margin for FY08-09 was 3.4%. A person close to the company told ET that the low margin is because the company is currently in the process of building its network throughout India. The operating profit next year would also be low, this person said. The changes that Tata DOCOMO have introduced in the market, include per-second billing that saw tariffs falling sharply, as other companies responded. The price-war has seen margins shrinking with even market leader Airtel reporting EBIDTA margins of 30%, last quarter down more than a percent. According to information available with ET, TTSL posted a loss of Rs 2,505 crore in FY09, excluding one-time gains. The loss widened from Rs 1,814 crore in the previous year even as the company recorded a robust growth in subscriber base in FY09.

TTSL is the majority shareholder in Tata Teleservices (Maharashtra), which offers landline services in Maharashtra and Goa. Besides GSM services offered under the Tata DOCOMO brand, it also operated a CDMA-based mobile phone service under a brand called Tata Indicom and is one of the two leading CDMA operators in India, apart from the Anil Ambani-controlled Reliance Communication. CDMA is a rival to GSM.

PRESSURE POINT
By March 2015, DOCOMO can further raise stake to 51% and take control of the company by subscribing to new shares But these options get triggered only if TTSL is not able to meet the aggressive performance criteria The targets include reaching a minimum operating profit margin of 15% and rolling out 20,000 GSM towers by March 2012 By March 2015, TTSL has to increase the number of GSM towers to 26,000 and further hike EBIDTA margin to 25%