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Docomo out of the Indian market, Sistema in

Russian firm reported to be in talks to buy Japanese firm out of Tata Docomo, and merge that with its own MTS India unit


Published: 26 June, 2013

READ MORE: M&A | India | Regulator | GSM

More upheaval in the Indian market, where Japan's NTT Docomo looks set to exit the huge but chaotic sector. Talks are reportedly at an advanced stage to sell its 26% stake in Tata Teleservices to Sistema of Russia, which already operates under the MTS brand in India.

According to the local Economic Times, Tata Group, the carrier's parent group, would also sell part of its stake to the Russian firm, which is expanding its interests in its home markets and beyond. Sistema will be eyeing a controlling share in an Indian telco, and Tata is said to be in favor of this move.

NTT Docomo acquired its stake in Tata in 2008 for $2.7bn and launched under the Tata Docomo brand. It had previously indicated it wanted to raise its stake, but its confidence in the market was rocked by the scandal surrounding 2G licence allocations. That saw 122 licences being revoked and their owners forced to bid for them in a new auction.

Meanwhile, in a market with the lowest ARPUs on earth and unsustainable levels of competition in some areas, Tata Teleservices has ended up with heavy debts and losses. This has not only cooled Docomo's ardor, but alienated the main parent - Tata Group is said to have cut off new funding for its venture, forcing the cellco to end services in some operating circles.

Sistema has also suffered problems with its own joint venture, MTS-branded Sistema Shyam, which saw 21 of its 22 operating licences cancelled in the 2010 scandal and has also suffered losses - it is targeting positive operating profit only by the end of 2014. However, it has taken the opposite approach to Docomo's, apparently deciding the long term opportunities in India are worth the short term pain, and that it needs to build sufficient scale to be competitive with leaders like Bharti Airtel.

Sistema was the sole bidder for 2G licences in the second round auction to reallocate the recalled spectrum, and paid $665m for GSM frequencies in eight circles, bringing its total of operating regions to nine. The interesting aspect is that the 1.8GHz band could be refarmed for LTE in future - many operators round the world are adopting this as a short cut to 4G, and an ecosystem of devices and roaming is developing rapidly.

Now the Russian player could significantly increase its presence by effectively merging the Tata and Sistema ventures - provided, of course, it can get round regulatory hurdles. Although the government has been discussing rule changes to ease foreign investment and mergers in the telecoms sector, in order to encourage more economically viable groups, current laws could force Sistema to give up, or pay market price for, Tata Teleservices's spectrum holdings, if it takes majority control of the group. However, that may delay rather than wreck the deal, since the Department of Telecom will reportedly announce its new M&A policies within three months.

The companies have appointed bankers, Rothschild for Sistema and Standard Chartered Bank for the Tata Group, according to the report.

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