Tata Comm to Sell Stake in SA Unit Neotel to Voda Arm
Deal values Neotel at .` 3,955 cr; move may be a precursor to group’s exit from telecom
Tata Communications (Tata Comm) sealed a deal to sell its stake in South African telecommunications unit Neotel to an arm of Vodafone Group for an enterprise value of $676 million (.`3,955 crore), sending the Indian company’s shares surging by more than 7% in Monday trading. The deal may be a precursor to the Tata Group making a wholesale exit from telecom by selling its various units to Vodafone, people familiar with the matter said. These include loss-making telcos Tata Teleservices and Tata Teleservices Maharashtra, the second of which is listed, apart from undersea cable firm Tata Comm. The Tatas are widely believed to be looking to sell their holdings in the debt-laden telecom units and have reportedly been in talks with Vodafone for a while now but these had stalled over valuations. The South Africa deal may give a boost to negotiations for a bigger deal. This is the first bid by the Tata Group to deleverage the balance sheet of its telecom businesses to pare debt since it sold 26% of Tata Teleservices to NTT DoCoMo for $2.7 billion in 2009 and 2011. NTT DoCoMo has since decided to exit India after the latter didn’t meet certain financial milestones amid stiff competition. (If the Tatas can’t find a buyer for NTT’s stake by June end, it has to pay a market-linked price, or at least .` 7,250 crore, half the investment the Japanese major had made in the joint venture. Tata Comm confirmed the South Africa deal in a release on Monday, saying that Vodacom SA has agreed to buy 100% of Neotel for an enterprise value of ZAR 7.0 billion. The other shareholders in Neotel are Nexus Connection and Communitel. Johannesburg-based Vodacom said the deal will be funded through cash and existing credit facilities.
“It is in line with our financial objectives while paving the way for Neotel to improve its value proposition in the South African market,” Vinod Kumar, MD and CEO at Ta- ta Comm, said in the statement. Tata Comm owns 67% of Neotel, which has around 1,52,000 customers and 1,000 employees. The company provides wholesale telecom and internet services to companies in Africa. The stock rose as much as 7.4% before closing 3.7% higher at .` 304.80 on the Bombay Stock Exchange, outpacing broader market gains. The transaction is crucial to the Tata Group-owned undersea cable company, which needs the money to reduce accumulated net debt of $1.4 billion. It hasn’t been able to raise funds to meet capital expenditure requirements because the Indian government, a stakeholder in the company, has not allowed any share sale. The group acquired a controlling stake in Videsh Sanchar Nigam, as the company was known at the time, from the government in 2002. “This deal enables Tata Comm to focus on its international enterprises business and also invest further into its domestic backbone capability,” said a senior source involved directly with the deal. Prashant Singhal, telecom industry leader at Ernst & Young, backed this view, saying Tata Comm can now focus on its core business of undersea cables and high-end data services. Vodacom Group will get access to 15,000 km of Neotel’s fibre optic cable, including 8,000 km in Johannesburg and Cape Town, the person cited above told ET. In addition, Vodacom will also get airwaves in the 1.8 GHz, 800 MHz and 3.5 GHz bands.
Analysts added that after selling its American telecom business to Verizon last year, Vodafone has surplus cash of $130 billion, which it is investing in strategic businesses and geographies.
Standard Chartered was the advisor to Tata Comm on the deal, negotiations for which were first reported last September. The talks hit a hurdle when it was revealed in April that the local telecom authority was debating whether to allow the transfer of airwaves as part of the deal, critical to the transaction, people familiar with development had said.
The Independent Communications Authority of South Africa (Icasa) was considering stripping Neotel’s spectrum if the company was sold to Vodacom. This would have made a deal near impossible as the bandwidth was one of the most crucial elements in the sale.
Issues relating to the deal weren’t resolved until Sunday, Vodacom CEO Shameel Joosub said on a conference call. The company won’t have to take on Neotel’s debt as part of the deal, while the next step would be to gain clearance for change of ownership from Icasa and the Competition Commission, Joosub said.
“We are applying for a transfer of ownership, not a transfer of spectrum,” he said. The deal will probably be completed by the end of March 2015. The 7-billion rand ($676 million) transaction will be funded through cash and existing credit facilities, Johannesburg-based Vodacom said.
According to sources, the Tatas have been in talks with Vodafone India for the sale of Tata Teleservices. A person familiar with the matter said the DoCoMo exit could have been part of a broader strategy to enable Vodafone to negotiate with just one seller, instead of two.
There was no response to emails sent to Vodafone while Tata declined to comment.
Tata Comm first invested in Neotel in 2006, buying 26% stake for around $250 million. With that, it owned the highest share in the second fixed-line telco in South Africa. Subsequently, it raised the stake to 67%.