BackWhy the Essar Group made it in telecom but the Tatas couldn’t
Analysts attribute this to the Tata group's poorly executed strategy and wrong bet on CDMA, a technology which is now almost obsolete
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Mumbai: The $100 billion Tata group and the $39 billion Essar Group began their telecom journey almost two decades back, with both entering the then sunrise sector and choosing the partnership route to expand their respective businesses.
However, while the Essar Group has managed to get returns of about $6 billion from the sale of its telecom businesses till date, the Tata group has not been so lucky. Analysts attribute this to the Tata group’s poorly executed strategy and wrong bet on code division multiple access (CDMA), a technology which is now almost obsolete.
On 30 August, a unit of the Essar Group agreed to sell its telecom business in Kenya for $120 million to Kenya’s Safaricom Ltd and Bharti Airtel Ltd’s Kenya unit, marking a complete exit from the core telecom business it launched in 1995 with a single-city operator licence in Delhi, under the brand name of Essar Cellphone.
The divestment will see Safaricom taking over Essar Telecom Kenya Ltd’s network, information technology and office infrastructure, while Airtel will acquire the company’s subscribers.
With this, the Essar Group completes the telecom exit process it started in 2010 with the sale of its tower business to ATC IP Llc, followed by the sale of its 33% stake in Vodafone Essar Ltd for $5.46 billion to Vodafone Group Plc in 2011 —$460 million more than what was originally envisaged.
The Essar Group, though, still has a telecom presence with a chain of multi-brand and multi-service outlets in the telecom retail space—The MobileStore—launched in 2007.
A senior Essar Group executive, who did not want to be named, said his group identified the “right telecom partners, businesses, and developed them before monetizing". He added the group always wanted to exit the telecom business and will use the funds from the transaction to focus on its other businesses.
The Tata group entered telecom in 1996 by pioneering the CDMA technology platform in India through Tata Teleservices Ltd (TTSL), an investment which accounted for about $7.5 billion of the group’s total investments as on 31 March.
TTSL had a total debt of ₹ 23,491.49 crore as on 31 March 2013. It made a net loss of ₹ 4,858.41 crore in fiscal year 2013.
In April, NTT DoCoMo Inc. of Japan decided to sell its entire 26.5% stake in loss-making TTSL and withdraw from cellphone operations in India after a five-year struggle. The company did not specify the details about potential buyers, but said the Tata group would be required to buy the stake if another buyer was not found, at half the acquisition price or a fair market price.
Japan’s largest communications services provider had entered India in March 2009 by acquiring the stake in TTSL for $2.7 billion after the Indian telecom company got a dual-technology licence that allowed CDMA-based operators to offer rival GSM-based services as well.
On 19 May, Tata Communications Ltd, the telecom submarine cabling and data centre subsidiary of the Tata group, sold Neotel Pty Ltd—the South African fixed-line phone operator in which it owned a 67% stake—for 7 billion rand ($676 million) to African telecom service provider Vodacom SA, in which British telecom giant Vodafone Plc holds a 65% stake.
A senior Tata group executive, who did not want to be named, said: “In hindsight, the CDMA entry proved wrong, but that does not mean that the group is out of the telecom business". He added the group was “examining all options to revive the telecom business in the context of DoCoMo’s exit".
The long-term performance of the telecom ventures of the Tata group and the Essar Group is a manifestation of both the strategic choices they made, as well as how well they executed their strategies, said Alok Shende, founder-director and principal analyst, Ascentius Consulting.
“Essar’s investment in telecom could piggy-ride on the best managerial talent and practices, first from Hutchison and then from Vodafone, which brought a strategic perspective of other markets," Shende said. He added that with the regulatory framework in telecom working as “an ally for a local minority investor, Essar could exert strategic clout in the venture and extract economic rent at the time of exit".
On the other hand, “the choice of CDMA never did bear fruit" for the Tata group, said Shende.
According to Mahesh Uppal, director, Com(First) India Pvt. Ltd, a telecom regulatory firm, Essar played its cards well in the telecom sector in India by focusing on GSM and building a presence in lucrative telecom circles like Delhi and Mumbai, which have a huge subscriber base. “However, the Tatas started with fixed-line and then ventured into mobile with CDMA and then GSM. Their telecom strategy seemed confused. CDMA didn’t work for the Tatas the way GSM did (for their peers)," Uppal said.
He believes the Tata group’s telecom business “seems poised for a transaction: they will either sell off their telecom assets or acquire another telecom service provider to grow inorganically. The Tatas are a much bigger player than Essar; so, exiting is not the only option for them."
According to Jaideep Ghosh, partner, telecom at consulting firm KPMG (India), “telecom has never been a strategic business for Essar and they have never been a market leader. This may be a similar reason why the Tata Group is looking to hive off its telecom assets after selling its Neotel Africa business".
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