The Tata group has made an offer to buy out Japanese telecom major NTT Docomo’s 26.5% stake in the loss-making Tata Teleservices Ltd (TTSL) for Rs 23.34 a share after the finance ministry and the Reserve Bank of India (RBI) rejected its application to buy back Docomo’s shares at the pre-agreed valuation of Rs 58 a share. The 60% lower offer was made to Docomo based on a fair market value determined on 30 June 2014.
Docomo has now moved the London Court of Arbitration to approve Rs 58 a share so that it can receive Rs 7,200 crore from the Tata group for its stake. For Docomo, it will be a double whammy as it would not only receive a 60% lesser valuation for its shares but with the Japanese yen losing value by about 30% since 2008 till now, it will be taking home a fraction of its investment in the Indian company.
At Rs 23.34 a share, Tata Tele is valued at Rs 11,000 crore as compared to the pre-agreed valuation of Rs 27,000 crore at Rs 58 a share.
When contacted, a Tata Sons spokesperson declined to comment on the matter.
NTT Docomo had invested $2.2 billion in Tata Teleservices in November 2008 at Rs 117 a share with an understanding that if it exits Tata Teleservices in five years, it would get a minimum 50% of its acquisition price. But since the acquisition, the financial metrics of Tata Teleservices continued to decline with the company’s net worth completely eroding two years ago. It made a loss of Rs 3,846 crore on revenues of Rs 10,944 crore for fiscal 2015. Its losses are mainly due to a massive Rs 27,082 crore debt as on March this year which led to high finance costs.
“The liability, if any, to the extent of the difference in price sought by Docomo and the fair market value is dependent on the outcome of the arbitration and prevailing exchange control regulations,” Tata Steel, one of the investors in Tata Teleservices along with other Tata group companies, informed its shareholders in its annual report of fiscal 2015.
According to the agreement with the Tatas, Docomo has the right to sell its stake if performance targets are missed. After Tata Tele failed to deliver, Docomo announced plans to exit the joint venture by selling its 26.5% stake in April last year.
By virtue of its first right of refusal, Tata Sons agreed to buy out the Japanese company at Rs 58 a share as per the shareholders' agreement and made an application to the RBI for special permission to pay Docomo a price that was higher than the current fair value of TTSL shares. In January this year, the RBI recommended the finance ministry to grant the request, but the finance ministry did not permit the transaction as current laws do not allow pre-determined valuation.
In a note to the finance ministry, the RBI requested that the Tata group be allowed to buy back Docomo's stake at a pre-determined price of Rs 58 a share, despite the company's valuer, Price Waterhouse, estimating the stake at Rs 23.34 a share, 60% lower. "The larger issue here is of fair commitment in the contracts in relation to an investment and a downside protection of an investment rather than an assured return. Besides, our relationship with Japan in relation to foreign direct investment flows is also a matter to be kept in view. Therefore, we are inclined to accept the (Tata) proposal," RBI had said in a note to the finance ministry.
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