TATA-BIRLA AT&T MERGER: The Titans Meet

The

recent cellular merger between the two titans of Indian industry–Tatas

and Birlas–has triggered off a lot of speculation in telecom

circles. And not without reason. For the first time since the

1940s, the two houses have come together on a business platform.

A number of aspects in the

deal are yet to be worked out. For instance, the name of the new

JV (the companies say it would reflect the three companies–Tatas,

Birlas, and AT&T), what sort of brand promotion would be

undertaken, and whether the liabilities of the companies would

be transferred to the JV. What is only clear as of now is that

the three players would have an equal stake in the JV. It is

assumed that the Tatas will buy out the 10 percent holding held

by AIG in Tata Communications.

The

Significance

Apart

from historical value, what makes the merger so significant? The

merger can be appreciated from three perspectives: cellular as

an emerging mode of communication; the opening up of the long

distance telephony; the convergence of voice and data services

in the form of the soon-to-be-launched WAP-enabled services.

Officials associated with the deal maintain that the merger has

been effected to bring about economies of scale and pass on the

benefits to the end-user as per the directives of NTP’99.

Increasingly cellular has

been looked up on as the primary mode of communication. World

over, the cellular industry is on the verge of a massive

explosion. The ITU report on world telecom refers to the

cellular phone market as a "cash cow". The

Scandinavian countries have more mobile penetration than fixed

lines. Europe as a whole is geared up to have a mobile

penetration of 50 percent. And for a country like India with

fixed line penetration of 260 lakh in 50 years as against 15.8

lakh cellular subscribers in just four years, the penetration is

pretty significant.

With that kind of

penetration, cellular operators are looking at a scenario where

the subscriber-base will grow exponentially. The lowering of tax

on handsets from 25 to 5 percent, the lower rentals, the new

tariff structure along with the possibility of the

implementation of the CPP regime are all factors that will

trigger off the cellular boom in the country. The industry

expects a growth of around 66 percent during the current year

and estimates that the total mobile subscriber-base would stand

at 2.7 million by 2001.

The opening up of the long

distance telephony segment has set the ball rolling in the

merger and acquisition scenario. We have the Mittals of Bharti

Enterprises acquiring Skycell and JT Mobile, which means that

Mittal now commands the area from Himachal Pradesh to Chennai

with Delhi, Madhya Pradesh, and Andhra Pradesh thrown in between–the

name of the game here being contiguity. The Reliance Group

already has the licence for the eastern region for cellular

services and is laying down a fibre optic cable along eastern

coast. Escotel is executing a fibre optic project at a cost of

Rs 350 crore in the northern part of the country.

Singapore-based Hutchison Whampoa after buying stakes in the

immensely lucrative Delhi from Essar has now picked up stakes in

Fascel, the mobile service provider in Gujarat. The Tata-Birla AT&T

merger would, however, be the first in the Indian telecom

scenario. The combined forces would have telecom footprints in

Gujarat, Goa, Maharashtra (except Mumbai), and Andhra Pradesh

which will control around 25 percent of the total traffic. The

combined subscriber-base with the alliance is estimated to have

been around 1,28,000 subscribers in end-1999.

The national policy is

expected to restrict the number of players in long distance to

four, including DoT. The likely players to emerge in the long

distance scenario are the Bharti Group, the Tata-Birla and

AT&T combine, Hutchison Whampoa, Reliance, and BPL.

A section feels just the

opposite.

"It is incidental that

AT&T is involved," says an observer close to the

deal. "It is a clear case of the Tatas buying out the

Birlas," he adds. According to him, the AV Birla Group

has been suggested by its consultants to get out of the

telecom business. Anyway, Birla AT&T has been run as a

professional company right from day one.

In today’s communications

business, you either plan big or get out. Tatas certainly

have big plans. The Birlas have two options: either to put

more money into telecom business or to get out. For first

option, they have to get to a minimum threshold level. The

merger fits into both the plans.

The question that remains is

will the Birlas really get out after making the combined

entity public? Then, what is AT&T’s positioning? Will

it remain an equal partner with the Tatas or will it be a

Tata show in only a matter of time?

These are questions only few

are asking at this point of time. So stunned they are at

this sudden announcement. But with long distance opening up,

Indian market again hotting up, the answers are certainly

important.

Shyamanuja

Das

Technological compulsion

has driven telcos around the world for mega-mergers. One of the

major ones in recent times has been the Vodafone-Mannesmann

merger. The combined business will now have 54 million customers

across 24 countries. The cellular industry, which is on the

verge of 3G services, will require huge investments that can

only be absorbed by networks of considerable size. The existing

investment of the combined network of the new JV stands at Rs

3,200 crore. AT&T, which is a leading international player

in long distance telephony, will be the technological edge for

the new venture. The Tatas especially stand to benefit in this

aspect since it was technologically weak after Bell Canada, its

foreign collaborator, walked out of the joint initiative.

The 3G cellular

technology, which will enable high-speed data transfer by virtue

of packets reducing costs dramatically, has immense potential in

India. Globally, the volume of data traffic is already seen to

overtake the voice traffic in telephone networks. The

Consolidation

The

cellular industry is now set to enter into a phase of

consolidation. This deal will set the ball rolling for more

mergers and acquisitions in the near future. As Sunil Mittal has

said in various forums of late that ultimately only four or five

big players will emerge. Players that are yet to have financial

closures are likely to get swallowed by the bigger players.

Besides acquisitions, there could be a number of business

mergers during this phase of consolidation. BPL and Bharti are

said to be working out a strategy just as the Ruias and the

Modis are apparently chalking out their collaborative plans and

a buy-out is expected in the next few weeks. The Escotel Group

is also eyeing the southern market. According to a leading

telecom consultant in Delhi, it is possible that the new JV

could also be on the lookout for possible acquisitions. The

industry also does not rule out the possibilities of

cross-alliances amongst these smergers.

This mega-merger has,

however, left the other bigwig in Indian cellular, Sunil Bharti

Mittal unmoved saying, "Competition is always

welcome." He adds that both the houses anyway



existed and that the combined strength will in fact be a
drawback because it will hinder the responsive time to change

which a smaller organization can effect much more quickly.