Tata Teleservices Limited and Tata Teleservices Maharashtra Limited will combine their Consumer Mobile Businesses with Bharti Airtel. As per the agreement, Bharti Airtel would absorb Tata Teleservices’ operations across the country in 19 circles. On the face of it, one can call it a sweet deal for both the parties. N Chandra always wanted to get rid of the unviable mobile telephony business and that will allow him to concentrate the Tata Group’s capital in places where it really matters. For Bharti Airtel, it gives them access to a captive client base, which is likely to increase its overall client base by 12%-14% without taking on too much of additional debt. But, first, let’s look at the contours of the deal.

How is the deal likely to be structured?

To begin with, the detailed contours of the deal are yet to be announced but the broad contours are already available. Tata Tele currently has a portfolio consisting of consumer mobile business, enterprise business, fixed line business and the broadband business. Of these four segments, only the mobile business will go to Bharti Airtel and the other three will stay on with Tata Tele. Tata Tele currently has a debt burden of Rs 30,000 crore with an additional Rs 9,000 crore of spectrum liability. While Bharti will not be taking over Tata Tele’s core debt, they will be taking over some portion of the spectrum liability. Bharti will, effectively, get a customer base of nearly 40 million customers.

What about the enterprise value?

Since Tata Tele’s mobile business has a negative value after considering the losses, it will result in negative equity and will, therefore, have zero enterprise value. For the Tata Group, the question is what happens to the Rs 30,000 crore of debt on the books of Tata Tele. That will be taken over by Tata Sons. However, Tata Sons will have valuable assets left with it after the demerger of the fixed line, enterprise and broadband businesses that are still with Tata Tele. Since mobile was the major-loss making business for Tata Tele, this will allow the Tata Group to retain the more profitable businesses. The enterprise business of Tata Tele and Tata Communications jointly has a market share of 35% of the segment. Effectively, the deal will be on a debt-free and cash-free basis.

What’s in it for Bharti Airtel?

For Bharti Airtel, it means the addition of 40 million customers to its existing customer base, which will increase by 12%-14%. Other than paying a small part for the proportionate spectrum charges, Bharti will get Tata Tele’s entire mobile business without assuming any additional debt. But the big benefits could be in the form of getting Bharti Airtel’s market share and revenue share closer to that of the merged Vodafone-Idea entity.

After the deal, Bharti Airtel’s customer base will go up from 281 million to 321 million, while the revenues will go up by 10% and take the combined market share up to 41.5% of telecom sector revenues. This will be slightly lower than the 43% market share of the combined Vodafone-Idea entity but the deals with Telenor and Tata Tele have surely taken the Bharti group closer to the largest player. Remember that Bharti Airtel operates on much higher average revenue per user compared to Vodafone and Idea and hence the profitability is much higher.

For Bharti, the worry is that Tata Tele’s average revenue per user, at around Rs 164, is lower than that of Bharti and substantially lower than what Jio will be able to achieve. Hence, for Bharti, the competitiveness of its average revenue per user vis-à-vis Jio may be an issue after the merger with Tata Tele mobile business. Tata Tele made a loss of Rs 4,617 crore in the financial year 2016-17. But currently the company has accumulated losses to the tune of Rs 25,696 crore against a total asset base of Rs 30,000 crore. To that extent, this deal becomes lucrative for the Tatas and a market booster for the Bharti Airtel group.

A lot will finally depend on how the nuances of the deal pan out. But, prima facie, the deal will give a customer boost to Bharti Airtel and bring its overall market share closer to the merged Vodafone-Idea entity. However, Tata Tele’s lower average revenue per user will have a downward effect on the performance of Bharti Airtel, which will have to look at larger synergies to compensate for this.

For Tata Tele, it is an opportunity to exit the mobile telephony business, which was never profitable in the first place. With aggressive pricing by Jio, the average revenue per user could only go down further. Additionally, the Tatas will benefit from a sharp focus on the enterprise business and the landline business. For the final touch, one will have to await the finer details.

This article first appeared on Business Standard.