Neotel Deal To Help Cut Debt; Data Biz To Be In Focus: Tata Comm

The company today said that Liquid Telecom, a pan-African teleco group will acquire its South African subsidy Neotel for Rs 2,900 crore.

While Neotel’s debt will be reduced, the core debt of the group will come down by USD 50 million post the deal. “Our intent is to bring down our debt to EBITDA ratio to 2.5 times,” says Advani.

Tata Communications' focus is on strengthening its data services business. The margins for data business are expected to improve to 30 percent over the next three years, she says.

Below is the verbatim transcript of Pratibha Advani's interview with Reema Tendulkar and Nisha Poddar on CNBC-TV18.

Reema: How much of this will help in paring down your debt of USD 1,438 million or will the entire amount go in paring down Neotel’s debt?

A: Let me just clarify our debt of USD 1.438 billion pertains to the debt for our core business. If you were to add the Neotel debt on top of that and USD 1.438 billion is actually the net debt.

The gross debt is close to USD 1.8 billion and if you add the Neotel debt than there is close to USD 2.1 billion of gross debt, so this will help in paring down our consolidated debt for Tata Communication.

Reema: What will be the net amount that you will be netting in Tata Communications from this particular deal?

A: We have close to ZAR 5.1 billion of debt and net of that and after some debt like items that we would pay off, the balance 67 percent would come to Tata Communication.

Reema: How much would be that number?

A: It will be sub USD 50 million.

Reema: Your core debt which stands at a net amount at USD 1.4 billion or your core gross debt at USD 1.8 billion will only come down by USD 50 million, that’s right.

A: So let me put some perspective. Our intent for coming out of South African operation was because of our strategy now to move into our data services business and grow that business, so this was not core to our strategy and hence we decided to come out of Neotel and while debt is a reason because we needed to invest into that business, but that’s not the only reason why we are getting out of Neotel.

Reema: That’s fair enough but let me come back to that earlier point. Your core debt should come down by only USD 50 million on account of this deal.

A: That’s right.

Nisha: Now that debt reduction efforts have been on by way of deals for Tata Communication. You did sign the ST Telemedia sometime back over USD 600 million deal there, that along with this and apart from that you are making some efforts in terms of the ATM business also going for a sale.

How much of a debt reduction are you looking at with these transactions and also help me understand that are these piecemeal sales giving you better valuations than what you would have got from Vodafone which you were in talks for a consolidated sale earlier.

A: Coming back to your earlier question, our intent is to continuously bring down our debt to EBITDA ratio and that currently from 3.25 odd levels we in the medium term like to bring it down to 2.5x, so that’s our intent and in terms of more granular details, I wouldn’t be able to share with you at this point in time.

Nisha: In this particular deal you have taken over two years for the consummation of the deal and now Vodafone deal did not go through, Vodafone was in talks with you for over two years. Was that particular deal really dependent on the overall consolidated deal per se and that’s why this particular deal didn’t get through. What was the reason for the shift in the buyer as well if I may understand that?

A: The reason that the Vodacom deal did not go through was on account of regulatory approvals that we were waiting which did not come through. However, with Liquid Telecom, we don’t see that to be a problem although we have to go and get both the competition commission as well as the telecom regulatory authority approval, however, we don’t see that to be too much of a challenge given that Liquid Telecom does not have presence in South Africa and hence it will not put them in an unfair competitive position.

Reema: Post the sale of Neotel, how will the company’s financials look like. We know it contributes 9 percent to your consolidated revenues Neotel was about 11-12 percent of your consolidated EBITDA, for the rest of the piece what will be the growth rates at least for the medium term. Any numbers you can give us?

A: I would actually like to focus on our data services business and very clearly we have been saying that we expect our data services business to continue growing around 15 percent year on year on constant currency terms that has already demonstrated a 17 compound annual growth rate (CAGR) over the last 4 years and last year it grew by 18 percent and we are also confident that we will see increase in our in EBITDA margins as we grow and get efficiencies of scale.

In the short term because of the data services business we may see a margin decline, but our stated intent is that over a 3 year period we should look at 30 percent EBITDA margin for our data services business with 15 year on year constant currency growth.

Reema: There are reports which suggest that you are looking to sell the ATM business as well. Is that true?

A: I won’t like to comment on that.

Nisha: So your debt levels are clearly very high. What is your debt equity at this point and what is the larger plan because you said that yes your margins will improve a long haul, what is your overall plan of really bringing debt equity levels at a more comfortable level because the small transactions here and there will not really reduce debt too much?

A: On the contrary our debt levels have been consistently coming down, given that in a heavy lifting in terms of high capex investment in our business is actually come down and if I look at core business capex intensity as a percentage of EBITDA from FY10 which was almost 171 percent that come down to 71 percent.

So we really don’t require debt to for our capex investments, in the same breadth I would also like to add that our cost of debt is at 3.41 percent, so with the growth that we are seeing in our data services business it is able to absorb the interest cost, so it is not an undue concern area for us.

However, in the same breadth I would like to add that we would like to pare down our debt, but we are committed more importantly to improve our return on capital employed and that between last year and this year has increased from 5 odd percent to 7 percent and our stated goal again there is that over the next 3-4 years we like to hit 15 percent.

Source : http://www.moneycontrol.com/news/business/companies/neotel-deal-to-help-cut-debt-data-biz-to-befocus-tata-comm-986372.html

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