DoCoMo's $2.7 billion investment in India

Early and enthusiastic adopters of 3G phones, Japanese are some of the world's most sophisticated consumers of cellular services. But Japan is not a growth market. It's now almost saturated, with nearly 82% of the country's population of 127 million toting cell phones. Struggling with moribund sales at home, Japan's NTT DoCoMo (DCM) is now looking to a very different type of market, India. Indian wireless networks aren't anywhere as advanced as those in Japan, but India is the world's fastest-growing cellular market, adding as many as 9 million new customers a month. That's why DoCoMo, the largest Japanese cellular operator, on Nov. 12 announced it is picking up a 26% stake, worth $2.7 billion, in Tata Teleservices, the No. 6 player in India.

DoCoMo expects there's plenty more room to grow, too. India has just over 300 million subscribers, of which Tata Teleservices (which sells under the brand Tata IndiCom) has cornered about 29 million. With incomes rising sharply in urban India, and somewhat slower in rural India, estimates for growth in India's market are pretty exuberant; Gartner (IT), the research firm, thinks that cell-phone subscribers could more than double, to 737 million subscribers, by 2012.

The DoCoMo-Tata deal is just the latest in a flurry of merger-and-acquisition activity involving India's telecom industry. Vodafone (VOD) paid $13.1 billion for a 67% stake in Hutchison Essar last year, valuing each Hutch subscriber at more than $800. (That's in a market where revenue per customer tends to be less than $10 a month, on average.) Not all the deals have panned out, though. This year, Reliance Communications (RLCM.BO) and Bharti Airtel (BRTI.BO), the country's two largest mobile-phone operators, faced off in a bidding war for a stake in South Africa's MTN, even though no deal resulted.

High valuations

Making money in India is another story. Bitter competition for India's price-sensitive, mostly prepaid customers has resulted in high churn, massive advertising budgets, and a per-minute calling rate that's often less than 2¢ a minute, the lowest in the world. DoCoMo is entering a market where valuations remain high, even overheated, while revenues per subscriber are likely to remain low for the foreseeable future. But at the same time, says Neha Gupta, an analyst with Gartner, the price it is paying for acquiring this stake is offset by the growth potential. 'India has a growth story to sell,' she says, 'and the Tatas are in a great position.'

The partnership could yield other benefits as well. Tata's Videsh Sanchar Nigam, a wholesale bandwidth provider in countries such as Singapore and Vietnam, has had no foothold in Japan or other northern Asian nations. In India, Tata Teleservices operates a CDMA network but has applied to acquire GSM licenses, where DoCoMo's technology could prove crucially important.

Tata Teleservices, which is privately held by the investment arm of the sprawling Tata Group, is reportedly unprofitable but has about $2 billion in ambitious development plans. Hence one appeal of a DoCoMo alliance for Tata. 'Even though it's not a cash-tight company, any inflow of cash will help them expand,' says Gupta.

Back in Japan, DoCoMo is facing an onslaught on its core revenues, as stagnant mobile-phone sales and nimbler competitors have forced the company to drop its earnings guidance. On Oct. 31 the company warned that revenues and net income for the full fiscal year through next March would likely be lower than previously predicted in July.


The company had originally forecast $48.7 billion in revenues, a 1.2% rise over last year's sum, and net income of $5.13 billion, a 2.4% gain. Now it expects $46.9 billion in revenues, down 2.4% from last year, and net income of $5 billion, up 0.8%. It kept the operating profit prediction"”$8.47 billion, up 2.7% from the previous year"”unchanged.

Emerging market interest

In 2006, DoCoMo officially started hunting for foreign acquisitions, even though its previous overseas forays had gone sour, resulting in as much as $15 billion in write-offs from one single investment in the 3G spectrum in Britain. In June, DoCoMo singled out emerging markets such as Bangladesh, Vietnam, Cambodia, Laos, and China as strategic battlegrounds. On June 16 it announced a $350 million deal to purchase 30% of TM International in Bangladesh.

The DoCoMo investment in Tata might get even larger. Because of regulatory requirements on the Indian side, DoCoMo will also co-float an open offer for at least 20% of the shares outstanding for a subsidiary, Tata Teleservices Maharashtra (TTML.BO), which does business in the rapidly industrializing state of Maharashtra, home to the Indian financial capital of Mumbai. At Wednesday's closing price, an offer for 20% of TTML's nearly 1.9 billion outstanding shares could cost more than $140 million, assuming the open offer does not include a premium.

If the open offer for the Maharashtrian subsidiary goes well"”it is unclear what kind of premium Tata Sons and DoCoMo would offer"”the two companies would face competition from both ends. Much larger players such as Bharti Airtel and Reliance Communications are keen to poach subscribers from smaller companies like Tata, but with an upcoming, multibillion-dollar 3G spectrum auction, and new licenses being handed out to foreign players, deep-pocketed new entrants will be making splashy entrances.

Srivastava reports for BusinessWeek from New Delhi. Hall is BusinessWeek's technology correspondent in Tokyo.

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