New Delhi: The Tata group is looking to exit its telecom business, which has been a drag on its finances, and is in talks with Bharti Airtel Ltd, said three people familiar with the matter.

The Economic Times first reported on Friday that the Tata group and Bharti Enterprises were in discussions to form an alliance across telecom and direct-to-home (DTH) television.

The three people cited above (all spoke on condition of anonymity because the talks are still in their initial stages despite having been on for months, according to them) ruled out an alliance or a merger between Airtel and the Tata group citing liabilities on the books of Tata Teleservices Ltd and Tata Communications Ltd.

For Tata, it is all about exiting its telecom businesses, the three added. The inclusion of Tata Sky (Tata’s DTH business) is just to sweeten the deal for Airtel, which has its own DTH unit.

The three said Airtel was definitely interested in all of Tata’s telecom assets: spectrum in 800 megahertz, towers, sea cables and around 45 million active subscribers.

“The Tatas wanted Bharti to take over the entire telecom business. The question is at what value? What are Tatas left with? Tatas would want to clear the debt but the telecom business is not sustainable for them. It does not make sense to put in more money in the business. So, Tata Sky is just a value-add to make the deal more lucrative," said one of the three, a Mumbai-based investment banker.

Airtel declined to comment. A Tata Sons spokesperson declined to comment on “market speculation".

The banker added that Tatas had made a proposal to banks that they will infuse Rs14,000 crore in the telecom business, but the fine print said their equity infusion will be milestone-based.

“Tatas wanted banks to reduce the average cost of borrowing from 11% to 9% and offer a longer repayment period. The banks said that the Tatas must bring in equity first before asking for any relaxation," the banker added.

Tatas have also been in talks with banks to refinance their loans but it is learned that State Bank of India, which has the maximum exposure to their telecom business, has ruled out any such option, leading other banks to stay away from such a move.

The second person, an executive in the telecom industry who is familiar with the talks, said while the deal is primarily about telecom, the combination of Tata Sky’s DTH business with its own would make Airtel the market leader in the business.

But if there is a transaction, it would probably end up being an outright purchase, said a third person, who works for one of Airtel’s rivals.

Tata’s telecom business has debt of Rs31,000 crore and losses of Rs3,400 crore a year, this person added.

That effectively rules out a merger, he said.

The Tatas have also been in talks with Vodafone in the past to sell their telecom business. The talks fell through as Vodafone wanted Tatas to clear their liabilities first, the third person said.

This person added that the Indian government also holds a significant stake (26%) in Tata Communications after selling a 45% stake in Videsh Sanchar Nigam Ltd to the Tatas in 2002 for about Rs1,500 crore.

Talks between Airtel and Tata Teleservices come at a time when the former’s 20-year-old dominance of the telecom industry is being threatened by Reliance Jio Infocomm Ltd and the proposed merger of the country’s second largest operator Vodafone India Ltd and No. 3 Idea Cellular Ltd, a part of the consolidation triggered by Jio’s launch in September with an array of free services.

Jio’s impact has been such that aggregate revenues of Indian telcos fell for the first time since 2008-09 to Rs1.88 trillion in 2016-17 from Rs1.93 trillion the previous year, according to brokerage CLSA.

Airtel’s shares rose 0.85% to Rs384.65 at the close of trading on the BSE on a day the Sensex ended little changed at 31,360.63 points.

Airtel itself has made some smart acquisitions. In February, it agreed to acquire the assets of Telenor ASA’s India business. As part of the deal, Airtel will assume the Telenor unit’s liabilities related to licence fees and lease obligations for phone towers. The transaction, which won’t involve any cash payments to Telenor, will give Airtel access to 44 million customers (increasing its user base to 307 million), 43.4MHz of spectrum in the 1,800MHz band and 20,000 base stations. Airtel may look at a similar transaction with Tatas.

India’s telcos are loaded with debt—around Rs4.85 trillion at the end of December 2016—and face the burden of payments due to the government for spectrum (close to Rs3 trillion). They also face intense competition, with the average revenue per user falling sharply since Jio’s launch.

“Based on Jio’s current rate of expansion and the speed at which Tata Teleservices is shrinking, the latter’s fate is not the key issue in this scenario," Tony Worthington, senior adviser at CCS Insight, said in a report on 27 June. “The main point is that India will become a five-operator market—four private and one state-owned—each with more than 100 million subscribers."

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