Search engine giant Google Inc and ecommerce behemoth Amazon are among those in talks with the Tata Group to buy the data centre business of Tata Communications in a deal expected to fetch about Rs 4,261.4 crore to Rs 4,589.2 crore ($650-700 million).
They are competing with bulge-bracket private equity funds including the Blackstone Group, Carlyle, KKR, Bain Capital and Advent International, who are all looking to buy up to 74% stake in the data centre unit and take control of the business that is spread across 44 locations in India and abroad. The salt-to-steel conglomerate is likely to retain a minority stake.
The transaction, if successful, will help Tata Communications reduce debt burden and concentrate on its core data carrier business. The company has net debt of Rs 9,178 crore ($1.4 billion), according to a July 2015 investor presentation.
The Tata Communications stock ended 3.1% down at Rs 402.35 on Thursday. Its current market cap is Rs 11,467 crore.
The Tata Group has hired Jefferies LLC to advise on the transaction. "The initial round of bids have already come and we are in the midst of advancing the process," one of the sources said.
Tata Comm declined to comment saying it would not say anything beyond last month's exchange filing. In the exchange filing, the company said it is exploring various strategic options for its data centre infrastructure business. Google, Bain, Advent, KKR, Carlyle and Blackstone declined to comment.
Amazon did not respond to mails seeking comments.
UP IN THE CLOUD
Besides India, Tata Communications has data centres in the US, UK and Singapore, with over 1 million sq ft of co-location space, offering managed hosting and storage services. In India, it has facilities in leading metros such as New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Pune, besides some tier-II and tier-III locations.
The interest from giants such as Google and Amazon is because of their intention to expand the cloud computing infrastructure business in India, a key market. Third-party data centres have become essential as more and more enterprises opt to outsource IT infrastructure services.
Acquiring large data centre operations will give access for companies like Google to penetrate into the Indian data market. Google already has a partnership with the Tatas. Google Cloud Interconnect is connecting with Tata Comm's IZO Public platform that enables companies to set up cloud computing facilities.
Amazon Web Service, or AWS, is one of the leading data centre operators in the world and the company has aggressive plans in India, said a banker close to Amazon.
GOOD TRACTION FOR DATA CENTRE
Tatas are achieving good traction with both providers of cloud services and ecommerce providers for its data centre, it had said in the presentation.
Non-core asset monetisation will act as a potential catalyst for the Tata Communications stock as it will lead to a reduction in leverage, Morgan Stanley said on July 30, soon after the company's earnings. The data centre business addedRs 436 crore to Tata Communications' FY15 revenues and has about 27% EBITDA (earnings before interest, tax, depreciation & amortisation), the company said in an investor presentation last month after its June quarter earnings.
"Tata Communications is our top pick because of its higher leverage to global data growth as a result of a wide footprint, least exposure to regulatory risks and improving business mix that we expect to drive profits to the highest among our coverage universe," Morgan Stanley added.
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