MTNL-BSNL merger: A recipe for disaster

A merger between the two companies bodes well only if one of the two companies have a stronger balance sheet and the capcity to absorb the mess of other company. But in case of MTNL and BSNL, both companies are grappling with many problems and a merger will only make the situation worse.

Reports say that the government is once again contemplating merging the two public sector giants MTNL and BSNL. It’s now a ritual with every government since 2002 to announce the possibility of a merger between the two companies.

One only needs to look at the Indian Airlines-Air India merger, which though made common sense didn’t add up financially. Air India has not yet recovered from its merger or the other blunders committed during UPA I government. And one fears the same fate could befall the merger of the two telecom companies, whose financials alone is enough to conclude that the marriage is doomed from the word go.

The employee strength of both the companies have been a big hurdle in the past and will continue to weigh heavily on their operational costs in future. More than 80 percent of MTNL’s revenue is absorbed in employee costs, while in the case of BSNL it is 55 percent. Compare this to Idea Cellular where the number is less than four percent and we know why the PSU giants are losing the battle.

It is not that its huge employee base has gone unnoticed by the ministry. The liposuction needed to remove the excess fat never came. Instead the government resorted to minor plastic surgeries. Small VRS (voluntary retirement schemes) have been repeatedly announced, but these have failed to improve the financials of the company.

The size of the problem is so huge that the government has little option but to wait it out. MTNL has 40,000 employees while BSNL has 2 lakh. The cost of giving VRS to just 20 percent of the employees above the age of 50 in MTNL, which works out to 5,300 employees comes to about Rs 2,000 crore. MTNL’s annual wage bill including retirement benefit is Rs 2837 crore.

Merging the two entities is unlikely to solve the problem of its huge employees. With workers at both the companies wanting to have wage parity it will only add to the costs.

Unlike a private sector company where its management pegs the wages to its performance, public sector employees enjoy wage hikes irrespective of the performance of the company. MTNL’s revenue has come down from Rs 6,143.77 crore in 2002 to Rs 3,303 crore in 2016 but its employee costs have increased from Rs 1480 crore to Rs 2837 crore. Add to that the problem that MTNL has a negative net worth and a debt of just less than Rs 18,000 crore.

A merger would mean spoiling BSNL’s relatively respectable balance sheet. Further, BSNL is an unlisted entity; thus, in order to merge it completely BSNL would have to shell out money to buy out its listed shareholders.

The two companies have assets like tower companies and real estate which can be monetised to salvage the situation for some time, but will it really solve the problem of these companies in the current scenario? That is a bigger question. The public sector giants, especially MTNL, have among the weakest balance sheet among its peers.
In a pricing war, the company with the lowest cost is the one that will survive. Both BSNL and MTNL are the fattest among its peers. As the merger is not cutting flab, what purpose will it serve on an operational basis is anybody’s guess. In the end, as in the case of Air India, tax payers will end up paying for the inefficient companies.

-Shishir Asthana

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