The Japanese mobile sector – innovative in technology terms but generally slow-moving on the commercial side – is being pushed by its government, as well as the entry of Rakuten, to be more competitive and to drive down notoriously high prices. This has prompted NTT to propose a ¥4.3 trillion ($38bn) deal to bring its MNO subsidiary, NTT Docomo, back under its full ownership, which it said would give it a greater business agility.
Currently, NTT owns 66% of Docomo, which it partially spun off back in 1992 (that was followed by an IPO in 1998). NTT, which is in turn 33% owned by the state, said it initially approached Docomo with the proposal in August, and has now reached an agreement after several upward revisions in its per-share offer price. That offer now puts a 41% premium over Docomo’s share price just before the deal was made public.
The high cost will be justified, in NTT’s view, by a greatly improved ability to support “flexible and agile decision-making”.
Although Docomo is Japan’s mobile market leader and has advanced 5G roadmaps, its financial position is a far cry from its glory days in 2001, when it launched the world’s first large-scale commercial 3G network, based on its pre-standard technology, FOMA. At that time, it was valued at almost $400bn, while its current market cap is about $98.1bn – and that is up almost 16% since the announcement of NTT’s proposal.
Its earnings have been under pressure as a listed company. The costs of continual upgrades to a network whose users have very high usage and quality of service demands; the rising competitive challenge, particularly from Rakuten and, before that, Softbank; the migration to 5G and a cloud-native network; gradual price erosion – all these have weighed on Docomo’s performance and between 2017 and 2019 its net profit fell by about 20%. In its second fiscal quarter, Docomo reported a decline in mobile revenue of 5% year-on-year, though it is still the dominant MNO, with 80m subscribers and 44% market share.
As part of the new relationship with its parent, Docomo said it would introduce various new strategies, which would be easier to implement in an agile way if it were a privately held company rather than subject to the whims of the stock market – especially in a time of looming recession, when even Japan’s famously long-termist investors are feeling nervous and looking for quick results.
Docomo aims to diversify its services beyond mobile connectivity and applications. This will partly be about offering broader digital services – something in which it has lagged behind its three rivals in recent years. But that push will be far stronger if it can take advantage of NTT’s whole infrastructure, including mobile, fixed and WiFi networks.
The buy-out should also help Docomo meet the government’s demands to reduce mobile tariffs (see inset) by helping it to drive additional revenues from other services, while taking advantages of cross-network economies of scale.
Docomo went public in 1998, in what was the biggest IPO in Japanese history at the time. The re-privatization will break records too, as the largest tender ever for a Japanese company. The transaction is expected to close at the end of March.
Marc Einstein, an analyst at ITR in Japan, told LightReading he believed the new government’s comments about Japan’s high mobile prices, together with the Covid-19 pandemic, had brought Docomo’s valuation to a level that – even with the hikes to the offer – was attractive enough for NTT to carry out a long-held mission to reassert control of its mobile arm.
“NTT has long wanted to consolidate the operations across its subsidiaries to create a leaner organization and I think this is what is happening. This started a few years ago when NTT started consolidating group companies so I see this as an extension of this,” he said.
New Japanese PM wants to drive down mobile prices:
Japan’s new prime minister, Yoshihide Suga, has been a long-time critic of the high prices and profits of Japan’s MNOs, and now he has achieved the country’s top job, he is demanding that the operators reduce their prices, despite a downward trend in their profitability in recent years.
In a speech last month he said: “I want to create a framework that allows for greater competition in the field.” Since then, he has reiterated that tariff reductions remain a core policy, putting pressure on the operators to act pre-emptively rather than wait for new regulations. Suga has said that mobile rates could be reduced by 40%, and that data contracts in Japan are more than three times the price of those in France.
Jun Sawada, CEO of NTT – the parent of market leading MNO NTT Docomo – hinted at possible tariff cuts last week, although he denied this was in response to government pressure. However, one of the presumed reasons why NTT is buying full control of Docomo is to give it greater agility to drive costs down and economies of scale up, in order to counter the effects of lower mobile fees.
The new prime minister has been on the warpath against high mobile prices since he was chief cabinet secretary to his predecessor as PM, Shinzo Abe, in 2018. Share prices in the three leading MNOs fell on his appointment to the top role, Softbank’s the most steeply, by 5%.