Economic Times: October, 2016
Mumbai: Private equity heavyweight KKR and pension giant Canada Pension Plan Investment Board (CPPIB) are in talks with Sunil Mittal led Bharti AirtelBSE -0.05 % to acquire a significant stake in its listed tower arm Bharti Infratel, said four sources in the know.
Last week in a stock exchange notification Bharti Airtel said it has taken board approval to explore monetization of a significant stake in Infratel. It however did not provide much colour in terms in the quantum of stake that it plans to divest or the value. Airtel currently owns 71.96% in the company while the rest is held by public shareholders.
The exercise is an attempt to give Bharti, India’s largest telecom operator, more financial headroom to combat deep pocket rivals like Mukesh Ambani-owned Reliance Jio Infocomm, due for commercial next year, and Vodafone.
Sources in the know said, Airtel is looking to divest up to 40% stake to a consortium of financial investors making them the single largest shareholder block. Depending on the valuation and the premium offered by the investors, it may also give up management control. Considering the size and scale of the potential transaction, KKR and CPPIB are looking to team up. A consortium approach may also help them avoid the open offer trigger.
With the current market capitalization of Bharti Infratel being Rs 65,814 crore ($10 billion approximately), the Infratel stake sale expected at around $4 billion based on current market value, is poised to become the largest telecom tower transaction in the country till date.
Bharti Infratel also owns 42% in Indus Towers – India’s largest telecom tower’s company that is a joint venture between Bharti, Vodafone, Idea CellularBSE 0.92 %. Together with its share in Indus, the company has 90,000 towers across 22 telecom circles nationwide. Its standalone market share of installed tower bases was 9.8% in FY15 but together with Indus, it makes the dominant player with a 40.8% share.
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On each of its towers, over two slots are leased making the company's sharing factor 2.2 times. Bharti Infratel's average monthly rental per slot leased is also on the higher end of the industry at Rs 34,000.
In the last quarter ending in September the company reported revenue of Rs 3,292 crore and profit after tax of Rs 774 crore. It enjoys an EBIT margin of 27% and has an annualized EBIDTA of Rs 5,800. Between Indus Tower and Bharti Infratel the companies hold 40.8%. The ATC, Viom combine holds 14.8% market share. Reliance Infratel holds 11.6%.
KKR declined to comment. Mails sent to CPPIB on Saturday did not get a response till the time of going to press on Sunday. A Bharti Airtel spokesperson too said he had nothing to add at this moment beyond the last company statement on the matter.
“The board of directors at its meeting held on October 25 has authorized a committee of directors to evaluate options for monetization of a significant stake in Infratel…The final outcome of this exercise will be placed before the board for approval, before any final decision is taken. There is no certainty of a transaction until such time the board reviews and approves the proposal,” Bharti Airtel informed the stock exchanges last Wednesday.
Telecom analysts at HSBC there is a very good possibility of Bharti bringing down its stake in Infratel from the present 71% to 51% and de-leverage its balance sheet and this could bring down its net FY18e net debt /EBITDA to 1.7x from 2x (and if it were to add the recent auction related debt then net debt/EBITDA would come down from 2.1 x from 2.5x).
“In our view it is a matter time for Bharti’s shareholding in Bharti Infratel to come down to 51% and the aforesaid announcement by the company only accelerates the process. We believe funds raised may allow Bharti to reduce debt and fund capex for the next fiscal year. The one other inference could be Bharti benefiting from sector consolidation by attempting to consolidate its data spectrum holdings as GSM new entrants struggle with pure voice offerings,” wrote Rajiv Sharma and Darpan Thakkar in their report on Airtel dated October 26th. According to them, as per discounted cash flow (DCF) methodology, fair value of the shares is Rs 325/apiece.
On Friday, the Infratel stock closed at Rs 347/share, down 2.38%. However, two people familiar with the ongoing negotiations said a change of control could lead to a minimum of 10-15% premium of current price levels
KKR along with Temasek was part of a clutch of investors who had put in $1.25 billion in Bharti Infratel through a mix of equity and convertible debentures in December 2007. Of that, KKR alone had pumped in $250 million. It fully exited the company in 2015. Infratel was its maiden exit in India, giving it an estimated 70% return in rupee terms over a 7 year period. CPPIB is also one of the leading LPs of KKR globally and have in recent years emerged as a large infrastructure investor in India.
Most telecom companies are opting for an asset light model and looking at divesting their infrastructure arms. World over, telecom towers and other infrastructure are owned and maintained by independent tower companies like American Towers or Crown Castle. “Owning towers mean heavy investments and rising debt. This bloats the balance sheet with leverage and especially when EBITDA margins are under pressure as they are in India for most telcos, the problem gets more acute,” said a Mumbai based telecom consultant involved in the process.
Both Vodafone and Idea are looking to unlock value in their tower portfolios. Idea has 9,772 towers while Vodafone has around 12,000 towers. Both the companies have carved out the towers into self sufficient subsidiaries. Earlier this month, Reliance Infratel in a press statement said Canadian asset manager Brookfield may buy 51% in the company for Rs 11,000 crore.
Earlier this year, America Tower Corporation bought Viom Networks at an enterprise value of Rs 21,000 crore for 42,000 towers at a sharing factor of 1.9 times.
Bharti Airtel has a net debt of Rs 81,480 crore with revenue of Rs 24,652 crore and net income of Rs 1,461 crore in the quarter ended September 30. It is the first company to report profit in its India operations but was dragged by investments in Africa. With other operators including Idea Cellular looking at capital expenditure of around Rs 8,000 crore the investments ahead of Bharti Airtel are big. The company has so far invested around Rs 140,000 crore in spectrum, in the quarter ended September 30 Airtel spent Rs 5,288 crore capital expenditure on network expansion. Bharti too has been divesting parts of its African operations and has been looking to exit sub scale businesses in the Indian sub continent.
Competitor Vodafone India recently halved its debt as its UK-based parent converted Rs 47,700 crore worth of loans it had made to its Indian arm into shares. Idea Cellular’s balance sheet was also strengthened when its parent Aditya Birla Nuvo was merged with Grasim, giving access of the cement company’s cash to Idea Cellular.
Industry experts have said that the valuation of telecom towers is dependent on two factors, the first is the tenancy, or how many slots are leased on each tower, the second is the master level agreement between the operator and the tower company. James Taiclet, chief of American Tower has said the agreements signed in India don't have the same standards as global equivalents, lowering the premium on their sale.
However, the telecom tower companies have lately found many suitors as the Indian operators expand their 4G services. The demand for tower slots is expected to shoot up as incumbent operators compete with Reliance Jio.