Why the In­dus-in­fratel buy­out deal is not all roses

Mint ST - - MARK TO MARKET - Mo­bis Phili­pose mo­bis.p@livemint.com

In­dia’s largest tele­com com­pa­nies might soon get some debt load off their backs. A con­sor­tium of in­vestors led by pri­vate eq­uity firm KKR & Co. Lp and Cana­dian Pen­sion Plan In­vest­ment Board (CPPIB) will in­vest around $5 bil­lion to buy a stake in a Bharti In­fratel-in­dus Tow­ers com­bine, ac­cord­ing to The Times of In­dia. The ul­ti­mate ben­e­fi­cia­ries will be Bharti Air­tel Ltd, Voda­fone In­dia Ltd and Idea Cel­lu­lar Ltd who own stakes in th­ese tower com­pa­nies.

The cash in­flow will un­doubt­edly help in re­duc­ing debt and pro­vide—at least in the case of Bharti Air­tel—am­mu­ni­tion for in­vest­ments in its net­work. How­ever, that’s only one side of the coin. Ac­cord­ing to an an­a­lyst at a do­mes­tic in­sti­tu­tional bro­ker­age, the sale of tow­ers by a tele­com ser­vice provider is, for all prac­ti­cal pur­poses, a sale-and-lease­back trans­ac­tion. Whether the deal makes sense in the long run de­pends, to a large ex­tent, on the tower rentals th­ese com­pa­nies will agree to cough up to the new own­ers. In ad­di­tion, Voda­fone and Idea’s debt-ebitda ra­tio has now wors­ened to such an ex­tent that the tower deal can only go so far in help­ing them. Ebitda stands for earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­za­tion.

In March, a con­sor­tium led by KKR and CPPIB had bought a 10.3% stake in In­fratel at Rs325 per share. In­fratel’s val­u­a­tions have since risen by nearly a third. And not only have val­u­a­tions risen, but even the stakes are much higher, since the buy­out talks also in­volve a merger with the much larger In­dus Tow­ers Ltd.

If and when the con­sor­tium agrees to buy a much larger stake in the firm, they will ev­i­dently at­tempt to lock in a de­cent re­turn on the multi-bil­lion dol­lar in­vest­ment by push­ing for higher tower rentals from Air­tel, Voda­fone and Idea. Of course, de­tails about rentals are never dis­closed, which makes it dif­fi­cult to judge the mer­its of this trans­ac­tion.

In any case, like in any sale and lease-back trans­ac­tion, while there is cash in­flow on one hand, there are also re­cur­ring cash out­flows on ac­count of the rentals. True, since tele­com ser­vice providers had al­ready hived their tower as­sets into a sep­a­rate com­pany, they were al­ready pay­ing rentals.

But in turn, they re­ceived size­able div­i­dends. Idea, which has only a 11% stake in In­dus, re­ceived div­i­dends worth Rs265.7 crore in the past year; for per­spec­tive, its net loss in the past 12 months stood at Rs1,522 crore and profit be­fore in­ter­est and tax stood at Rs1,048 crore.

At a time when Jio’s rock-bot­tom tar­iffs, the cut in in­ter­con­nect us­age charges (IUC) and the im­po­si­tion of GST (bit.ly/2zjoxqk) are all dent­ing prof­its, things will get only worse when the div­i­dend in­flow stops.

If th­ese com­pa­nies also agree to pay higher rentals in the fu­ture, there’s fur­ther trou­ble wait­ing down the road as well.

Things are par­tic­u­larly tricky for Voda­fone and Idea. Ac­cord­ing to an an­a­lyst at a multi­na­tional bro­ker­age, by the time the im­pact of the IUC cut gets re­flected in fi­nan­cials, Idea’s debt-ebitda ra­tio would be in the re­gion of 9-10 times. At best, the tower deal can bring this down to around eight times, which is still far higher than lev­els that will give lenders com­fort.

Of course, all this is not to say that the tower deal isn’t a good de­vel­op­ment for tel­cos. But it will help only to some ex­tent, and in any case, the deal will only make sense if the lease rentals that are agreed upon are also favourable.

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