Bharti Infratel’s Stake-Sale Talks Hit a Valuation Bump
Sharp drop in share price dents potential deal value
Deepali Gupta & Sneha Shah
Mumbai: Talks to sell a controlling stake in Bharti Infratel to a consortium of KKR and CPP Investment Board seem to have hit a snag over valuation, with the telecom tower company’s shares taking a deep dive following news of a potential Idea Cellular-Vodafone India merger.
A 17% drop in the share price of Bharti Infratel in just two trading days last week eroded its market value by .₹ 11,400 crore, thus denting the potential deal value, executives in the know of the talks said.
Bharti Infratel has communicated to the private equity firm and the Canadian pension fund that the premium for ceding management control is significantly higher than the .₹ 340 a share offer they made, the executives said. The negotiations, though, are ongoing, they added.
The tower unit of Bharti Airtel is looking to sell a 41% stake along with management control. Bharti Airtel owns 71.96% of the company while the rest is held by public shareholders. The consortium submitted its bid late last week.
On Monday, the company’s shares closed at .₹ 304.60 on the Bombay Stock Exchange, valuing it at over .₹ 56,000 crore ($8.3 billion). The stock, which hit a year-high of .₹ 412.55 in July last, has recovered marginally after last week’s meltdown. Aspokesman for Bharti Enterprises, the group holding company, declined to comment on the talks. KKR and CPPIB didn’t respond to emails seeking comment. A merger between Vodafone India and Idea is expected to significantly affect demand for tower sites, as the second and third largest telecom operators will seek to rationalise the requirement of infrastructure by avoiding overlaps as a combined entity. That, in turn, will hurt the long-term profitability of the company. Analysts at JM Financial Institutional Securities estimate the potential damage to range between .₹ 40 and .₹ 53 a share for Bharti Infratel.
ment and Appellate Tribunal (TDSAT) has asked Telecom Regulatory Authority of India (Trai) to submit clarifications on Reliance Jio Infocomm’s free voice and data services, including whether the company had kept the watchdog in the loop on its promotional offers, reports This followed the Trai clearing Jio’s free ‘Happy New Year’ voice calling and data plan last week.
Co tells KKR and CPPIB the premium for ceding control is much higher than the 340 a share offer they made
Bharti Infratel derives around 85% of revenue from the top-3 operators, Bharti, Vodafone and Idea. Related-party transactions data indicate that it gets around 45.5% revenue from Bharti, which means about 39.5% of it comes from Vodafone and Idea. The company holds 42% of Indus Towers, India’s largest telecom towers company where Vodafone and Idea are its joint venture partners. Together with its share in Indus, the company has 90,000 towers covering all the 22 telecom circles the country is divided into. Its standalone market share of installed tower bases was 9.8% in the year-ended March 31, 2015, but together with Indus, it was the dominant player, having 40.8% of the market.
Both Infratel and Indus are in- terlinked, making both vulnerable to any consolidation among telecom operators. The valuation of Indus flows through into the valuation of Infratel’s 42% stake in the company. But, if the talks between Vodafone and Idea lead to a merger, Infratel will be reduced to a minority investor in Indus as a combined IdeaVodafone will own 58% in it. This risk, too, is weighing on Infratel’s valuation.
Bharti is basing its valuation on the recent sale of Viom Networks, another domestic tower assets provider. Last year, American Tower Corp paid a premium to buy an11% stake that was bundled with the management control of the company. Reliance Communications signed an agreement to sell a 51% stake for ₹ 11,000 crore, but let go of all management and voting rights at that price.
In October last year, Bharti Airtel said it has taken board approval to explore monetisation of a significant stake in Infratel. Combating deeppocketed rival Reliance Jio Infocomm, with rising costs of mobile airwaves and staring price wars, makes cash a precious commodity for Bharti, Vodafone and Idea.
A person cited earlier said talks at Infratel have already considered several permutations, including selling minority stakes spread across several investors or a minority stake to a single consortium. But suitors like KKR-CPPIB are keen to make it an independent tower company so that they can redraft tenancy agreements with operators.
“The deal sweetener was that Indus Towers could be expanded from 16 circles to all India by consolidating what (tower assets) Idea and Vodafone also have. Neither will give up tho- se assets unless Bharti gives up management,” he said.
“Considering the large investments required, KKR and CPPIB, along with some of their marque LPs are looking at a consortium to acquire a controlling stake in the company,” another person said. Brookefield and Blackstone, too, had evaluated the asset before dropping out.
With Bharti Infratel’s current market capitalisation of $8.3 billion, the 41% stake that is on sale is valued at $3.4 billion, making a potential deal the largest telecom tower transaction in the country till date. It would also trigger an open offer for an additional 26% stake in the company.
On each of its towers, at least two slots are leased out, making the company’s sharing factor 2.2 times. Its average monthly rental per slot leased is also on the higher end of the industry at ₹ 34,000.