Bharti Infratel may buy Voda’s 42% stake in Indus Tower, become tower giant

Bharti Infratel could become a majority owner in Indus Towers if talks with Vodafone India for its 42 per cent stake in Indus are successful. The Bharti Infratel board earlier took a resolution to explore and evaluate the acquisition of a stake in one or more tranches in Indus Towers with an aim to make it a subsidiary. Analysts believe it is not whether the deal will be sealed or not but when and at what price.

Both Bharti Infratel and Vodafone India have 42 per cent stake each in Indus Towers, while Idea has 11 per cent stake and Providence a 5 per cent stake. Bharti Infratel’s decision to increase its stake coincides with the decisions of its parent (Bharti Airtel) to shed its stake in the company. Idea and Vodafone too are keen to shore up their balance sheet by selling their stakes in Indus Towers to expand their operations and fight out the pricing war with Reliance Jio.

The acquisition will make Bharti Infratel, which is currently the second largest tower company after Indus Towers, the largest in the country with a tower count exceeding 210,000.

Bharti Infratel’s current tower count is about 91,000 towers. The second largest operator would be American Tower after it completes the acquisition of standalone towers of Idea and Vodafone, which would take its tower count to 80,000.

While the acquisition moves are known, the street will await valuations at which the deal goes through. Assuming that Indus Towers deal is done at similar valuations to that of Bharti Infratel of nine times FY18 enterprise value to operating profit, the deal value works out to just under Rs 700 billion (Rs 70,000 crore). Bharti Infratel’s current market capitalisation is Rs 640 billion (Rs 64,000 crore).

Analysts at Nomura believe that if the deal is done at these valuations, it will turn earnings accretive in the second year of acquisition if 90 per cent of the deal is funded by debt and the rest by cash. Bharti Infratel is expected to end FY18 with cash and cash equivalent of Rs 67 billion.

While this gives Bharti Infratel the benefit of size, given the deals signed by Idea and Vodafone with American Tower, which includes no exit penalties post rationalisation of towers, a similar arrangement with Bharti Infratel will be a negative for the stock. Moreover, any downward price negotiations by the telecom operators of the terms of their master service agreement would also impact its net profits and valuations.