The latest deal in the telecom tower business, between Wireless Tata Teleservices (WTT; the tower company of Tata Teleservices) and Quippo Telecom, has positive implications for the valuations of tower business of Bharti Airtel.
Quippo Telecom, a Srei group company, is merging with WTT and would be transferring its 5,000 towers to the merged entity along with a cash of Rs2,400 crore.
As per reports, WTT has about 13,000 telecom towers and the deal would take the total towers of the merged entity to 18,000.
Quippo Telecom will hold a 49% stake in the merged entity, while the majority stake will be held by WTT. If one adjusts for the 5,000 towers brought by Quippo Telecom, it is effectively paying Rs2,400 crore to acquire 49% stake in 8,000 additional towers owned by WTT.
This works out to a valuation of Rs0.6 crore/tower, which is around 60-70% premium to the capital expenditure of Rs0.3-0.35 crore required to set up the passive infrastructure of a telecom tower.
Now, if we use the benchmark to value the 60,000 towers owned and managed by Bharti Infratel as on September 2008, the valuations work out to Rs36,000 crore for Bharti Airtel and Rs174 per share for Bharti Airtel’s 92% stake in the subsidiary.
This is much ahead of Rs112 per share taken by us in the price target based on the discounted cash flow method.
However, the deal is at a steep discount to enterprise value (EV)/tower of around $0.45 commanded by Reliance Communications for the sale of 5% stake to private equity investors for $337.5 million at the height of the bull-run.
At the current market price of Rs685, the stock trades at 12.5x its FY2010 estimated earnings and 7.5x EV/EBITDA. We maintain our BUY call on the stock with a price target of Rs985.