Why the Indus-Infratel buyout deal is not all roses
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 amortisation.
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 Reliance Jio’s rock-bottom tariffs, the cut in interconnect usage charges (IUC) and the imposition of GST 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.