Bharti Airtel Ltd has been looking to sell a stake in its tower infrastructure subsidiary, Bharti Infratel Ltd, for some now. It was initially even willing to give up majority control, although it has dropped those plans for now. According to an analyst at a domestic institutional brokerage firm, a majority stake sale may not have been feasible given the hit on tower companies owing to the consolidation in the telecom sector.
With Airtel deciding to retain a stake of over 50%, a stake of up to 21.6% was up for grabs in Infratel. The company announced on Tuesday it has sold a 10.3% stake for Rs6,194 crore. The shares were sold at Rs325 apiece, or a 4% premium over Monday’s close and a 6% premium compared to the average price in the past one month.
Given the selling pressure and the 12% correction in Infratel shares since end-January, Airtel has got itself a fairly decent deal. Based on the transaction price, the tower company has been valued at a healthy EV/Ebitda multiple of 9.5 times, based on FY17 earnings and 8.7 times based on FY18 earnings, according to JM Financial Institutional Securities Ltd’s estimates. EV is short for enterprise value. Ebitda stands for earnings before interest, tax, depreciation and amortization.
Valuations were even higher earlier this year before Vodafone India Ltd and Idea Cellular Ltd said they were in talks for a potential merger. Evidently, the combined entity will no longer need as many towers as they did when they ran separate operations.
But as it turns out, the two companies said last week while announcing their merger that the overlap on tower tenancies amounts to only around 20% of the total.
Analysts at Credit Suisse, for instance, had estimated the overlap to be as high as 33%, and hence a greater hit on Infratel as redundancies are removed from the system post-merger. “Idea management believes that with subscribers of over 400 million (combined entity) and rapidly growing data volumes, it would be risky to shut down other tenancies. In other words, they see 220,000 sites as the size of the network in the long term. Seen from point of view of Bharti/Jio (165,000/100,000 tenancies), this could become a benchmark for nationwide network and accelerate new tenancy demands from these two operators,” Credit Suisse’s analysts wrote in a note to clients.
As such, the outlook for Infratel has improved marginally after Idea and Vodafone’s merger announcement last week. Of course, this is not to say that everything is hunky-dory. Revenue growth will be hit as Idea and Vodafone rationalize tower assets, and this will have an impact on economies of scale, and hence, margins. It is also not clear whether Infratel will be compensated by the combined entity through the payment of exit penalties.
Meanwhile, with Idea looking to sell its tower assets, as well as its stake in Indus Towers Ltd, and Vodafone possibly looking for an exit, too, Infratel could well consolidate its position in the sector, and gain a sizeable lead over competitors. Perhaps, this prospect helped get Airtel a premium for its Infratel shares.