Cash is king, while debt puts you in a bind. Ask Idea Cellular Ltd, perhaps the most leveraged company among India’s surviving telcos. It’s in a catch-22 situation with the decision to monetize its 11.15% stake in Indus Towers Ltd.

Idea has been given two options for its stake in the proposed merger between Indus and Bharti Infratel Ltd. It can exchange it for shares in the combined entity, but this won’t address its high debt levels. The other option is to exchange the stake for cash, although this comes with strings attached. According to the deal structure agreed upon by shareholders of the two companies, Indus’s valuation in case of a cash transaction will be at a 10% discount to Bharti Infratel’s EV/Ebitda multiple. EV stands for enterprise value and Ebitda is earnings before interest, tax, depreciation and amortisation.

Mint’s calculations suggest that Indus has been valued at a discount, albeit to a lesser extent, even in the case of a share swap. Shouldn’t Indus have been valued at a premium to Infratel, given its much larger size and better business mix in terms of the number of circles it operates in?

Indus Towers currently operates in 15 telecom service areas (circles) and Bharti Infratel’s operations are focused on the remaining 7 circles. Indus operates 123,639 towers, 3.1 times that of Infratel and its revenues are 2.8 times higher at Rs18,742 crore.

Besides, when American Tower Corp. had bought Idea and Vodafone’s standalone towers last November, the transaction was at a 20% premium to Infratel’s valuations then.

But on the flip side, Infratel’s leaner operation generates a considerably higher profit margin. Besides, Airtel will be settling for joint control of the company with Vodafone, even though it will have a higher stake in the merged entity. As such, there are arguments both ways and the decision to favour Infratel’s shareholders may not be something to split hairs about. But Idea’s decision to settle for an additional discount in case of a cash transaction suggests nervousness about its cash position. In some such cases, where a company is selling a block of shares and giving up control, they even manage to get a premium.

Note also that proceeds from the Indus stake sale is lower than what analysts anticipated. Some analysts assumed inflows will be in the region of Rs8,500-9,000 crore, whereas Idea will get only Rs6,500 crore if it sells its stake to Infratel. A stock exchange announcement by Bharti Airtel Ltd suggests a possible deal with a consortium of PE investors didn’t materialise, which perhaps explains why Indus’s selling shareholders have to settle for lower valuations. Infratel shares have also corrected since the ATC deal, which made things worse.

All of this means that Idea’s leverage ahead of its merger with Vodafone will be higher than estimates. Meanwhile, losses and cash burn continue to worsen. In the December quarter, Idea’s Ebitda was about sufficient to meet interest costs; in the March quarter, Ebitda is expected to fall short by a margin. After accounting for capex as well, the dent in balance sheet will be significant. From the looks of it, Idea’s financials won’t be a pretty sight when it eventually merges with Vodafone India Ltd.

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