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Google will invest as much as $1 billion in Bharti Airtel Ltd as the Internet giant redoubles efforts to increase smartphone access and accelerate digital transformation in the world’s second-most populous nation.

Google International LLC will buy a 1.28% stake in India’s second-biggest telecom services provider for $700 million and invest $300 million over the next five years in commercial arrangements in the areas of affordable mobile devices, 5G network and cloud technologies.

Google’s investment is aimed at developing the digital infrastructure in India, which will, in turn, generate demand for its products and services, including cloud computing, mobile devices, apps and digital advertisements. Google’s latest move follows a $4.5 billion investment in Reliance Industries Ltd’s digital unit, Jio Platforms Ltd, in July 2020. Both the investments are routed through the Google for India Digitization Fund.

“Big tech investments in infrastructure have been steadily increasing, and seeing it happen in India is a sign of a more symbiotic relationship developing between the telecom and digital sectors," said Vaibhav Kakkar, partner at Saraf & Partners.

Airtel will sell shares to Google at 734 apiece, the company said in an exchange filing on Friday. Airtel’s shares rose 1.23% to 715.9 on BSE.

“As part of the first commercial agreement, Airtel and Google will work together to build on Airtel’s extensive offerings that cover a range of Android-enabled devices to consumers via innovative affordability programmes," the carrier said. The commercial agreements will also be aimed at 5G network enhancement and accelerating the adoption of cloud computing.

Bharti Airtel chief executive Gopal Vittal said the company has no plan to build smartphones with Google but will work to increase smartphone adoption among consumers as part of the strategic partnership. Making smartphones more affordable will be done through targeted incentives, cash-backs and partnerships across device and e-commerce players.“We have mentioned we are not keen on a subsidy game, but equally, we are going to be competitive in the market; so wherever there is an incentive to be given, we have developed the software capability to target it into a device in order to be really smart and minimize the economic cost of that," Vittal said.

Airtel will also use data models to predict likely upgrades to smartphones among its user base, on the back of having converted over 80 million such users to smartphones. “We will continue to push for that because we also know that for every smartphone user, we get a significant jump in the Arpu, which is part of our premiumization agenda," Vittal said. The carrier aims to increase Arpu levels to 200 in the near term and to 300 in the long term, from 153 as of 30 September.

Vittal said the carrier would use existing Android capabilities, indicating the company would not develop its operating system. Airtel will continue to allocate capital towards home broadband, data centres, and 5G network. The company plans to spend $2.5 billion on capital expenditure for this financial year.

Vittal added that Airtel was in a comfortable leverage situation, generating solid cash flows to fund capex. “We have announced the rights issue, and we’ve made one call, there are residual calls to be made, to fund any additional growth capex that may be required," he added.

In August, Airtel said it will raise 21,000 crore through a rights issue, of which one call for 5,000 crore has been made. The balance can be raised over three years.

People aware of the developments said the deal should be closed in a couple of months after regulatory approvals, including from the Competition Commission of India, even as talks between both sides began in the first half of 2021.

Analysts said the deal is a win-win for both. “From Google’s point of view, certainly, it is seeing the advantage of tying up with a large telecom provider to create front-end solutions," said Aliasgar Shakir, an analyst at Motilal Oswal Financial Services Ltd. Airtel could leverage Google’s tech platform to explore monetization of digital offerings, he added.

Google’s tech platform to explore monetization of digital offerings, he added.

For Google, the partnership will be an extension of its ongoing initiatives of getting millions of Indians onto the internet and it's Android ecosystem of products. Bank of America advised Google on the transaction, said people aware of the details.

"With this partnership, we are excited about creating new and innovative business models to help grow the Android OEM ecosystem in India," the company said in a blogpost on Friday.

Over the last two years, Google has made steady progress on building an India-focused Android experience for the country’s new internet users, partnering with localised content providers and device makers, it added.

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