Home / Markets / Mark To Market /  Why Bharti Infratel, Indus Towers are sticking their neck out before AGR verdict

MUMBAI: Less than three months ago, Bharti Infratel and Indus Towers deferred their decision to merge, with reports suggesting that the companies wanted clarity on the adjusted gross revenue or AGR verdict of the Supreme Court.

After all, the verdict is expected to determine the fate of Vodafone Idea Ltd, and decide whether India will be a two-player market or one with three telco operators. But just ahead of the final AGR verdict, the two companies have decided to go ahead with the merger, raising eyebrows. The word on the Street is that the court will allow telcos to pay their dues over a twelve-year timeframe, allowing Vodafone Idea to survive in the process.

Analysts add Infratel is hedging its bet in case of an adverse outcome in the AGR ruling. The payment to Vodafone Idea is contingent on security deposit by Vodafone Idea and a corporate guarantee by one of its promoter, Vodafone Plc. “The security arrangement will provide the merged company a payment cover of over one year for the operational payments due from Vodafone Idea," Infratel said in a statement.

While the security deposit and corporate guarantee underscore the inherent concerns about Vodafone Idea, the merger is expected to strengthen Infratel, simplifying its holding structure. “The merger would strengthen the balance sheet, and capital structure of Bharti Infratel merged entity, but have limited earning gains from operational synergy, except merely aid in tax savings from dividend income from Indus," says an analyst at a broking firm.

The deal is now structured in a way that Vodafone Idea gets slightly more in terms of cash (than what was warranted based on the original terms of the deal), while Vodafone Plc. has settled for a slightly lower equity stake in the merged entity. Based on volume weighted average price on Infratel, Vodafone Idea is likely to receive 4,000 crore. Of course, that is 38% less than the 6,500 crore cash consideration Vodafone Idea was projected to receive at the initial merger announcement in April 2018.

Of course the world has changed since then, and Infratel shares have corrected sharply. Vodafone Idea is a large client of Infratel. As the group, Vodafone India-Idea Cellular, got busy with the merger, competition got ahead. The merged entity lost market share.

Vodafone Idea exited overlapping telecom tower sites and curtailing capital expenditure. This hit Infratel’s telecom tower tenancies, sending its stock lower by 37% since the Indus Towers merger announcement in April 2018. “Since the merger announcement in April 2018, the stress on Vodafone Idea has grown materially," analysts at Jefferies India Pvt Ltd said in a note.

In this backdrop the deterioration in Vodafone Idea’s investment in its tower venture only looks logical. Nevertheless, the funds infusion is much needed. Large dues (adjusted gross revenue or AGR) await Vodafone Idea and pressure on revenue, earnings is undermining its financial position.

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