When the going gets tough, some get going and some get out.
Singapore Telecommunications Ltd (Singtel) is attempting the best of both worlds. The telco has decided to renounce rights to over about half of the shares it’s entitled to subscribe to in Bharti Airtel Ltd’s mammoth rights issue. Those shares will be picked up by Singapore’s sovereign wealth fund GIC PteLtd. As a result, Singtel’s stake in the company will fall to 35.2% after the Airtel rights issue, from 39.5% currently.
This looks like a bit of a change in strategy, keeping in mind that Singtel had increased its stake in Bharti Airtel from around 33% to 39.5% between August 2016 and February 2018. This was the period when the onslaught from Reliance Jio Infocomm Ltd was at its peak, and Singtel’s unflinching support was a heartening factor for Bharti Airtel investors.
But Singtel’s decision to give up the chance to maintain its stake hasn’t particularly perturbed analysts. “The primary issue here is that Airtel raises the ₹25,000 crore it aims to from the rights issue. A change in the underlying shareholding pattern is a matter of secondary importance," said an analyst with an institutional brokerage firm.
Singtel is majority owned by Temasek Holdings (Pvt.) Ltd, another Singapore sovereign wealth fund, and investors may not be particularly bothered which of the Singaporean entities the money comes from, as long as the funding tap stays strong. To be sure, some analysts are seeing it as a vote of confidence from another large investor.
Besides, as far as Singtel goes, it must be noted that it had recently also made an investment in Bharti Airtel’s African business, which is busy preparing for an initial public offering. And it will remain Bharti Airtel’s largest shareholder.
If Singtel had subscribed to the entire entitlement worth $1.4 billion ( ₹9,900 crore), it would have made it a tad more leveraged than what rating agencies would like for its current investment grade rating.
“Post investments in Bharti, Moody’s expects Singtel’s gross leverage (under the dividend method) to increase to around 2.3x-2.5x. With cash balances, net leverage will be around 2.2x-2.4x, which is not within Moody’s expectations for Singtel’s current A1 rating," Nidhi Dhruv, vice president and senior analyst at Moody’s Investors Service, said in a note on 5 March.
Coming back to Bharti Airtel, the good news for investors is that over two-thirds of the rights issue proceeds are locked in, with GIC’s commitment. Besides, the promoter group has said it retains the right to buy additional shares in the event of under-subscription by minority shareholders.
The rights issue price has been set at ₹220, or 31% discount to prevailing prices at the time of the issue announcement. “This is to ensure minimum 90% subscription, a regulatory requirement," analysts at JM Financial Institutional Equities wrote in a note to clients. It’s not clear if Singtel will receive any of the nearly $250 million in value it is giving up to GIC, by letting it buy shares in the rights issue at this substantial discount. If not, GIC has been granted a fairly sweet deal.
As pointed out in this column last week, Bharti Airtel is the best placed on the leverage front among the three large Indian telcos with net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) expected to fall to around three times after its rights issue. Reliance Jio and Vodafone Idea Ltd’s leverage ratios are in the double digits.
Even so, Singtel’s manoeuvre shows that large funding demands by Indian telcos are putting a strain on promoters. This, again, calls into question the industry’s capacity to absorb high cash burn year after year.