How A Delayed Bharti Infratel-Indus Towers Merger Is Hurting Vodafone Idea
The delay in Bharti Infratel-Indus merger has cost Vodafone Idea nearly Rs 1,300 crore.
The impending merger of Bharti Infratel Ltd. and the unlisted Indus Towers Ltd. that would create the largest tower company outside China has been delayed four times till now, hurting the Vodafone Group and Kumar Mangalam Birla-owned Vodafone Idea Ltd.
That’s because, the delays, according to BloombergQuint’s calculations, have cost Vodafone Idea nearly Rs 1,300 crore.
Bharti Infratel recently extended the long-stop date for the merger till June 24 from April 24, despite receiving all approvals from the government. Uncertainty around adjusted gross revenues due to the government and the national lockdown following the novel coronavirus outbreak led to extension, the company said in a post-earnings call.
The initial deadline for the merger was October 2019, which was then extended to December and then again to February 2020. Despite receiving the final approval from the Department of Telecommunications on Feb. 21, the tower company controlled by Sunil Mittal’s Bharti Airtel Ltd. announced the extension of the deal to April 24.
As a result, Vodafone Idea will now be getting Rs 1,300 crore less by selling its stake in India’s largest tower operator, Indus Towers Ltd., as share prices of Bharti Infratel fell.
Indus Towers is jointly owned by Bharti Infratel, Vodafone Plc. and Idea Cellular. However, the announced merger between the tower companies gives Vodafone Idea the option to sell its 11.15 percent stake in Indus Towers to Bharti Infratel before the merger. Vodafone Idea also has the option to retain stake in the merged entity—which is less likely to happen as the merger agreement of Vodafone India and Idea Cellular mentions it will monetise its stake in Indus Towers.
As Indus Towers is an unlisted entity, the equity value of the company will be derived using the valuation multiple of the listed Bharti Infratel, according to the merger document.
The merger document has fixed the earnings before interest, tax and depreciation and amortisation for both the tower companies that will be used for the valuation purpose. The net debt will depend on when the merger completes, while the share price for calculating the valuation multiple will be based on the 60-day volume weighted average price.
Since the initial deadline of merger completion, Bharti Infratel’s 60-day volume weighted average share prices have dropped by 22.6 percent. This coupled with lower net debt of Indus Towers and higher net cash balance in Bharti Infratel led to a 25 percent drop in Indus Towers’ equity value.
Compared to when the merger was announced, the value of Vodafone Idea’s stake has diminished by 42 percent.
The fall in share prices can be attributed to falling tenancies—as operators put fewer antennae on its towers—and the Supreme Court’s ruling in the adjusted gross revenue case that’s set to weaken financials of operators, leading them to cut costs and limit growth. Recently, the tower company reported its worst sequential drop in operating profit on the back of delayed payments from incumbent telecom operators.
Still, the fall in tenancies after the merger of Vodafone India Ltd. and Idea Cellular Ltd. hasn’t weakened the financials of the merged tower operator since the deal was announced. That’s because the operator has not only started charging higher rental, but has been receiving exit penalties for cancelled tenancies. Introduction of the new accounting standard, IND-AS 116, also boosted its operating profit in 2019-20.