Why Sunil Mittal Won’t Mind If His Tower Arm’s Shares Fall

Billionaire Sunil Mittal won’t mind smiling when shares of his tower arm Bharti Infratel Ltd. fall.

As long as he is keen on acquiring rival Idea Cellular Ltd.’s stake in Indus Towers Ltd., a company that’s merging with Mittal’s arm to create India’s largest telecom infrastructure firm. That’s because Indus Towers’ valuation is linked to Bharti Infratel’s stock price, according to the terms of the merger.

So, lower the stock price of Bharti Infratel, the lesser Mittal pays for buying shares from Idea Cellular.

The stock has fallen about 10 percent since the two announced the merger in late April. The consolidation in the world’s second biggest telecom market stems from the need among incumbents to unlock value and pare debt amid a bruising tariff war unleashed by Reliance Jio Infocomm Ltd., the upstart led by the nation’s richest man Mukesh Ambani. Idea Celluar and Vodafone India Ltd. too await final nod for their merger.

Bharti Infratel and Vodafone India own 42 percent each in Indus Towers, while Idea Cellular holds 11.15 percent. The remaining 4.85 percent is held by U.S.-based private equity firm Providence.

The merger allows billionaire Kumar Mangalam Birla-controlled Idea Cellular to sell its 11.15 percent to Bharti Infratel. The only other choice is to retain the stake as the wireless carrier, according to the agreed terms, can’t sell it to a third party. Idea Cellular, in its pact with Vodafone India, has committed to monetising its holding in the tower company.

Bharti Infratel declined to comment on BloombergQuint’s query regarding how a fall in its share price may benefit the company. Idea Cellular is yet to respond to emailed queries.

Valuation

As Indus Towers is unlisted, its equity value will be derived using the valuation multiple of the listed Bharti Infratel, says the merger document. It factors in debt and operating performance of Indus Towers.

The merger terms have pegged the earnings before interest, tax, depreciation and amortisation for both the tower companies that will be used for valuations. Net debt will depend on where the number stands closer to the tower arms’ merger.

The decline in Bharti Infratel’s share price has lowered Indus Towers’ valuation by nearly Rs 5,000 crore. Which means, Idea Cellular could now get Rs 550 crore less for its stake in the merged entity.

But exiting Indus Towers will still help the company meet a key condition of its merger with Vodafone: to keep its leverage ratio low. Idea Celluar’s net debt-to-Ebitda rose to 8.7 times in the year ended March. The cash from selling shares in the tower firm will bring that down.