Bharti Infratel, Indus merger to create Rs 965 bn co, 2nd largest after ATC

The new entity will have 163,000 towers, but pressure on tenancy likely for 24 months

Bharti Infratel and Indus Towers will merge to create the second-largest telecommunications tower company in the world, valued at Rs 965 billion. The merged entity will have a presence in all the 22 circles of the country and have 163,000 towers. 

China Tower, a joint venture of three telecom operators, is the largest tower company in the world by volume of towers. It is estimated to have more than a million towers. American Tower Corporation (ATC) is possibly larger in valuation but not in terms of the number of towers it has.   
 

The deal values Indus Towers at Rs 715 billion. Airtel and Vodafone have a 42 per cent stake each in the company, Idea Cellular has 11.15 per cent and Providence has 4.85 per cent. Bharti Infratel will swap 1,565 of its shares for every Indus Tower share. Idea can sell its whole stake for Rs 65 billion, or get new shares in the merged entity. 

Vodafone will be issued 783.1 million new shares in exchange for its stake in Indus Towers. Providence has the option to receive cash or shares for 3.35 per cent of its stake in Indus, with the remainder being exchanged for shares in the new company. 
 

The merger is expected to be completed by the end of 2018-19. 

“With over Rs 253 billion in revenues (for the financial year 2017-2018), the combined company will be well placed to invest on a national basis,” a joint statement said. Bharti Airtel said it will engage with potential investors to evaluate a strategic stake sale in the new tower company. 
 

If both Idea and Providence sell their stakes, Airtel will be the largest shareholder in the new company, with a 37.2 per cent stake. Vodafone will have 29.4 per cent, Providence 1.1 per cent, and public shareholders have the rest. If Idea and Providence choose to get new shares, Airtel will have a 33.8 per cent stake, followed by Vodafone (26.7 per cent), Idea (7.1 per cent) and Providence (3.1 per cent). The public shareholders will have the rest. 
 

According to Credit Suisse, an immediate benefit of the deal would be saving on distribution taxation tax — the current annual outgo for this is Rs 5 billion for Indus Towers. 

Consolidation has picked pace in the mobile tower business in recent times. After the Bharti Infratel and Indus Tower merger, there will be only three major players (and a smaller one, BSNL). Earlier there were nine players.

Yet, according to analysts, in the next 12 months, with the Vodafone-Idea merger and other closures of telecommunication companies, as much as a fifth (20,000) of the 100,000 tenancies on the towers will not be there. This will put pressure on revenues, over the next 24 months.  “The tenancy ratio will go down from the current 1.5-1.7. But with the data revolution there will be requirement for more towers in the long run,” said a source. 

The new entity will lock horns with Reliance Jio, which will have over 162,000 towers after buying Reliance Communications’s tower assets.  The only pure-play non-telecommunication company to remain in business will be ATC. With a majority stake in the erstwhile Viom Networks, in which the Tatas still have a stake, and after its recent acquisition of the Vodafone and Idea tower assets, ATC will command over 78,000 towers. That is less than half of the two big boys in the game. At present, there are 500,000 telecom towers in the country.

State-owned BSNL, with 65,000 towers, is also an important player. It has the government’s permission to spin off this business into a separate entity. Two other players — GTL and Tower Vision, together controlling 32,000 towers — might eventually sell their assets, say analysts. 

The tower business has the advantage of being a predictable annuity one, as it is based on signing long-term tenancies. Also, in case telecommunication companies move out, they have to pay compensation. 

Tenancies are likely to bounce back by 2020 due to an increase in the data business. Since Jio’s disruptive entry, incumbents are working overtime to invest in increasing their coverage of 4G and VOLTE across the country. Also, the launch of 5G requires substantial bandwidth available only in the higher bands of spectrum. This would also require a huge increase in tower infrastructure. 

BNP Paribas said the merger will benefit all the companies. “In view of Idea’s high leverage, we believe it could opt for the cash option. Vodafone India will now have a stake in a listed company instead of Indus,” it added. 

Telecommunication companies claim monetisation will help incumbents in the pricing war, and also for new investments in as well as for acquiring spectrum for 5G, to be rolled out in the next two years. 

Bharti Airtel is also planning to invest Rs 240 billion this financial year for the roll-out of its 4G and VOLTE services across the country. Some analysts said even Reliance Jio, which uses its towers only for its own network, might try to monetise the business by bringing in tenants or divesting stakes to independent operators. 

The new Indus Towers board will have 11 members — three each from Bharti Airtel and Vodafone, one from KKR or Canada Pension Plan Investment Board as well as four independent members. KKR and CPPIB last year bought a combined stake of 10 per cent in Bharti Infratel. On Wednesday, the Bharti Infratel board has reappointed Akhil Kumar Gupta as executive chairman for five years with effect from August 1.