Fitch: Infratel-Indus Merger Reflects India Telco Cash Pressure

The merger of Bharti Infratel with Indus Towers (Indus) reflects fierce price competition in the Indian telecoms market, which has created pressure for consolidation and on incumbents to sell assets to raise funds, says Fitch Ratings. We do not anticipate any change in Bharti Airtel's 'BBB-' rating, as the deconsolidation of 54%-owned Bharti Infratel's USD450 million EBITDA and USD1 billion in net cash will be offset by cash dividends and greater liquid equity value in the merged tower entity. Deconsolidation of Infratel will only begin in the financial-year ending March 2020 (FY20), once regulatory approvals are obtained.

We expect some of the largest shareholders in the combined tower entity to sell down their stakes, or divest them entirely, following the merger, which appears at least partly designed to maximise equity valuations ahead of sales. Vodafone India and Idea Cellular Ltd - which own 42% and 11.1% of Indus, respectively - are merging, and have come under particular pressure since the entry of Reliance Jio into the market. Both companies have already sold off towers managed outside Indus worth USD1.2 billion, and we believe they may look to support their balance sheets further by selling down their stake in the merged tower entity. Idea raised another USD1 billion through a combination of equity infusion by its parent and a private equity placement.

 

Bharti, which owns a 23% effective stake in Indus through Infratel, has also been affected by Jio's entry, albeit less severely than Vodafone and Idea. Bharti's results for the financial year ending March 2018, announced along with the merger, showed a 9% drop in revenue and a 13% fall in EBITDA as blended average revenue per user (ARPU) fell by 27% yoy to a record low of INR116 (USD1.8) last quarter. Growth in Bharti's African operations, pay-TV, enterprise and tower segments provided some cushion but failed to arrest an overall EBITDA decline. FFO adjusted net leverage deteriorated to 2.1x (FY17: 1.9x) - excluding USD6.6 billion in deferred spectrum costs.

We expect Bharti to explore selling down its stake in the merged tower entity, reflecting its commitment to maintaining an investment-grade rating amid competitive pressures. It has sold down 18.5% of Infratel for around USD1.8 billion over the last 24 months.

We forecast Bharti's revenue and EBITDA to rebound in FY19, driven by a likely improvement in Indian mobile ARPU as data usage and tariffs rise. However, Bharti will continue to have negative FCF during FY19, as cash flow from operations will be insufficient to fund the higher capex of around USD4 billion needed to support strong growth in data traffic and to compete against Jio.

The Indus-Infratel merger will create one of the largest tower companies in the world, with about 163,000 towers - about 41% of all Indian towers. The merged entity will benefit from some economies of scale and will not face cash leakage through the dividend distribution tax, which is currently paid when Indus distributes dividends. Bharti and Vodafone India will jointly control the merged entity post-merger.

Beyond the short term, we expect price competition in the Indian telecoms market to ease following the emergence of three large telcos - Bharti, Jio and the merged entity of Vodafone-Idea - which we estimate to have a combined revenue market share of 90%. We expect industry revenue growth to be in the mid-single-digits in 2018, following a decline in 2017.

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