Vodafone may hang up on Indus in $5 billion deal

UK’S Vodafone is in the final stages of talks to sell its entire 42% stake in Indus Towers for about $5 billion, raising Bharti Infratel’s holding in the company to 84% through a share-swap deal.

This key step, leading to a consolidation of ownership, is also expected to revive investor interest in Bharti Infratel, said two sources aware of the ongoing discussions. The negotiations with a KKR-led consortium have been in limbo for months.

Vodafone’s stake is pegged at around $5 billion, said a person aware of the valuation exercise. However, the final number will be an outcome of the impact of tower cancellations that will arise once the different telcos consolidate the overlapping tenancies. Cancellation of tower rentals will significantly hurt operating profits of Indus Towers, which in turn could depress valuations.

Bharti Infratel, a subsidiary of Bharti Airtel, owns 42% in the Indus Towers joint venture. While Idea has a 16% share in it, the residual 42% is held by the UK-based telco. The no-cash transaction, involving a share swap, will see Vodafone getting a smaller pie of the combined Bharti Infratel.

“Both Vodafone and Airtel have run due diligence processes to find the overlap in tenancies and arrive at an accurate valuation,” said one of the two people mentioned above. The findings include around 55,000 telecom tower rentals that overlap between Idea and Vodafone, and around 12,000 among Bharti, Tata Teleservices and Uninor.

Vodafone and Bharti declined to comment. Last year, Vodafone and Idea announced a merger that will create the country’s biggest telecom services company. Bharti has taken over Tata Teleservices’ consumer mobile services and Norway-based Telenor’s Indian arm, Uninor. Along with these mergers comes the sector’s anticipated reduction in infrastructure and people overlaps. Indus Towers had 122,920 telecom towers at the end of June 2017, with 297,867 slots on rent. One way is for shareholders to accept a common number of cancellations, and the other is to pay an upfront fee to Indus Tower.

“If there is an offset or some such arrangement, it will lower the valuation of Indus Tower and Bharti Infratel significantly,” said an analyst who covers the telecom tower sector.

However, one of the two people quoted earlier said that regardless of a settlement, there is still a lump-sum payday coming up for Indus Towers. With the cash, the company can undertake expansion suited for 4G and 5G deployments.
Bharti, Vodafone and Idea have outstanding tenancy terms of two to five years, and termination of the rent agreements will mean that Indus would get about 80% of all future rent receivables upfront.

Tata Teleservices, which sold its mobile operations but not tower liabilities to Bharti, may have to pay as much as Rs 7,000 crore to American Tower Corp. for termination of rent agreements six years before they were due to run out. The penalty for rent cancellation will run into several thousand crores of rupees and will be shared roughly between Idea and Vodafone in the ratio of their shareholdings in Indus, the person quoted earlier said.

“Cash in the company should offset any impact from a short-term EBITDA (earnings before interest tax depreciation and amortisation) drop.” Vodafone and Bharti Airtel are now trying to ascertain if a part of the cash settlement for premature termination of rentals can be offset among the three partners.

In its most recent financial results, Vodafone said, “We continue to explore options very actively to monetise the group’s 42% stake in Indus Towers.”