The past year has been an eventful one for the sector. On the one hand, the merger of Vodafone India and Idea Cellular, the biggest in the history of Indian telecom, concluded successfully and on the other, a mega merger, between Bharti Infratel and Indus Towers, was announced, which, when complete, will create one of the biggest telecom tower giants in the world.
Both these deals were driven primarily by the idea of helping the telcos sustain themselves in the face of hypercompetition in the sector. Reeling from the disruptive entry made by Reliance Jio Infocomm Limited in 2016, the incumbents were compelled to make heavy capex investments to retain their market holding, even as pricing pressures took a toll on earnings.
In a bid to bridge the widening gap between capex requirements and cash flows, telcos engaged in significant financial activity during 2018 through asset sale, fundraising via debt or equity, or a combination of both. While Bharti Airtel continued to trim its stake in its tower company, Bharti Infratel, to generate funds, Vodafone and Idea decided to sell their stand-alone towers to ATC Telecom Infrastructure Private Limited. In fact, asset monetisation is increasingly featuring as a key telco strategy to improve their financial situation. Spin-offs and divestments of infrastructure assets to generate funds are becoming common.
While fundraising by the incumbents have been guided by the need to pare debt, for Jio it has been more about raising money for strengthening its network. As a wholly owned subsidiary of Reliance Industries Limited (RIL), Reliance Jio has the backing of the energy giant’s financial prowess. During 2018, RIL picked up majority stakes in wired broadband providers – Digital Entertainment Network Limited (DEN), and Hathway Cable and Datacom Limited for Rs 52.3 billion. The strategic investment will help in accelerating the roll-out of JioGigaFiber across 1,100 cities. RIL has also been in talks for acquiring a controlling stake in GTPL Hathway. Meanwhile, 2018 saw Jio expanding its borrowing base by securing loans from Japanese banks.
tele.net takes a look at the key financings in the telecom sector during 2018…
Mergers and acquisitions
Creation of Vodafone Idea Limited
The formal merger of Vodafone India and Idea Cellular in late August 2018 created an entity of great size – Vodafone Idea Limited (VIL), the largest service provider in the country in terms of both revenue and subscriber market share. The company draws support from its two largest shareholders – Vodafone Group Plc and Aditya Birla Group – to drive value creation. The merger is expected to generate an annual synergy of Rs 140 billion, including opex synergies of Rs 84 billion, equivalent to a net present value of approximately Rs 700 billion (according to the Vodafone-Idea merger announcement on March 20, 2017). The equity infusion of Rs 67.5 billion in Idea and Rs 86 billion in Vodafone, coupled with the monetisation of stand-alone towers of both companies for an enterprise value of Rs 78.5 billion, provided the company a strong cash balance of over Rs 193 billion post a payout of Rs 39 billion to the Department of Telecommunications (DoT). A new board of directors comprising 12 directors (including six independent directors) has been constituted with Kumar Mangalam Birla as the chairman. The board has appointed Balesh Sharma as chief executive officer of the new company.
Bharti Infratel to merge with Indus Towers
In April 2018, Bharti Infratel and Indus Towers announced their decision to merge and create a telecom tower infrastructure giant. The combined entity, which will have a portfolio of 163,000 towers spread across all 22 telecom circles, will be the largest tower company in the world outside China. The merger is currently awaiting regulatory approvals from the National Company Law Tribunal and DoT, and is expected to conclude in the first quarter of 2019-20.
The merger ratio for the deal will be 1,565 shares of Bharti Infratel to one share of Indus Towers. Bharti Airtel and
Vodafone Plc will jointly control the company, in accordance with the terms of the new shareholder agreement. At present, Indus Towers is jointly owned by Bharti Airtel (42 per cent), Vodafone Plc (42 per cent), the Aditya Birla Group (11.15 per cent) and Providence (4.85 per cent). After the merger, Bharti Airtel and the UK’s Vodafone Plc will hold 37.2 per cent and 29.4 per cent stakes respectively. While the Aditya Birla Group is currently holding 7.1 per cent, it is likely to eventually cash out. It is also being speculated that Bharti Airtel and VIL will bring down their stakes over time to strengthen their respective balance sheets. To this end, Bharti Airtel has announced plans to dilute its stake in the merged entity.
The combined company will continue to offer passive infrastructure services to all telecom operators on a non-discriminatory basis. In the long term, it also plans to tap new growth opportunities in the areas of fibre sharing, small cells, data centres and Wi-Fi offloading, among others.
Fundraising activity
Jio was at the forefront of initiating several deals for raising funds for business expansion. In April 2018, the telco raised $500 million through a syndicated samurai loan from three Japanese banks – Bank of Tokyo Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation and Mizuho Bank. The floating rate loan is for a seven-year period. In the same month, it raised Rs 25 billion in corporate bonds from Axis Bank over a term of five years at an interest rate of 8 per cent. Later, in June 2018, Jio signed a $1 billion long-term loan facility with the Korea Trade Insurance Corporation (K-SURE). The facility will be used for financing goods and services procured mainly from Samsung Electronics and Ace Technologies Corporation. The facility has a door-to-door tenor of 10.75 years. This transaction marks the second K-SURE, covered facility for Jio in the past three years. Meanwhile, in August 2018, a total of 22 mutual funds participated in Jio’s Rs 15 billion fundraising exercise through private placement of non-convertible debentures (NCDs). The NCDs bear a coupon rate of 8.7 per cent per annum and will be redeemable in July 2021.
In February 2018, Bharti Airtel’s parent company Bharti Telecom raised Rs 26.49 billion from Singapore Telecommunications Limited (Singtel) through a preferential allotment of shares. According to the agreement, Singtel International Investments was allotted up to 85.45 million new equity shares in Bharti Telecom at an issue price of Rs 310 each. With this transaction, Singtel’s total stake in Bharti Telecom has increased from 47.17 per cent to 48.9 per cent. Its economic interest in Bharti Airtel has gone up to 39.5 per cent. In March 2018, Airtel raised approximately Rs 30 billion through the issue of listed, unsecured, rated, redeemable NCDs through private placement. In November 2018, Airtel announced its plans to raise more than $2 billion in loans from banks. It agreed to two- and three-year bilateral loans with 10 to 12 lenders. The all-in cost for Bharti’s dollar loan, which includes margin and upfront fees for the deals, is 110-120 basis points over the London interbank offered rate. The multiple fundraising exercises have been aimed at helping the operator repay some of its debt and fend off competition by bolstering networks.
VIL also raised Rs 15 billion in September 2018 by way of NCDs on a private placement basis. The debentures have an interest rate of 10.9 per cent per annum and come with a maturity period of five years.
Asset monetisation
In January 2018, Bharti Airtel announced that it will transfer 25 per cent stake in its direct-to-home (DTH) arm Bharti Telemedia Limited to its wholly owned, subsidiary Nettle Infrastructure Investments. Later, in March 2018, the company declared that it will sell a further 19 per cent stake in the DTH business for raising funds. Meanwhile, in August 2018, the telco received foreign direct investment (FDI) clearance from the government for the sale of its 20 per cent share in Bharti Telemedia to Warburg Pincus for $350 million. According to the deal, Bharti Airtel will sell its 15 per cent stake in the DTH arm and another Bharti entity will sell a 5 per cent stake in the company.
In December 2018, Bharti Airtel’s board decided to sell 32 per cent of its stake in Bharti Infratel to Nettle Infrastructure Investments. After the completion of this transfer, Bharti Infratel’s shareholding structure will change, with 18.33 per cent stake with Bharti Airtel, 35.18 per cent with Nettle and the remaining 46.49 per cent with the public and other shareholders.
During the year, Reliance Communications concluded the sale of its media convergence nodes and related infrastructure assets to Jio for Rs 20 billion. It also sold its fibre and related infrastructure assets, amounting to Rs 30 billion, to Jio.
Meanwhile, prior to their merger in August 2018, Idea Cellular and Vodafone India monetised their stand-alone tower assets by selling them to ATC. While Idea’s transaction was closed at an enterprise value of Rs 40 billion for approximately 9,900 stand-alone towers, Vodafone’s stand-alone tower business sale was completed at an enterprise value of Rs 38.5 billion. The deals have helped the two operators in strengthening the financial position of the merged entity. Later in November 2018, VIL transferred its fibre network assets to a wholly owned subsidiary with the aim of holding an early sale. According to the company, a potential early sale would enable it to release capital into its core mobility business and reduce future capex investment.
In December 2018, Reliance Jio announced the creation of two wholly owned subsidiaries for its fibre and tower businesses. The demerger has been approved by the Jio board; however, the decision is subject to regulatory and shareholder approvals.
Proposed IPOs
In April 2018, Atria Convergence Technologies Private Limited, an internet service provider controlled by private equity (PE) firms TA Associates and True North, filed its draft red herring prospectus with the Securities and Exchange Board of India (SEBI). It is looking to raise Rs 8 billion, the majority of which will be used for boosting its infrastructure and paring debt. The IPO is likely to be a mix of fresh fundraising and stake sales by both the existing private equity investors.
In August 2018, Route Mobile received SEBI’s approval for raising funds through an initial share sale. The company had filed draft papers with SEBI in January 2018, seeking its clearance to float an IPO. According to the draft papers, the IPO includes a fresh issue of shares worth Rs 3.5 billion and an offer of sale for up to 6,500,000 shares. According to industry sources, the IPO, which seeks to raise Rs 6 billion, will value Route Mobile at around Rs 25 billion.
Outlook 2019
Going by various industry estimates, the financial turmoil in the sector is far from over. As a result, a major part of 2019 is likely to see the incumbents exploring more strategies to pare their debt while infusing more capex into their networks. Monetisation of infrastructure assets will continue to be a key theme. Almost all operators, including Jio, are spinning off their infra businesses into separate entities to generate cash flows from the sale of stake in these newly created entities. The enterprise value/EBITDA multiple of a pure asset business is much higher than that of a telco business.
Akanksha Mahajan Marwah
