After a span of over two years, Bharti Infratel and Indus Towers have finally decided to proceed with their long-pending merger deal. Recently, at a meeting on August 31, 2020, Bharti Infratel’s board of directors gave a final go-ahead to the scheme of arrangement between the two towercos. The new merged entity is all set to become the largest tower company in the world outside China, having a pan-Indian tower footprint of 163,000 towers spread across all 22 telecom circles.

Two years in the making

The Bharti Infratel-Indus Towers merger deal was first announced in April 2018, with the initial deadline for the merger set to October 2019. However, in October, the long stop date for the deal was extended to December 2019 citing non-receipt of requisite government approvals and incomplete processes. While the two companies received approval for the deal from other regulatory bodies, the absence of requisite approvals from the Department of Telecommunications (DoT) led them to again extend the timeline for closing their merger deal to February 2020.

Despite receiving foreign direct investment (FDI) approval from DoT on February 21, 2020, the towercos announced another extension to April 2020 due to lack of approvals from the National Company Law Tribunal (NCLT), Chandigarh. In April 2020, final approvals from the NCLT and the process of taking the deal on record by the Registrar of Companies (RoC) were still left thereby leading to another extension to June 2020. In June 2020, uncertainty around the adjusted gross revenue (AGR) verdict as well as non-fulfilment of conditions precedent for the merger pushed the deadline further to August 2020. Finally, on August 31, 2020, the board of directors decided to proceed with the scheme of arrangement and comply with other procedural requirements for completion of the merger, including approaching the NCLT to make the scheme effective subject to certain procedural conditions precedent.

Deal dynamics

The likely ownership structure of the merged tower entity is based on the cash consideration chosen by Vodafone Idea Limited (VIL) for its 11.15 per cent stake in Indus Towers on the basis of an agreed formula. Upon calculation, the figure comes to approximately Rs 40 billion.

As per the terms of the merger deal, VIL has agreed to make a prepayment of Rs 24 billion to the merged tower entity from the cash consideration to be received from Bharti Infratel at the time of closing the deal. According to VIL, the prepayment amount will be adjusted to the extent of 50 per cent of all undisputed and due amounts payable by it to the merged tower entity post closing and VIL will be required to pay only the balance 50 per cent of undisputed dues. Further, the telco stated that the prepayment amount would accrue annual interest at 6 per cent and this would continue till the entire prepayment sum with accrued interest is fully adjusted.

To secure the payment obligation of VIL under the master service agreements (MSAs), Bharti Infratel has entered into certain security arrangements with VIL and UK’s Vodafone Group Plc for the benefit of the merged company. According to Bharti Infratel, this includes a combination of a security deposit by VIL, security via pledge of a certain number of shares of the merged company out of those issued to Vodafone Plc (as part of the scheme) and a corporate guarantee by Vodafone Plc, which can get triggered in certain situations and events.

Bharti Infratel has added that these security arrangements remain subject to all applicable regulatory approvals by Vodafone Plc’s lenders. The security arrangements will provide the merged tower company a payment cover of over one year for the operational payments due from VIL.

The delay in the closure of the merger deal also seems to have brought about a change in the shareholding structure of the merged entity. According to industry sources, the earlier merger ratio of 1,565 shares of Bharti Infratel for every Indus share has changed to 1,519 shares of Bharti Infratel for each Indus share. This change is in favour of Bharti Infratel as it will be issuing fewer shares which will lead to lower dilution. As per Bharti Infratel, the likely shareholding in the merged company, based on adjustments reflecting current facts and circumstances, would be Vodafone Plc with a 28.2 per cent stake, Providence Equity Partners with 3.2 per cent, Indus with 31.4 per cent and the current Infratel shareholders with a 68.6 per cent share. However, Infratel added that the aforesaid percentages are subject to change based on agreed closing adjustments.

Meanwhile, the combined towerco, which will fully own the respective businesses of Bharti Infratel and Indus Towers, will change its name to Indus Towers Limited and will continue to be listed on the Indian stock exchanges. It will be jointly promoted by Bharti Airtel and the Vodafone Group.

As per Bharti Infratel, the merger scheme would become effective on the date on which a certified copy of the order of the NCLT is filed with the RoC. It added that the effective date would be communicated to the stock exchanges for further public dissemination as and when the scheme becomes effective.

Synergy realisations

When the Bharti Infratel-Indus Towers merger was announced in 2018, there were two key synergies – saving of the dividend distribution tax (DDT) and greater economies of scale. Earlier, Bharti Infratel had stated that the merged entity would save close to Rs 5.6 billion annually of which Rs 5 billion would be due to the cascading impact of DDT. However, the new tax regime has dissolved the cascading impact on DDT, thereby reducing the benefits of the merger. Now, the completion of the merger is not expected to realise any financial benefit as against an annual benefit of Rs 5.6 billion estimated at the time of the merger announcement. Nonetheless, the two companies can still expect greater economies of scale from combining operations.

In terms of commercial synergies, the highly complementary footprints of the two towercos would enable the merged entity to continue supporting the delivery of services under various government initiatives such as Digital India.

The companies are also anticipating some operational synergies but have not quantified them at this stage. These include the benefits of scale for capex, both in terms of new tower roll-outs and tower maintenance; simplification of the organisational structure; as well as general and administrative cost efficiencies.

Meanwhile, the capex-related synergies owing to the merger could be volume discounts anticipated due to combined buying and savings on common investments such as IT, facilities like corporate headquarters and tower operating centre.

Outlining strategies

The combination of the two companies’ highly complementary tower footprints will create a towerco that would have the ability to offer high quality shared passive infrastructure services needed to support the pan-India expansion of wireless broadband services using 4G/4G+/5G technologies thereby benefiting consumers and businesses. Further, the merged entity would be well placed to offer services to all telecom operators on a non-discriminatory basis and invest on a national level for satisfying the sustained data traffic growth and rolling out new network technologies as operators continue to densify their networks. This would end up creating substantial value for all stakeholders.

Moreover, the merged entity would be able to offer high quality passive infrastructure services, thereby supporting the delivery of services under government initiatives. For instance, currently Bharti Infratel and Indus Towers are a part of smart city initiatives as separate entities. However, post the merger, the two companies would be able to bid together for smart city initiatives and take advantage of their combined synergy.

Recognising these opportunities, Bharti Infratel has outlined a five-pronged strategy for the merged entity. These include promoting tower sharing, achieving cost efficiencies across tower portfolios, increasing revenue and capital productivity, leveraging organic growth and acquisition opportunities, and capitalising on opportunities related to data growth as well as government initiatives such as Digital India and the Smart Cities Mission.

Impact on VIL and Airtel

The completion of the merger seems to be good news for Bharti Airtel as it will allow the telco to better monetise its stake in the merged entity in the near future.

However, VIL seems to be on the losing side. As per industry experts, the delay in the merger has cost VIL close to Rs 25 billion. This is because of the sharp fall in share prices of Bharti Infratel. When the merger was announced, VIL was supposed to get Rs 65 billion for its 11.15 per cent stake in Indus Towers, while now it will be getting only Rs 40 billion.

Meanwhile, VIL has announced that it is planning to seek its shareholders’ approval for a 10-year MSA with Indus Towers and Bharti Infratel for renting mobile sites across India. The move is one among various avenues that the operator is exploring for raising additional funds to ensure adequate cash flow for its ongoing operations.

What lies ahead?

Net, net, the Bharti Infratel-Indus Towers merger would play a big role in putting India on the global map by forming a telecom tower behemoth that would be counted among the world’s largest ones. Some brokerage firms are of the opinion that having a bigger tent to attract tenants would prove to be the most important element of this merger. While the number of private telcos in the Indian market has reduced to three, indicating a moderate growth in new tenancies, there are other new avenues that would help the merged entity garner revenues. For one, the new entity can prove to be a strong support to operators as they transition towards new technologies such as 5G. It can also explore emerging growth areas such as in-building solutions and public Wi-Fi especially in the wake of the Covid-19 crisis when work-from-home has become the new norm. The merged entity can also play a bigger and vital role in key government programmes and help the country chart a growth path in the digital domain.

By Kuhu Singh Abbhi