TELECOM SECTOR CONSOLIDATION: INDUS TOWER MERGES WITH BHARTI INFRATEL

NEW DELHI, APRIL 25, 2018: Sunil Bharti Mittal-led Bharti Airtel has announced merger of Indus Towers with its tower arm Bharti Infratel, creating a pan-India tower company with over 1.63-lakh towers across 22 telecom circles.

“The board evaluated two options — one an offer for sale of significant stake in Bharti Infratel from a consortium of leading PE investors and the other a proposal for merger of Indus Towers into Bharti Infratel. The Board after due deliberations approved the proposal for merger of Indus Towers into Bharti Infratel,” said Bharti Airtel in a statement.


KEY HIGHLIGHTS 

The combined company, to be the largest tower company in the world outside China, will fully own the respective businesses of Bharti Infratel and Indus Towers, will change its name to Indus Towers Limited and continue to be listed on the Indian Stock Exchanges.

The combination of the two companies’ highly complementary footprints will create a tower operator with the ability to offer the high quality shared passive infrastructure services needed to support the pan-India expansion of wireless broadband services using 4G/4G+/5G technologies for the benefit of Indian consumers and businesses. The combined company will continue to offer high quality passive infrastructure services to all telecom operators on a non-discriminatory basis, thus helping to support the delivery of the Government of India’s vision of ‘Digital India’.

The merger ratio (1,565 shares of Bharti Infratel for every 1 Indus Towers share, the “Merger Ratio”) is within the range recommended by the independent valuer. The transaction values Indus Towers at an enterprise value of INR715bn (US$10.8bn) or 9.3x EV/LTM EBITDA.

Idea Group has the option to either: (i) sell its 11.15% shareholding in Indus Towers for cash based on valuation formula linked to the VWAP for BhartiInfratel’s shares during the 60 trading days prior to completion of the merger, which, if calculated at the time of this announcement, would equate to a cash consideration of INR65bn (US$1.0bn), or alternatively, (ii) receive new shares in the combined company based on the Merger Ratio. All the proceeds from the sale of the 11.15% stake will be for the benefit of the entity resulting from the merger of Vodafone India and Idea Group.

Providence has the option to elect to receive cash or shares for 3.35% of its 4.85% shareholding in Indus Towers, with the balance exchanged for shares.

Vodafone will be issued with 783.1m new shares in the combined company, in exchange for its 42% shareholding in Indus Towers. On the basis that (a) Providence decides to sell 3.35% of its 4.85% shareholding in Indus Towers for cash, and (b) Idea Group decides to sell its full 11.15% shareholding in Indus Towers for cash, these shares would be equivalent to a 29.4% shareholding in the combined company. The Transaction values Vodafone’s shareholding at INR284bn (US$4.3bn).

On the basis that (a) Providence decides to sell 3.35% of its 4.85% shareholding in Indus Towers for cash, and (b) Idea Group decides to sell its full 11.15% shareholding in Indus Towers for cash, Bharti Airtel’s shareholding will be diluted from 53.5% in Bharti Infratel today to 37.2% in the combined company.

Pro forma for the Transaction, the combined company’s equity value would be INR965bn (US$14.6bn).

The final number of shares issued to Vodafone and the cash paid or shares issued to Idea Group and Providence, will be subject to closing adjustments, including but not limited to movements in net debt and working capital for Bharti Infratel and Indus Towers.

Bharti Airtel and Vodafone will jointly control the combined company, in accordance with the terms of a new shareholders’ agreement.

The transaction is conditional on regulatory and other approvals, including from CCI, SEBI, NCLT, DoT (FDI approval), and is expected to close before the end of the financial year ending 31 March 2019.


TRANSACTION DETAILS

Bharti Airtel Limited (NSE:BHARTI) (“Bharti Airtel”), Idea Cellular Limited (NSE:IDEA) (along with its subsidiary ABTL, “Idea Group”) and Vodafone Group Plc (LSE:VOD) (“Vodafone”) today announce that they have agreed to merge Vodafone’s, Idea Group’s and Providence Equity Partners’ (“Providence”) respective shareholdings in Indus Towers Limited (“Indus Towers”) into Bharti Infratel Limited (NSE:INFRATEL) (“Bharti Infratel”), creating a combined company that will own 100% of Indus Towers (the “Transaction”).

Indus Towers is currently jointly owned by Bharti Infratel (42%), Vodafone (42%), Idea Group (11.15%) and Providence (4.85%).

The transaction will be structured as follows:

a)      Indus Towers will be merged with and into Bharti Infratel through a scheme of arrangement.

b)      The Merger Ratio of 1,565 shares of Bharti Infratel for every 1 Indus Towers share is within the range recommended by the independent valuer. Based on the SEBI pricing guidelines for Bharti Infratel, in relation to the proposed scheme, as at 23 April 2018 (INR363 per share), the Merger Ratio implies an enterprise value for Indus Towers of INR715bn (US$10.8bn). This is equivalent to valuing Indus Towers at 9.3x EV/LTM EBITDA.

c)      It is intended that Idea Group will sell its 11.15% shareholding for cash concurrent with completion of the Scheme. The cash consideration payable by Bharti Infratel will be based on a formula linked to Bharti Infratel’s VWAP for the 60 trading day period prior to completion of the merger. Based on Bharti Infratel’s VWAP during the last 60 trading days prior to the date of this announcement, this would equate to a cash consideration of INR65bn (US$1.0bn). In lieu of cash, Idea Group will be able to elect to be issued with 207.9m new shares, based on the Merger Ratio. This would be equivalent to a 7.1% shareholding in the combined company, on the basis that Providence also elects to receive new shares in exchange for its full 4.85% shareholding in Indus Towers. All the proceeds from the sale of the 11.15% stake will be for the benefit of the entity resulting from the merger of Vodafone India and Idea Group.

d)     Providence will receive new shares equivalent to a 1.1% shareholding in the combined company in exchange for 1.5% out of its 4.85% shareholding in Indus Towers. The consideration for the remaining 3.35% of its shareholding in Indus Towers will be settled by Bharti Infratel in cash or shares at Providence’s election. The valuation terms of the cash consideration will be identical to that for Idea Group and the valuation terms for the share consideration will be based on the Merger Ratio.

e)      Vodafone will be issued with 783.1m new shares in the combined company, in exchange for its 42% shareholding in Indus Towers. On the basis that (a) Providence decides to sell 3.35% of its 4.85% shareholding in Indus Towers for cash, and (b) Idea Group decides to sell its full 11.15% shareholding in Indus Towers for cash, these shares would be equivalent to a 29.4% shareholding in the combined company. The Transaction values Vodafone’s shareholding at INR284bn (US$4.3bn).

f)       On the basis that (i) Providence decides to sell 3.35% out of its 4.85% shareholding in Indus Towers for cash, and (ii) Idea Group decides to sell its full 11.15% shareholding in Indus Towers for cash, Bharti Airtel’s shareholding will be diluted from 53.5% in Bharti Infratel today to 37.2% in the combined company.

g)      The final number of shares issued to Vodafone and the cash paid or shares issued to Idea Group and Providence, will be subject to closing adjustments, including but not limited to movements in net debt and working capital for Bharti Infratel and Indus Towers.


STRATEGIC COMBINATION

Indus Towers currently operates in 15 telecom service areas (“Circles”) and Bharti Infratel’s operations are focused on the remaining 7 Circles. The combination of Bharti Infratel and Indus Towers, with their highly complementary footprints, will create a pan-India tower company with the ability to offer high quality passive infrastructure services to all operators on a non-discriminatory basis, needed to support the pan-India expansion of wireless broadband services using 4G/4G+/5G technologies.

Taken together, Bharti Infratel and Indus Towers had over 163,000 towers and 367,000 tenancies as at 31 March 2018. With over INR253bn (US$3.8bn) in revenues (for the financial year ended 31 March 2018), the combined company will be well placed to invest on a national basis to satisfy the future demand from all telecoms operators in India as they continue to densify their networks to support sustained data traffic growth and roll out new network technologies. The merger of Bharti Infratel and Indus Towers is founded on a shared commitment to realise the Government of India’s ‘Digital India’ vision, delivering significant benefits to 1.3bn Indian consumers and creating substantial value for all stakeholders.

Operational synergies are also anticipated but have not been quantified at this stage. They include

 i.            Benefits of scale for capex, both in terms of new tower roll-out and tower maintenance;

 ii.            Simplification of the organisational structure; and

iii.            General and administrative cost efficiencies.

Joint governance and management

Bharti Airtel and Vodafone will have equal rights in the combined company. They have entered into a shareholders’ agreement and it is expected that the combined company’s articles of association will be amended at completion to reflect some of these rights.

Following completion, the Board of the combined company will comprise of 11 directors, of whom three will be appointed by each of Bharti Airtel and Vodafone, one will be appointed by KKR/Canada Pension Plan Investment Board and four (including the Chairman) will be independent. The management team will be confirmed prior to closing.

None of Bharti Airtel, Vodafone or Idea Group (if it elects to receive shares), will be subject to a lock-in on their shareholdings in the combined company.

After completion, the combined company will be accounted for under the equity method by Vodafone and Bharti Airtel.

Capital structure and dividend policy

It is intended that any cash consideration paid to Idea Group and/or Providence will be financed through new debt facilities and the existing cash resources of Bharti Infratel. On the basis that Idea Group and Providence elect to receive the maximum possible cash consideration, the pro forma net debt of the combined company would have been INR56bn (US$0.8bn) as at 31 March 2018. This is equivalent to 0.5x net debt/LTM EBITDA.

Pro forma for the Transaction, the combined company’s equity value would be INR965bn (US$14.6bn), based on the SEBI pricing guidelines for Bharti Infratel in relation to the proposed scheme, as at 23 April 2018 (INR363 per share).

Bharti Airtel and Vodafone have agreed a capital structure and dividend policy which is expected to be implemented post completion. The combined company is expected to distribute any excess cash flow to its shareholders through dividends or share buybacks, without exceeding a maximum leverage ratio of 3.0x LTM EBITDA.

Conditions to completion and indicative timetable

The transaction is subject to approvals from the relevant regulatory authorities, including from CCI, SEBI, NCLT, DoT (FDI approval), approval from Bharti Infratel’s shareholders, necessary corporate approvals from the companies involved, as well as closing conditions. The transaction is expected to complete before the end of the financial year ending 31 March 2019.


KPIs and key financials of Bharti Infratel, Indus Towers and the combined company

12 months ending 31 March 2018

INRm (US$m)

Bharti Infratel (excl. its 42% share of Indus Towers)

Indus Towers (100%)

Combined company

Towers

39,523

123,639

163,162

Tenancies

88,665

278,408

367,073

Tenancy Ratio

2.24x

2.25x

2.25x

 

 

 

 

Revenue

INR66,180m (US$999m)

INR187,424m (US$2,830m)

INR253,604m (US$3,830m)

EBITDA

INR31,854m (US$481m)

INR77,160m (US$1,165m)

INR109,014m (US$1,646m)

Capex

INR11,223m (US$169m)

INR24,730m (US$373m)

INR35,953m
(US$543m)

Net debt / (net cash)

(INR68,162m)
((US$1,029m))

INR39,176m
(US$592m)

INR55,595m
(US$840m)

 
Current shareholding structure of Bharti Infratel and Indus Towers

 

Bharti Infratel

Indus Towers

Bharti Airtel

53.5%

Bharti Infratel

n.a.

42.0%

Vodafone

42.0%

Idea Group

11.15%

Providence

4.85%

Public shareholders

46.5%

 
Indicative combined company shareholding structures

 

Idea Group (all cash election); Providence (1.5% in shares, 3.35% in cash)

Idea Group (all shares election); Providence (all shares election)

Idea Group cash election?

Yes

No

Providence cash election?

Yes

No

Bharti Airtel

37.2%

33.8%

Vodafone

29.4%

26.7%

Idea Group

7.1%

Providence

1.1%

3.1%

Public shareholders

32.3%

29.3%

 


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