India’s oldest private telecom operator – Bharti Airtel Ltd. – yesterday decided to buy back the shares in its DTH business which was once sold to a private equity investor. In an announcement to the exchanges, the company said:
A full control and ownership over Bharti Telemedia (DTH) allows Airtel to offer differentiated and converged solutions to customers so as to promote “One Home” strategy.
Being invested in this company for close to about 18 months, we are not only surprised by the timing of this acquisition, but it also raises a lot more questions.
Deal Contours
The company said it will acquire a 20% stake in its DTH business from Warburg Pincus for ₹ 3,126-3,226 crore. It will do so by issuing 3.7 crore shares (which will lead to a dilution of 0.7%) at ₹ 600 each and will pay cash of ₹ 938-1,038 crore based on book closing adjustments as of March 31, 2021.
In 2017, Bharti Airtel along with the promoter entity had sold this 20% stake to Warburg Pincus for ₹ 2,260 crore. The transaction provides Warburg Pincus an exit and a healthy return of 38-43% over a 2.5-year holding period (the deal was completed in August 2018 but announced in December 2017).
The valuations of this deal seem reasonable.
The company has also formed a committee to reorganise the company structure with a sharper focus on digital & non-telecom businesses to enable value unlocking.
Doubtful Moves In Past
#1
Back in Q1 and Q3 FY20, the company paid close to ₹ 4,200 crore pertaining to certain indemnities offered to pre-IPO investors in Airtel Africa IPO. The issue prospectus was not available to investors sitting in India and the company’s annual report had a reference to this but a not-so-clear one without much in terms of details on the backdrop, scope, or magnitude. Also, these indemnities were, of course, not disclosed at the time of the pre-IPO equity raise.
The company back then had received close to ₹ 10,300 crore in investment from pre-IPO investors for Airtel Africa, which implied that nearly 41% of investment was returned in cash.
#2
A few months back Bharti Airtel bought close to a 5% stake in the tower business – Indus Towers Ltd. The company had spent close to ₹ 2,900 crore for the same. This investment caught us by surprise as, since Bharti Infratel’s (now known as Indus Towers) listing in 2012, Bharti Airtel has been steadily reducing its stake to deleverage its balance sheet. There was an expectation that Bharti could sell a further stake to create reserves to participate in the upcoming spectrum auctions.
This investment could financially only be justified because of the attractive 6-7% dividend yields it offers. However, the sustainability of these yields is dependent on the survival of the Vodafone Idea in its current form. Given the continued market share loss by Vodafone Idea to Bharti Airtel and Reliance Jio, its going concern risk hasn’t receded.
Questions
- In the past 3 months, the company has spent close to ₹ 6,100 crore (cash outflow is ₹ 3,900 crore) on increasing its stake in the tower and DTH business. As there was no compulsion for Bharti Airtel to buy these stakes, why did the company not choose to spend this amount on acquiring spectrums in the upcoming auction or for deleveraging?
- Bharti Airtel’s investment in Bharti Telemedia (DTH) is difficult to justify. In our view, the DTH market offers limited growth given the high TV penetration in India. Moreover, with the risk of digital disruption, the outlook for the DTH industry continues to remain weak. On the other hand, the home broadband business, which is currently witnessing sharp growth, wouldn’t the company be better off by investing the amount there?
- In past, the company disposed of stakes in these companies as its intent was to focus more on its core telecom business, monetisation of assets, value unlocking, and deleveraging. As the company has now again bought a stake in these companies, does this mean its earlier stated intent has changed?
- Bharti Airtel has a net debt of ₹ 1,15,000 crore, which will increase by around ₹ 1,000 crore due to the DTH transaction and further due to the upcoming spectrum auction. The average cost of borrowing turns out to be close to 12.7%. Is the company comfortable with this as most of the other companies in India are focusing on deleveraging?
- Airtel owned a majority stake in DTH business (80%). So how would a 20% increase in stake help reorganise its shareholding and help the company offer “differentiated and converged solutions” to promote the “One Home” strategy?
- Generally, any kind of acquisition, be it small or big, should add value to the current business. At this point, we are unable to understand what these recent acquisitions bring to the table for Bharti Airtel or how does it make Bharti Airtel better than what it was earlier?
Bharti Airtel has generally set the highest standards on corporate governance and disclosures. However, we were a little disappointed with the indemnity-related disclosures and are a little disappointed with the current acquisitions as we believe that they do not make any business sense for the company.
Along with the business performance of the core telecom business (key driving factor for the share price), we will be closely watching on any further disclosures regarding the recent acquisitions, deleveraging plans, spectrum purchases and its plan to now grow the DTH business as it has full control and ownership.
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