Airtel’s stake buy-back in DTH arm from Warburg win-win for both: Analysts
The deal, they said, offers Warburg a healthy exit with a 40% return on its 2017 investment, while Bharti limits its cash outflow as it’s paying 70% by shares.
Brokerage Jefferies, though, has questioned Bharti Airtel’s strategic intent, saying the telco has spent around Rs 6,000 crore over the past three months by initially shelling out around Rs 2,900 crore to increase its stake in Indus Towers by 5% and now buying back the Warburg Pincus holding, money that could instead have been spent to buy around Rs 9,000-12,000 crore of 4G spectrum or even make investments in the digital space.
“We are surprised by this move as well as its timing, given the upcoming spectrum auctions as there was no compulsion for Bharti to buy its stake back from Warburg Pincus, which raises questions around its strategic intent,” Jefferies said in a note to clients.
The Airtel stock was down around nearly 1% in early afternoon trade at Rs 588.50 on BSE Thursday.
Last week, Airtel, Reliance Jio and Vodafone Idea filed applications with the Department of Telecommunications (DoT) to participate in the 4G spectrum sale, starting March 1. Nearly 2300 units of airwaves across seven bands – from 700 MHz to 2500 MHz – valued at Rs 3.92 lakh-crore at the base price will be up for sale. Airtel is believed to have deposited earnest money of around Rs 3,000 crore, which would allow it to buy 4G airwaves worth Rs 15,000-25,000 crore, say industry executives.
Sunil Mittal-led Airtel on Wednesday had said it would acquire Warburg Pincus affiliate, Lion Meadow Investment’s 20% stake in Bharti Telemedia, for around Rs 3,126 crore, which would be paid primarily by issuing around 36.47 million shares of the telco at Rs 600 a share, and up to Rs 1,037.8 crore in cash. It had added that the proposed preferential share issue would be subject to shareholders’ approval.
Back in December 2017, the Warburg Pincus affiliate had bought the 20% equity stake in Bharti Telemedia for $350 million, or over Rs 2,250 crore. Since it’s exiting at around $420 million, it will rake in 40% returns over a 2.5 year holding period, analysts said.
Analysts at CLSA said the stake buy-back from Warburg Pincus “is part of a larger Airtel strategy to align the shareholdings of its customer facing/digital businesses”. This, it said, is since the telco has constituted a special panel of directors to recommend steps for reorganising its businesses and shareholding structure for a sharper focus on its digital assets leading to potential value unlocking in the near future.
Kotak backed the view, saying buyback of the 20% stake from Warburg Pincus in the DTH business will make Bharti Telemedia a wholly-owned Airtel arm, and will, in turn, enable “Bharti to achieve structural flexibility, by aligning shareholding of its customer-facing businesses and also allowing it to offer converged solutions to customers as part of its ‘One Home’ strategy.
Airtel had nearly 18 million Digital TV customers and 2.8 million home broadband subscribers in the quarter ended December.
Last week, Bharti Airtel chairman Sunil Mittal had told ET that the telco, which has housed all its digital assets under the Airtel Digital unit, is discussing making it a parallel entity to the telco, opening up the option of monetising a separate asset in the future. He had added that the new structure could remove telecom regulatory overhang over Airtel Digital, which could even be listed in two-three years.
Airtel Digital houses the telco’s digital properties including Wynk Music, Thanks, Xstream, payments, and products such as Airtel IQ and Safe Pay, and employs more than 1,500 people, which is being scaled up rapidly. The combined digital service revenues of Airtel, which is currently at Rs 100 crore, is proposed to be scaled up to Rs 1,000 crore in a few years.
Analysts say the planned organisational rejig could potentially enable Airtel to attract big-ticket equity infusions from global tech players and private equity firms, who may be more interested to buy into a stabler, pure digital services business as the revenues would be ring-fenced from statutory pay-outs linked to adjusted gross revenue (AGR), such as licence fees and spectrum usage charge,” said a senior analyst at a leading global brokerage.
