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Bharti to acquire Vodafone Plc’s 4.7% equity stake in Indus – cash neutral for Bharti

Bharti announced that it will acquire Vodafone Plc’s 4.7% equity stake in Indus Towers. Without disclosing the price, the management indicated that it will be at a “significant discount”. Assuming INR200/share, this would imply INR25b of cost. The acquisition will raise Bharti’s stake to 46.4% at <5x EV/EBITDA on FY24E basis.

Chain of transaction; cash neutral for Bharti

Bharti’s INR25b investment to acquire Indus stake is based on the precondition that the amount paid to Vodafone Plc shall be infused as fresh equity in VIL. Subsequently, this amount will be used by VIL to clear its outstanding dues towards Indus. Indus, in turn, should use the amount to pay annual dividends. Assuming INR20/share dividend, Bharti should receive INR25b (including 4.7% stake). The transaction, thus, is cashflow neutral for Bharti and its existing FCF generation and deleveraging trajectory may not be disturbed. Indus will need INR54b (@ INR20/share) for dividend payment, of which, INR40b will be received through Vodafone Plc’s 7.1% stake sale remittance to Indus.

Why Bharti is raising its stake in Indus?

Through this transaction, Bharti plans to: a) strengthen its holding in Indus Towers that will secure steady services and protect its value in the company, and b) receive healthy dividends. Ironically, during the recent investor meet, Bharti’s senior management had categorically denied any possibility of buying an additional stake in Indus (as the previous 5% acquisition provided an additional Board seat implying enough control). Further, Indus’s outlook is dependent on VIL’s longterm viability, without which, Indus would lose estimated ~40% revenue causing significant EBITDA loss

Bharti may acquire further stake; Vodafone Plc ready to sell

Vodafone Plc has indicated its intention to sell-off the residual 21% stake in Indus, which could certainly create significant stock supply in the market. We believe Bharti may look to acquire additional 5% share, possibly to increase its stake beyond 50% and become the majority shareholder. This will safeguard Bharti’s holding in Indus, which offers it critical infrastructure. Interestingly, Bharti had acquired 4.94% stake in BHIN for INR28.8b (~INR217/share; raised its stake to 41.7% in BHIN) last fiscal (3QFY21). However, with the onset of 5G and possibility of increased capex, Bharti may require improvement in capital allocation.

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