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Event update: Bharti Infratel (Outperformer) - Merger with Indus Tower addresses an impending overhang

Infratel Indus merger finally announced: Merger ratio is 1,565 shares of Infratel for 1 share of Indus. Idea and Providence have an option to either sell their holdings for cash or hold on to the stake. Idea’s stake would be valued at US$1bn on post merged basis and likely Idea will cash out. Vodafone will be issued 783.1mn shares as part of this merger. Transaction is subject to regulatory approvals.

Transaction at a slight premium vs. our estimate: The transaction values Indus at Rs715bn, slightly ahead of our estimate of Rs650bn. The transaction implies an EV/EBITDA 9.3x LTM vs. Infratel which is trading at 8.5x trailing EBITDA. Merged entity has pro-forma EBITDA of Rs109bn, with Net debt of Rs55.5bn. Adjusting for the Indus dividend payout, the transaction is EPS accretive (14%- FY18) for Bharti Infratel.

Shareholding to be with Airtel and Vodafone - Vodafone will be issues 783.1mn shares, and the dilution for the Infratel shareholders is to the tune of 30%. This assumes that Idea (incl. Providence) decide to cash out. Post the transaction, Bharti Airtel will own 37.2% and Vodafone will own 29.4% in the merged entity.

Implications for operators: While the transaction removes an overhang on Bharti Infratel, we see this as positive read for incumbent operators. Voda-Idea merged entity getting cash infusion of US$1bn will be a positive and improve their balance sheet flexibility to undertake capex. Additionally, once the transaction is completed, it does open up balance sheet de-leveraging through stake of merged entity for Bharti Airtel.

Cleaner structure, savings of dividend distribution tax: The shareholders would have a liked to see a levered transaction as that would have corrected Infratel’s capital structure, in that sense share swap is bit of a dampener. That said, this results in cleaner holding structure and will also save shareholders leakage of Rs~5.5bn due to double counting of dividend distribution tax.EPS accretion will be near about 14%-15%.  Also on capital allocation, company will distribute excess cash flow through dividend and buybacks, without exceeding 3.0x net debt/ebitda (LTM). Retain Outperformer.