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MOSL: BHARTI INFRATEL (Neutral)-Indus merger to accentuate earnings pressure

Bharti Infratel: Indus merger to accentuate earnings pressure

(BHIN IN, Mkt Cap USD7.5b, CMP INR285, TP INR275, 4% Downside, Neutral)

 

Bharti Infratel hosted an analyst meet to discuss its merger with Indus and the way forward. Reiterating that its dominance in the tower space will continue post-merger, the company plans to focus on multiple new growth avenues. But, our discussions with peers and other market participants raised concerns on a new entrant’s ‘go solo’ strategy, prominence of in-building solutions (IBS), small cells and expansion of American Tower Corporation (ATC), which could be severely detrimental to the merged entity’s future growth prospects.

• Merger rationale: The merger will improve capital structure, ROE, EPS, remove holding company discount to Indus and drive group level operational synergies.
• Management believes that earnings have bottomed out and majority of site cancellations are behind; focus will now shift to new growth avenues. Management indicated that growth opportunities remain strong in macro site requirements, apart from new avenues like fiber sharing, small cells, IBS, wifi hotspot and smart cities.
• Focus on shareholder returns: All new growth avenues will be tapped provided they are not ROE dilutive, else the company will return excess cash to shareholders with an outer limit of 3x net debt to EBITDA.
• Weakening competitive position: Earlier, Right of First Refusal (ROFR) in all 23 circles from Vodafone-Idea stayed with Bharti Infratel. But, due to the sale of Vodafone and Idea’s independent towers to ATC and ROFR in seven out of 23 circles shifting to ATC, competitive position of BHIN-Indus will be diluted.