The $14.5 billion (Rs 96,773 crore) union between Bharti Infratel and Indus Towers will improve the capital structure of the combined entity and make dividend outgo more tax efficient, according to analysts.
The deal will also potentially improve long-term tenancy visibility from Idea-Vodafone. For Idea, its stake in Indus can now be monetised, which is a positive given its high leverage, analyst firm Citi Research said in a note on Thursday.
Bharti Infratel and Indus on Wednesday announced a merger to create world's second-largest tower company with 163,000 towers across India with an enterprise value of $10 billion and equity value of $14.5 billion. The entity will be called Indus Towers and will remain listed on Indian exchanges.
Another note by Jefferies said there could be some capex synergies based on the scale. "The key saving will be in the form of dividend distribution tax (DDT) which currently Indus pays to Infratel." Bharti Infratel is the majority shareholder in Indus with 42% stake.
At present, Indus pays total DDT of around Rs 500 crore annually, of which 42% is taxed again. "The savings will then be of around Rs 210 crore," Jefferies said.
Also, post-merger, Indus will have net debt of $0.8 billion, assuming Idea and Providence opt for cash, and a net debt to Ebitda (earnings before interest, tax, dividend and amortisation) of 0.5x, Jefferies note said.
Bharti Airtel, the majority shareholder in Bharti Infratel, on Wednesday said it plans to engage with potential investors to evaluate a stake sale in the combined entity, bringing down its shareholding to 33.8-37.2%.
Shareholders of Indus - Bharti Infratel, Vodafone, Idea and private equity (PE) firm Providence - will receive 1,565 shares of Bharti Infratel for every share held.
In return for its 42% stake in Indus Towers, Vodafone will get between 26.7% and 29.4% of the Indus-Bharti Infratel combine, depending on the options two other shareholders in Indus - Idea and PE firm Providence – exercise.
Idea has an option to sell its 11.2% stake in Indus for about $1 billion or receive new shares in the combined company. Providence has the option to receive cash or shares for 3.35% of its 4.85% holding in Indus, with the remainder exchanged for shares in the combined tower firm.
Bharti Airtel and Vodafone will have equal rights in the combined company and the deal is expected to close the end of this fiscal.
Vodafone and Idea Cellular are in the process of merging and both the companies have already sold the towers managed outside Indus, worth Rs 1,200 crore. Bharti has also sold 18.5% stake in Infratel for around $1.8 billion over the last 24 months.
Fitch Ratings said that it expects some of the largest shareholders in the combined tower entity to sell their stakes, or divest them entirely, following the merger. "The merged entity will benefit from some economies of scale and will not face cash leakage through the dividend distribution tax, which is currently paid when Indus distributes dividends."
Beyond the short-term, price competition in the Indian telecom market is expected to ease following the emergence of three large telcos – Bharti Airtel, Reliance Jio and the Vodafone-Idea combine. Also, industry revenue growth is expected to be in the mid-single-digits in 2018, following a decline in 2017.
