UK’s Vodafone is looking to combine its stake in Indus Towers, India’s largest tower company, with Bharti Infratel, the tower arm of market leader Bharti Airtel, on the basis of $5 bln valuation for its asset, the Economic Times reported, quoting unnamed sources.

The move would seem to indicate an upcoming merger of Indus Towers and Bharti Airtel, which would then house the remaining tower assets of all the three companies — Bharti Airtel, Vodafone and Idea Cellular.

It is also likely that Bharti Airtel and Vodafone-Idea would own equal stakes in this combined entity, thus bringing back the original equilibrium of power between all the stakeholders.

Indus Towers, which has around 1.25 lakh towers, was conceived of as a balanced partnership between the three operators with a 42% stakes for Bharti and Vodafone, and the remaining 16% for Idea.

The balance was supposed to keep the tower company from favoring any operator over its partners. However, with the Vodafone and Idea merging, the balance was under threat as the new company would end up with 58% against Bharti’s 42%, giving it significant control over Indus Towers.

However, merging Bharti Infratel — which has a market valuation of $10 bln — with Indus Towers, which has a market valuation of $11.9 bln (according to the ET article), would allow both Bharti and Vodafone-Idea to retain an equal ownership.

It should be noted that Bharti Airtel’s 42% stake in Indus is held via Bharti Infratel, and therefore, Infratel’s $10 bln valuation includes the $5 bln valuation for the 42% stake in Indus that it owns.

THREE-WAY SPLIT AGAIN?

At present, Bharti Airtel and co-promoter Nettle Infrastructure, have a 53.5% stake in Bharti Infratel. Given the $10 bln market capitalization of Infratel, this would value Airtel’s stake in the company at $5.35 bln, and that of public shareholders at $4.65 bln.

Similarly, if Vodafone is valuing its 42% stake in Indus Towers at $5 bln, then the value of the combined stake of Vodafone and Idea (58%) will be $6.9 bln.

Merging all the stakes together in one company would create a new entity with a combined equity valuation of $16.9 bln. Within this, $5.35 bln worth of shares would accure to Airtel, $4.65 bln to the public shareholders of Infratel and $6.9 bln to Vodafone-Idea.

However, as the Economic Times article pointed out, Vodafone and Idea’s valuation of their stakes in Indus Towers may have to be revised downwards if they are to be allowed to shut down its towers without penalty.

According to the article, Vodafone and Idea have around 50,000 rentals on Indus Towers that can be got rid of as part of their ongoing merger.

Given that this is a significant part of the 3 lakh total rentals (or tenancies) on Indus Towers, this would require Vodafone and Idea to pay thousands of crores of rupees by way of penalties to Indus Towers.

If paid in full, 42% of this penalty would ultimately end up with Bharti Infratel (which is the holding company for Bharti’s 42% stake in Indus), while 58% will go back to Vodafone-Idea.

In other words, it can be seen as Vodafone-Idea paying 42% of the actual penalties to Bharti Infratel.

This money can then be used by Bharti Infratel to increase its stake in Indus before the merger.

Better yet, Vodafone-Idea can settle for a discount on the value of its stake in Indus Towers in exchange for a waiver on the penalties. Such a discount would then bring the value of its stake down to the same ballpark as that of Bharti Airtel’s ($5.35 bln).

This would then pave the way for both Bharti Airtel and Vodafone-Idea ending up with an equal stake in an entity formed from the merger of Bharti Infratel and Indus Towers.

In other words, instead of a three-way arrangement between the three operators in the form of Indus, a merger would result in a three-way arrangement between Bharti, Vodafone-Idea and the public shareholders of Bharti Infratel.

In this new merged tower company, Bharti and Vodafone-Idea could end up with a stake of around 35% each, and the public shareholders of Bharti Infratel would end up holding the remaining 30%.

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