Delays have dangerous ends, said William Shakespeare. The long delay in the merger of Indus Towers Ltd and Bharti Infratel Ltd is resulting in trouble, with a news report in Business Standard suggesting shareholders of the two companies aren’t seeing eye to eye.
When the merger was announced in April 2018, the two companies had said that the merger was expected to be completed by March 2019. But it has received regulatory approval only this month, and the two companies have extended the long stop date on the original agreement to 24 April 2020. Companies include a long stop date in preliminary merger agreements so that they can walk away if a delay makes the deal unfeasible for either the buyer or the seller.
From the looks of it, Bharti Infratel’s majority shareholders are likely to act pricey. To start with, as the chart shows, Indus Towers’ operating profits have fallen by about 12% since the merger was announced. Bharti Infratel’s profits have been intact during the same period.
“Indus has seen a higher impact from Vodafone Idea Ltd’s tenancy exits,” IIFL Securities Ltd said in a note. According to an analyst at a domestic institutional brokerage firm, Infratel has been able to offset the drop in tenancy ratios thanks to exit penalties levied on telcos who reduced tenancies. Note that after the Vodafone-Idea merger, tenancies were reduced by the merged telco to avoid duplication and reduce costs. While Bharti Infratel’s total tenancies fell by 13.9% in the December 2019 quarter, compared to the March 2018 quarter, Indus Towers’ tenancies fell by 16.3%.
A renegotiation in terms will be a double blow for Vodafone Idea, which owns an 11.15% stake in Indus Towers. In July, the company had said it expects to receive ₹5,630 crore in exchange for its stake in Indus Towers, based on a formula involving the average traded price of Bharti Infratel shares. But Bharti Infratel shares have fallen by over 20% since, which means Vodafone Idea will need to settle for a lower price for its stake in any case. A renegotiation will only make things worse.
The outlook on tenancies isn’t very bright either. Liquidity constraints are weighing on network investments by Vodafone Idea, a major customer.
“Though Vodafone Idea may be rescued, our calculations suggest that for Vodafone Idea to remain competitive, it needs industry average revenue per user to more than double in three years even after assuming AGR liability. Hence, Vodafone Idea faces an uphill task which poses risks to Indus’ tenancies,” add IIFL Securities’ analysts. AGR is adjusted gross revenue. Of course, the worst-case scenario would be if the massive AGR liability sinks Vodafone Idea, which will materially change the business prospects for both tower companies.
In the changed circumstances, it’s but natural that the original terms of the merger may be revisited.
