How Bharti Infratel’s Stock Rout Pinched Vodafone Idea

Mounting debt and pending statutory dues are not the only bad news for Vodafone Idea Ltd. Since the Vodafone Group's Indian unit agreed to merge with Kumar Mangalam Birla-controlled Idea Cellular Ltd., the value of their stake in Indus Towers Ltd. has eroded by nearly a third.

That's because shares of Bharti Infratel Ltd.—controlled by Sunil Mittal's Bharti Airtel Ltd.— wiped off nearly 37 percent during the period. And the value of Vodafone Idea's 11.5 percent in Indus Towers is linked to Bharti Infratel's stock that reported its worst monthly fall since listing in October.

The merger agreement of Vodafone Idea, which jointly owns Indus Towers with Bharti Airtel, said it will monetise its holding in the tower operator. The proceeds from a potential stake sale is crucial as the operator is not only looking to reduce debt but also needs to pay close to Rs 28,309 crore to the government after the Supreme Court ordered to include non-core revenue for calculating levies. As of June 30, the company had cash worth Rs 21,180 crore but it's burning cash because of higher costs and capital expenditure.

As Indus Towers is an unlisted company, the Vodafone Idea merger terms said the equity value of the company will be derived using the enterprise value-to-Ebitda ratio of the listed Bharti Infratel.

According to Vodafone Idea merger terms:

• Earnings before interest, tax and depreciation and amortisation for both tower companies is fixed.
• Net debt will depend as and when the merger is completed
• 60-day volume weighted average of the Bharti Infratel's share price will be used for calculating its EV-to-Ebitda multiple.

Since the announcement of merger in April 2018, Bharti Infratel's shares have dropped by 37 percent. That, coupled with a rise in the net debt of Indus Towers and lower net cash balance of Bharti Infratel, led to a 31 percent erosion in Indus Towers' equity value.

The stock tumbled because of falling tenancies—operators putting antennas on its towers—and after the Supreme Court's ruling on adjusted gross revenue case as it's expected to weaken telecom operators' financials and could potentially lead to carriers cutting costs.

The two tower operators have also announced a merger but Bharti Infratel extended the long-stop date to complete the deal as the Department of Telecommunications is yet to approve the transaction.