Here is a compilation of what brokerages have to say about the development:
KOTAK INSTITUTIONAL EQUITIES
The Indian wireless market is getting close to becoming a consolidated 3-player market (plus the government-owned BSNL/MTNL). Positives of consolidation, however modest in comparison to the negatives of market disruption witnessed in the past 12-15 months, have started emerging and should start mitigating some of the negatives, even if those continue at the current levels.
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The writing is on the wall for the current challenger set. Telenor and TTSL / TTML transaction contours clearly suggest that there is no ‘painless or less-pain’ exit available to these players anymore – either the promoter groups take the pain (like Telenor and Tatas are taking) or the lenders and creditors do (likely in case of RCOM).
The on-paper high MTM values of liberalized spectrum mean little as there is no liquidity in the market at those prices; secondary market for spectrum is now firmly a buyers’ market. Bharti and Jio are in a pole position to benefit from this, in our view.
We upgrade Bharti to ADD from REDUCE with a revised target price of ?470/share (from ?430) as we bake in (1) upside from the two value-accretive acquisitions (Telenor and TTSL’s wireless business) and (2) negative impact of the recent cut in mobile termination rates. The deal with TTSL is a sweet one for Bharti and the deal contours are a validation of the consolidation positives of Jio-led market disruption.
The deal reflects the diminishing bargaining power of sellers in the ongoing telecom sector consolidation. We understand that TTSL remains loss-making at EBITDA level, which could be largely due to sub-optimal network utilisation having network cost at 30-35% (~50,000 cell sites and a bloated fixed-cost structure). Assuming Bharti Airtel
would lose 25% market share due to the potential CDMA shutdown and the loss of second SIM usage (of TTSL), our workings indicate that it can potentially garner 45% EBITDA margin.
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We believe the deal is significantly in favor of Bharti Airtel
for two reasons: (1) Improvement in the revenue market share should translate into strong EBITDA contribution on the back of operating synergies; and (2) It should strengthen BHARTI’s 2,100mhz and 1,800mhz spectrum portfolio in the key circles.
We have not factored in the upside from the deal as we await further clarity. We remain positive on Bharti with an SOTP-based target price of Rs 470, valuing India wireless and Africa operations at EV/EBITDA of 9x and 4x, respectively.
Though the transaction is not significant from the financial point of view for Airtel, it bolsters its leadership position through acquisition of customers, spectrum & fiber and provides additional muscle to combat competition from Jio. We foresee the acquisition to be earnings accretive post integration besides improving its subscriber and revenue market share by 300-400bps narrowing the gap with Vodafone-Idea combined. We view the acquisition as positive.