Airtel's Africa arm gets $1.25 bn from 6 investors, IPO to follow

This will enable the telecom major to cut its consolidated debt by 8% and reduce its annual interest outgo

Bharti Airtel announced it was getting six marquee investors to put a total of $1.25 billion in its fully-owned subsidiary, Airtel Africa. 

This will be through the issue of new equity, followed soon by an Initial Public Offer (IPO) on the international stock exchange.  

This will enable the telecom major to cut the consolidated debt by eight per cent and reduce its annual interest outgo, estimated by analysts at Rs 10 billion, says ICICI Securities. This will strengthen the company as it takes on its chief rival, Reliance Jio, in the Indian market.   

Understandably, the market gave the stock a big thumbs-up. The scrip closed nearly nine per cent higher at Rs 311.55. 

The six investors include Warburg Pincus, an earlier investor in Bharti, Temasek, existing partner Singtel (which has invested $250 million) and SoftBank International. With this deal, Bharti Airtel's stake in the company will go down from 100 per cent to 71 per cent. 

Bharti's consolidated debt is $15 billion (Rs 1.1 trillion), of which $7 billion is on the books of the Africa operations. With the deal, its ratio of net debt to operating earnings (Ebitda) will fall from 3.6 to 3.3. The company has also set a floor price for the future IPO. Even assuming it offers a conservative 10 per cent stake in the company through the IPO, say analysts, this should reduce the debt further by around $900 million (Rs 66 billion), based on its current enterprise value, after the deal of $9.4 billion, as estimated by Credit Suisse. 

According to ICICI Securities, the company has a refinance obligation of Rs 260 billion in 2018-19, of which it refinanced Rs 84 billion through euro bonds this month. With the extra debt reduction from the Africa deal, it says, the refinance obligations will significantly reduce.

Going ahead  

Raghunath Mandava, the Africa managing director for Bharti, said: "This primary equity issuance clearly underlines the confidence of leading global investors in Airtel Africa's successful business strategy and its potential to sustain growth and profitability. The transaction will help us further deleverage our balance sheet and boost our capacity to upgrade networks, expand coverage in different markets and achieve rapid growth of Airtel Money across our operations."

Airtel has been trying to reduce its debt by issuing of equity and monetising of assets. It needs cash to invest for maintaining the revenue market share against Jio's onslaught. For instance, it recently sold a 20 per cent stake in its direct-to-home business for $350 million. With the proposed merger of tower company Indus Towers with Bharti Infratel, it will have a 35-36 per cent stake in the company, which could again be monetised. Analysts say the valuation of this entity is around $15 billion, which means Bharti could raise $5.4 billion if it plans to sell the entire stake, though that would be unlikely. It also has the potential to monetise its fibre network to raise cash if required.

Airtel needs to make large investments for not only expanding its fourth-generation technology (4G) network, where Jio is far ahead, it is also required for a fibre-to-home network, where the recent acquisition by Jio of Hathway and Den Networks has given it a huge edge over Airtel. The company also needs to put in money for converting its tower backhaul from microwave to fibre, where again Jio is entrenched. 

That is why the company is investing $4 billion (Rs 295 billion) this year for capital investment. Analysts estimate it will have to put in a similar amount of cash for the next two years.

Analysts are unsure of the recent deal's impact on the company's Indian business. Credit Suisse says it continues to remain cautious on this as there is no let-down in competitive aggression from Jio. Deutsche Bank does think the deal is positive for Bharti and Singtel but Jefferies says challenges in the India business will continue in the near term and that the valuation of the Africa business is below their expectation.