Bharti Infratel Ltd’s decision to extend the long stop date of its proposed merger with Indus Towers Ltd again does not come as a surprise. The stock lost less than 1% on Thursday. What’s more, the management commentary and delay in approvals is leading to the belief that the merger may be called off eventually. Bharti Infratel has said the merger is contingent upon receipt of requisite regulatory approvals and there can be no assurance that the merger can be completed in the extended time-frame. “Considering it has been challenging to secure merger-related permissions over the past 18-20 months, we believe Bharti Infratel could call-off the merger," analysts at Edelweiss Securities Ltd said in a note.
The impact will be felt by the key shareholders of both the companies - Bharti Airtel Ltd and Vodafone Idea Ltd. More so by Vodafone Idea as the company is banking on selling its stake in the combined entity to raise funds for its India mobile services business. For Bharti Infratel, which also holds stake in Indus Towers, the opportunity to enhance its financial returns through better management of taxes as a combined entity (however meager these benefits are) will be lost. Importantly, the merger would have created a large telecom tower firm that would have made it easier to raise fresh funds or sell stakes to new investors, says an analyst at a domestic broking firm.
Of course, given the state of the Indian telecom industry, investors are broadly shying away from the domestic telecom industry. The Bharti Infratel stock has been a laggard, losing about 30% of its value in the last two years. The concerns are not unfounded. Exit of small telecom companies from Indian market and consolidation of Vodafone India Ltd with Idea Cellular Ltd has significantly impacted Bharti Infratel’s tenancies. Total co-locations or the total antennas deployed by the telecom service providers dropped one-fifth (21%) from 2.2 lakh in Q2FY18 to 1.7 lakh in Q2FY20. Tenancy ratio or the occupancy (antennas) on the company’s towers dropped from 2.42 to 1.86 during the time. Agreed, the company’s recent quarterly results show signs of stabilization. But analysts are not seeing an immediate revival. The cash strapped Vodafone Idea, a large customer, is not in a situation to aggressively incur network investments.
Of late, Vodafone Idea’s focus is optimizing investments in the key revenue generating regions instead of blanket network upgrading. The company is losing subscribers and continuous pressure on operating earnings means a substantial expansion in tenancies in the near term can be ruled out. “Even as the recent developments in the wireless sector increase the likelihood of a three-player market structure sustaining, Vodafone Idea getting back into a meaningful network expansion phase would need a lot more. Reliance Jio and Bharti Airtel have both indicated that they are past their peak 4G capex phase," analysts at Kotak Institutional Equities Research said in a note.
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