Bharti Telecom (BTL), the holding company of Bharti Airtel, has announced that it will consider a special resolution to provide an exit to its minority shareholders by extinguishing these shares via capital reduction. This offers shareholders a chance to exit from the company as it is no longer listed.
A special resolution requires the approval of 75% of the shareholders, which could easily have been achieved by Bharti and SingTel voting. However, BTL has, though not legally mandated to do so, decided to proceed ahead only with the nod of the majority of minority shareholders, following which it will approach the NCLT.
Bharti Telecom had delisted from the BSE in October 1999 with an exit offer of Rs95 per share for minority shareholders. It holds a 50.1% stake in Bharti Airtel.
The current offer price is based on valuing the shares of Bharti Airtel at Rs368 – which is its two-week VWAP as of May 31, 2018, after factoring in an illiquidity discount of 25% as determined by EY and a DDT rate of 20.55%.
In our view, the exit price of Rs163.25 per share (which together with the dividend distribution tax of Rs33.55 per share payable by the company on account of capital reduction amounts to Rs196.80 per share) is reasonable. If the minority shareholders would have sold the BTL shares in a bilateral trade, the same would have been subject to capital gain taxes.
|Offer price to minority shareholders (Rs/share)||163.25|
|Effective price per share (Rs)||196.80|
|Total shares of Bharti Telecom (cr)||261.07|
|Illiquidity discount (%)||25%|
|Equity Value of Bharti Telecom (in Rs cr)||68,497|
|Net debt of Bharti Telecom (in Rs cr)||5,251|
|Implied value of holdings of Bharti Airtel (in Rs cr)||73,747|
|Total shares held in Bharti Airtel (cr)||200.27|
|Implied share price for Bharti Airtel (Rs)||368|
The total outlay for BTL for this capital reduction is Rs560cr for a total of 2.84cr shares (1.09% of the total shares).
This current offer is not comparable to the preferential issuance done to SingTel in February earlier this year.
In February 2018, Bharti Telecom had allotted 85.45mn shares (1.73%) to SingTel through a preferential allotment at an effective price of Rs310 per share based on the then market share price of Bharti Airtel. Since then, telecom stocks have sold off strongly by ~30%, as the continued tariff war has significantly softened revenues and as well as materially reduced EBITDA margins.
Also, the nature of the transaction is meaningfully different as the transaction with SingTel was an issuance and is not comparable to a capital reduction. Further, the proceeds from that transaction went towards deleveraging the BTL balance sheet, which only aided the equity valuation for all shareholders.
The telecom industry is currently facing strong pricing pressure as Jio continues its price war through the launch of its new Jiophone as well as a new post-paid plan. Adjusted Gross Revenues for the telecom industry fell by 7% qoq in Q4FY18; while Jio continued to gain RMS. ARPUs for major operators also fell by 12% qoq during Q4FY18 and are expected to move lower in Q1FY19 as well. With Jio launching the Jiophone 2 along with a phone exchange offer, it is likely that the telecom sector will continue to experience stress in the near term.
We believe that the offer price for BTL accurately reflects the value of its holding in Bharti Airtel as a 25% discount for illiquid equity investments is in line with best practices. Given the attractive pricing and illiquidity of BTL, investors should participate in the offer. – IIFL