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Bharti Airtel in talks with Warburg Pincus to raise up to $1.5 billion

Bharti Airtel is holding talks with US private equity firm Warburg Pincus to raise up to $ 1.5 billion by selling as much as 15% of Bharti Airtel International, its holding company for African operations, according to a report by The Economic Times. The two companies are discussing a sale of 10-15% stake for $1.25-1.5 billion, said the ET report quoting two people familiar with the deal. Airtel’s Africa unit will reportedly be valued at $8-9 billion for the transaction. The deal will be followed by a listing of the company in the overseas market, the report added.

“The proposed transaction is a precursor to its planned listing of the African business in the overseas market in which Bharti Airtel aims to raise a similar amount,” said one of the aforementioned persons to ET. It has to be noted that in December last year, Warburg picked up a 20% stake in Bharti Telemedia Ltd, the Direct-To-Home (DTH) arm of Airtel, for about ₹2,275 crore. In that deal, Bharti Airtel sold 15% of the stake, while another Bharti entity sold the balance.

The proceeds of the deal, expected to be completed by December, will be used to pay off some of the company’s Rs 95,000-crore debt and to counter the increased competition in the Indian telecom market, the report added.

African success to be leveraged for the domestic fight

In the recent past, while the previously loss-making African entity of the company turned profitable, its core business in India flipped for the worse. The African entity completed its first full year of profitability in March by posting a net profit of Rs 1,827 crore. On the other hand, Airtel’s Indian operations reported its first net loss in almost 15 years in the fourth quarter of 2017-18. India’s biggest telecom operator recorded a net loss of Rs 652 crore in the January-March quarter, compared with a net profit of Rs 770.80 crore a year earlier. Airtel just managed to avoid recording a net loss at the consolidated level largely thanks to its Africa operations. The company posted a consolidated profit of Rs 83 crore, down 78% year-on-year. The ongoing price war in India’s telecom sector, thanks to the entry of Reliance’s Jio, weighed on the bottom line of most major telecoms in the country, including Airtel.

In such a scenario, the company seeks to divert the proceeding from its African business to help fight the battle in its home territory. “Since the African business has turned profitable, it does not need capital for investment,” said one of ET’s sources close to the deal. Moreover, an overseas listing (post the divestment) will help Bharti get better valuations for the Africa business thanks to more advantageous profit margins than the India business, said an investment banker with a foreign firm to ET.

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According to the report, the deal will be similar to the Bharti Infratel deal, where Airtel had raised billions of dollars through an IPO and subsequent sale of shares, while still holding a significant stake. Bharti Infratel is a Bharti Airtel unit that has raised over Rs 12,000 crore by selling minor stakes in the tower company in separate tranches over the past year.

Competition to get tougher

Although Airtel would be pleased with the staggering number of customers it added in May, the development should be seen as an anomaly, owing to the integration of the customers from the recently acquired Telenor India operation. As Jio continues to disrupt the market by offering extremely cheap services, the other two major players (Airtel and Idea/Vodafone) in the industry will have to be careful in matching their offerings to Jio or risk having their bottom lines turn red. Airtel, Idea and Vodafone have all showed losses in their most recent quarterly results. While the Vodafone/Idea merged entity will be rejuvenated to take on competition owing to its soon-to-be-acquired status of the largest telco in the country (by subscribers), Airtel will have to count on making right moves.

While Vodafone can also count on its parent company to help transfer/share expertise and insights on upcoming technologies, Jio has never been shy in publicizing the fact that its network is future ready, owing to an alleged investment of Rs. 2,50,000 crore the company has made on its network. The Mukesh Ambani backed company has announced that IoT and 5G are central to its future plans. In this context and given the debt on its parent company, the proceedings from Airtel’s African entity may turn out be a crucial investment in the company’s fight to stay relevant.

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