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Will the country’s largest telecom operator, Bharti Airtel, exercise its right of first refusal to buy the 30% stake in Bharti Hexacom that it doesn’t own in a deal that could cost it as much as Rs 1,800 crore or $400 million? That could be a tough choice for the telecom giant that recently sealed one of the biggest overseas acquisition ever by acquiring Zain’s African telecom assets.

The question puts Bharti Airtel in a tricky position for two reasons. One it would have to pay a substantial premium to the government (who owns the 30%) compared to what it had offered five years ago which was deemed too low and so didn’t see the deal through.

Secondly, what are the additional benefits it may generate from buying that stake at such a huge price, as Bharti Hexacom is already a subsidiary so there would be only a minor change in its consolidated net profit(post minority interest owned by others).

 The government has been advised by consultants that the 30% stake should fetch Rs 1,500-1,800 crore that values the firm at around Rs 6,000 crore ($1.3 billion). The deal value is unlikely to be substantially lower than this given the ongoing allegations of the exchequer being shortchanged in the allocation of 2G licenses as also ministers saying the government will seek the best price and may wait for the right time to sell the stake.

So what does Bharti Airtel gets for this money? It gets complete control over a chunk of business that has operations in six northeastern states (excluding Assam) and Rajasthan. If Bharti decides to exercise its right of first refusal for the stake it would need to justify paying almost seven times that it had offered five years ago when its offer of Rs 262.5 crore was not acceptable to the government. Bharti Airtel’s own market cap has risen 2-3 times in the same period, after facing investors apathy to shrinking margins.

What other options does the government have if Bharti backs out? It maybe a self defeating proposition for newer players to enter India as the management control will remain with Bharti. But a new player, say a foreign major can still pick the stake and affect board decisions. There could also be an entry of a private equity firm as a financial investor.

The other possibility is the government taking this firm public if the offers by Bharti Airtel or any other bidder does not match its expectations. However there are policy issues which may prevent this including shareholder agreement between the government and Bharti Airtel.

As per published reports, Bharti Hexacom had revenues of Rs 1,346 crore, profit of Rs 331 crore and net worth of Rs 918 crore in 2007-08. This is said to have gone up substantially over the last two years. However, Bharti group have not agreed to government demand to start paying dividend even six years after it became profitable. This is even as Bharti Airtel itself gave its maiden dividend payment last year.

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