Airtel Africa indicative IPO price implies limited unlocking of value for Bharti

Mumbai: A major takeaway for Bharti Airtel Ltd’s investors from the initial public offering (IPO) of Airtel Africa Ltd is value unlocking. The London listing is expected to help the subsidiary derive better value and help the parent lower its debt.

But as it emerges, the IPO is not giving the kind of monetary gains as initially envisaged. First, the company toned down the amount of funds it planned to raise from the IPO: from a purported $1 billion to $750 million. Then came the IPO price range of 80 to 100 pence per share, a sizeable discount to the pre-IPO placement.

And now it appears the company is looking to price the IPO at the lower end of the price range. A Reuters report quoted bookrunners as saying that the public offering may be priced at 80 pence.

If indeed the company prices the IPO at the lower end of the price band, then the transaction will not result in major value unlocking, according to Jefferies India Pvt Ltd. “The pricing implies a trailing EV/EBITDA of 5.3 times. This is well below the previous round at 7.4 times and also peers at 5.6-7.6 times. The valuations are also below our expectations of 7 times forward EV/EBITDA. The IPO will then not lead to any value unlocking at these prices,” analysts at Jefferies said in a note. EV is enterprise value and Ebitda is earnings before interest tax depreciation and amortization.

What's more, the IPO will help lower parent Bharti Airtel’s leverage only marginally. “The deal will lead to small reduction in leverage for the company, as it reduces the debt by $750 million. The FY20 net debt to EBITDA for Bharti would fall to 3.2 times from 3.4 times post IPO,” analysts at Jefferies add.

Of course as pointed out earlier, the pricing is only a minor irritant for investors who otherwise are worried about the intense competition in the India business and cash burn in the telecom sector. In this backdrop, Bharti Airtel’s decision to go ahead with the IPO despite the lower valuation is a positive for its deleveraging plans. This should place the company well to deal with investment opportunities. As IIFL Institutional Equities pointed out in a note released last week, a publicly traded Airtel Africa shares would give Bharti Airtel the currency for further divestments, if required. “Reduced leverage would ensure that Bharti is well placed to acquire spectrum should the need arise, even if market repair in India is delayed,” according to IIFL.