Singtel associate Bharti Airtel proposes to raise up to US$3b

Singapore

BHARTI Airtel has proposed to raise up to US$3 billion in a mega debt-equity exercise ahead of its deadline to pay a hefty fine.

The Indian associate telco of mainboard-listed Singtel is looking to issue shares worth US$2 billion via a qualified institutional placement with a floor price of 452.09 rupees per share, according to Singtel's bourse filing on Thursday.

The actual issue price will be determined by Airtel in consultation with the book-running lead managers. The preliminary placement document was filed on Wednesday.

Meanwhile, Airtel is also planning to issue up to US$1 billion in foreign-currency convertible bonds. Fitch Ratings has assigned a BBB-/RWN rating to the proposed bond sale.

The capital-raising exercise was launched less than a year after Airtel raised 249.4 billion rupees (S$4.7 billion) in May 2019 from a rights issue which was 105.6 per cent subscribed. Proceeds from that issue were used for deleveraging.

The latest fundraising also comes as the phone carrier needs to fork out billions of dollars in statutory dues to the Indian government by Jan 24, as mandated by India's Supreme Court.

On Oct 24 last year, the court had ordered India's mobile operators including Airtel to pay the state a total of 920 billion rupees in penalties plus interest within three months. The verdict ended a protracted 14-year legal tussle over the definition of "adjusted gross revenue", which determines licence fees.

Based on the court's judgment, Airtel made a provision of about 284.5 billion rupees in its financial statements for the second quarter ended Sept 30, 2019. This figure accounts for the estimated licence fees and spectrum usage charges payable to the government, Airtel said in a regulatory filing on Nov 14.

Airtel is a key regional associate that has weighed on Singtel's earnings and balance sheet.

On Wednesday night, Citi Research wrote in a report that the capital raising is unlikely to affect Singtel's cash flows.

Singtel will not participate in the share placement as it is not a qualified institution for participation, and there is also no preferential allocation on the foreign-currency convertible bonds. Airtel has not disclosed whether the Singapore telco has acquired any of the new bonds, "although we find no evidence of interest on such securities based on its history", Citi analysts Arthur Pineda and Hussaini Saifee noted.

The capital raise could dilute Singtel's stake in Airtel to 32 per cent from 35 per cent, assuming Singtel does not buy the convertible bonds, Citi estimated. But this dilution will not have a material implication on the sum-of-the-parts valuation as the offer is only at a "very slight" discount of around 2 per cent, the analysts said.

Citi foresees Singtel's average free cash flow will sufficiently cover its dividends at 17.5 Singapore cents per year - this was previously a key concern for Singtel investors given the potential outlays for Airtel, according to the analysts.

Citi has maintained its "buy" call on Singtel, with a target price of S$3.85, as the fundraising is not expected to affect dividend prospects.

Singtel shares fell three cents or 0.9 per cent to S$3.36 on Thursday.