Bharti Infratel pulls off India’s largest IPO in two years

The telecom tower operator raises $763 million in a busy week for Indian deals after attracting good demand from foreign investors.
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Bharti Airtel is the controlling shareholder and largest customer of Bharti Infratel, which is scheduled to start trading on December 28 (AFP)</div>
<div style="text-align: left;"> Bharti Airtel is the controlling shareholder and largest customer of Bharti Infratel, which is scheduled to start trading on December 28 (AFP)</div>

Bharti Infratel, one of India’s largest providers of telecommunication towers and other infrastructure, has raised about Rs41.719 billion ($763 million) from the largest initial public offering in India in two years.

The company, which is controlled by Bharti Airtel, the leading provider of wireless services in India, sold 10% of its enlarged share capital although close to a quarter of the shares came from four pre-IPO shareholders, namely Temasek, Goldman Sachs, Anadale and Nomura.

Overall, the demand was not that spectacular and the total offering, excluding the 15% anchor tranche, was just 1.3 times covered. However, it was mainly the domestic demand that was weak, which may be partly due to the presence of others issues in the market at roughly the same time that absorbed some of investors’ rupees, including the government’s sale of a 10% stake in National Mineral Development Corp (NMDC) which raised about $1.1 billion.

This is also the first time a telecom tower operator is listing on the Indian exchanges, meaning domestic funds and retail investors had no familiar names to compare it to.

According to data on the National Stock Exchange website, the retail portion of the deal, which accounted for 35% of the total offering, was just 0.19 times covered, while the 15% non-institutional tranche was 0.29 times covered.

But encouragingly, foreign investors showed all the more interest. They accounted for 96% of the order amount from qualified institutional bidders (QIBs) and lifted the subscription ratio for the 35% QIB portion to 2.84 times. There was also large foreign participation in the anchor portion of the deal, which was completed the day before the general bookbuilding opened on December 11. The latter was evidenced by the fact that the Mauritius-based entities of Citi and Morgan Stanley were allocated 18.4% and 34.3% of the anchor tranche respectively on behalf of foreign investors buying shares through P-notes.

Another 10.9% went to funds within the US-based Columbia asset management group, which according to a source is one of the largest investors into telecom towers in the world.

US investors also featured prominently in the institutional order book, which is perhaps not too surprising given that there are quite a few tower companies listed in the US. As a result, investors there are very familiar with the asset class.

In total, the anchor tranche was split between 11 different investors, although some of them bought shares through several funds. The strong interest was evident by the fact that the price was fixed in the upper half of the range at Rs230 per share. The shares were offered at a price between Rs210 and Rs240.

Sources said the price for other investors could have been fixed at the same level, but the company decided to leave a few rupees on the table to ensure the stock trades well. So, the overall price was set below the mid-point at Rs220 per share. One source noted that there was hardly any difference in the order book between the Rs220 and Rs230 price levels.

Since the company was already offering a discount to retail investors of Rs10 per share, that meant that Bharti Infratel sold its shares at three different prices: Rs230 for anchor investors; Rs220 for institutional, corporate and high-net-worth investors; and Rs210 for retail investors. It will be interesting to see how that may impact the trading.

The main price of Rs220 values Bharti Infratel at an enterprise value-to-Ebitda multiple of about 10 times, based on earnings estimates for the fiscal year to March 2014 – the first full year after listing. This pitches the company at a discount to the US tower providers, which are trading at 2013 EV/Ebitda multiples of 15.5 to 17 times, one source said. It is also coming at a discount to Indonesia’s Tower Bersama, which is quoted at about 14.5 to 15 times.

India-based analysts had varying views about whether this was attractive or not and the fact that some pre-deal research reports recommended investors not to buy may have contributed to the weak domestic demand.

The deal comprised 188.9 million shares, of which 77.4% were new. The rest came from the four pre-IPO investors who bought into the company in 2008 as part of a wider group of international investors that also included units of KKR, Millennium, AXA and Citigroup. The latter are not selling any shares as part of the IPO and nor is Bharti Airtel, which will own 79.4% of the company after the listing.

The bookbuilding was open for three days for institutional investors and four days for retail investors, with the price being fixed on Monday this week. The trading debut is expected to be December 28.

Bank of America Merrill Lynch, J.P. Morgan, Standard Chartered and UBS were joint global coordinators for the IPO, while Barclays, Deutsche Bank, Enam, HSBC and Kotak Mahindra joined them as bookrunners.

The international interest in Bharti Infratel’s IPO mirrors the significant increase in foreign inflows over the past month as a series of economic and strategic reforms proposed by the government has reignited interest in India. The benchmark Sensex index has gained close to 12% since early September and is now up more than 25% in 2012, making India the third best performing market in Asia after Thailand and the Philippines.

The improved sentiment has also led to a boost of activity in the equity capital markets. As of December 7, the overall ECM volume was up 51% year-on-year at $12.3 billion, according to Dealogic data. But the majority of that has come from follow-ons, primarily sell-downs by existing shareholders. New capital-raisings have for the most part been very small. IPO volumes were down 77% by December 7 and amounted to just $314 million.

Those numbers will improve after last week, particularly because of Bharti Infratel’s $763 million offering, which was the largest Indian IPO since Coal India’s record-breaking $3.46 billion offering in October 2010. It was also the largest IPO by a private-sector company in almost five years (Reliance Power raised $3 billion in January 2008). Coal India was 100% owned by the Indian government before its IPO.

There were also two smaller Indian IPOs in the market last week – a $111 million offering by jewelry maker PC Jeweller and a $99 million deal by ratings agency Credit Analysis & Research, also known as Care. The latter attracted the most interest and was more than 40 times covered when the bookbuilding closed last Tuesday. PC Jeweller, which finished a day later, received orders for 6.85 times the number of shares on offer.

But the largest deal last week was the government’s sell-down in iron ore miner NMDC through an offer for sale (OFS) auction last Wednesday. This deal raised $1.1 billion and was 1.7 times covered. It was the largest OFS by the government since the maiden $2.58 billion issue in ONGC in early March, which got across the line only because state insurance company LIC stepped in and bought the bulk of the offering.

NMDC was significantly more successful and the sale added important funds to the government’s coffers. According to local media, before this offering the government had raised only $148 million from the sale of stakes in various state companies this fiscal year as volatile markets and government infighting have caused several planed offers to be delayed. The transaction, which was led by Bank of America Merrill Lynch, Citi, Enam Securities, Goldman Sachs and ICICI Securities, doubled NMDC’s free-float to 20% from 10%.

Assuming the markets hold up, the Indian government is expected to reduce its stake in several other companies before the end of the 2013 fiscal year on March 31. It has earlier said that it plans to raise $5.5 billion from divestments this fiscal year and sales have been flagged in Oil India, power producer NTPC and National Aluminium.  

Adding to the activity, BT Group, the parent of British Telecom, sold its remaining 9.1% stake in outsourcing company Tech Mahindra on Wednesday last week, raising $184 million. The block was priced at Rs871 per share, which translated into a discount of 1% versus the previous day’s close.

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