India’s largest telco is eyeing two deals to reduce its high debt levels

Bharti Airtel has been on a debt-fuelled buying spree in recent years in order to maintain its market share in India.

After being pushed into a corner by new entrant Reliance Jio, Airtel, which is India’s largest telecom operator by subscribers, has issued debt to buy spectrum, refinancing existing debt obligations and support a significant cut in data and calling prices so as to lure additional subscribers. Consequently, it’s net debt has ballooned to $14.6 billion.

As most price wars go, Airtel has no choice but to match Reliance Jio’s prices and heavy spending. The Sunil Bharti Mittal-led firm hiked its capital expenditure plans by 25% in the recently-concluded fiscal year to ₹250bn to expand its 4G and broadband network. It will spend a similar amount this year as well.

The spending has affected Airtel’s bottom line. It recently reported the first quarterly loss from its Indian operations in 15 years, following eight consecutive quarters of profit drops.

Going forward, Airtel will need to maintain its solvency and cut down it’s debt. This is why it’s planning two important transactions, both of which could reduce its total debt by $4.6 billion by 2021.

First, it is looking to raise $1.5 billion by selling a 25% stake in its profitable Africa unit via an initial public offering (IPO) in London or South Africa early next year. Second, it will sell a part of its stake in the tower company formed from the merger of Bharti Infratel Ltd, its tower infrastructure subsidiary, and Indus Towers Ltd. The two companies agreed to merge at the end of April in a deal that will create one of the world’s largest telecom tower operators. Airtel will own a 37.2% stake - valued at over $5 billion - in the merged entity.

The deals, and the subsequent debt reduction, will help Airtel prevent a downgrade in its investment ratings. The lower the firm’s rating, the more expensive it becomes for it to borrow money or issue debt. In essence, it needs to reduce debt now in order to make its future debt cheaper to service.

And why does Airtel’s debt reduction plan matter to consumers?

The only reason subscribers have been able to benefit from low mobile subscription prices is because of the intense competition in the telecom sector. Airtel, Vodafone-Idea and Reliance Jio are all trying to undercut each other. However, if either of Reliance Jio’s competitors were to fall out of the race due to insolvency or unprofitability, it would give the disruptor greater control of the industry and subsequently, the power to increase prices. Airtel is by far the best competitor Jio has in the country.