Bharti Airtel has announced buyback of 20% stake in Bharti Telemedia for Rs 31 bn. The deal valuation is reasonable at 7.3x EV/Ebitda, but offers an attractive exit to Warburg Pincus. Jefferies are surprised by this move as well as its timing given the upcoming spectrum auctions, and its investments of Rs 60 bn over the past three months raise questions around its strategic intent. Jefferies see this as a marginal negative and maintain Hold rating with price target of Rs 675. Bharti Airtel share price today is Rs 595, up Rs 6 or 1%.            

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Bharti Airtel to acquire 20% stake in Bharti Telemedia: Bharti Airtel has announced its plans to acquire 20% stake in Bharti Telemedia, their DTH business, from Warburg Pincus for a consideration of Rs31bn, The company will issue 36m shares of Bharti Airtel to Warburg Pincus (locked in for one year) along with a cash payment of Rs9bn for this transaction. The transaction will raise Bharti Airtel's stake in Bharti Telemedia to 100% from 80% at present

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Valuations reasonable but offer an attractive exit:

Warburg Pincus had acquired 20% stake in Bharti Telemedia in late 2018 for a reported consideration of US$350m/ Rs22bn which implied an EV/Ebitda of 8.2x. Even though the current transaction values Bharti Telemedia at 7.3x EV/Ebitda, the transaction provides Warburg Pincus an exit and a healthy return of 40% over a 2.5 year holding period.

Questions around capital allocation arising again in Bharti Airtel:

Jefferies were surprised by this move as there was no compulsion for Bharti Airtel to buy its stake back from Warburg Pincus. Including the current transaction and its recent 5% stake purchase in Indus Towers (more about that here), Bharti Airtel has invested Rs 60 bn over the past three months which could have been used to acquire Rs 90-120 bn worth of spectrum in the upcoming auctions or to make investments in the digital space. This raises questions around its strategic intent.

Bharti Airtel's investment in Bharti Telemedia is difficult to justify. In Jefferies view, the DTH market offers limited growth given the high TV penetration in India. Moreover, since it's a wireless business, it has limited overlap with the home broadband business which is currently witnessing sharp growth. Even though the acquisition amount is small, the intent has taken us by surprise and we see this as a marginal negative. Jefferies maintain their Hold recommendation on Bharti Airtel.