SingTel – CIMB

Bharti goes safari hunting

Bharti eyes 51% stake in MTN

The Financial Times reported that Bharti (SingTel’s 30.5% associate) has made a bid for control of Johannesburg-listed MTN, a major telco player in 21 countries across Africa and the Middle East. Bharti is said to have tabled an indicative bid of R165/share (MTN’s closing price at May 5 was R150/share) for a 51% stake. This values the 51% stake at US$19bn.

The acquisition will be funded by US$12bn in debt and the balance US$7bn by issuance of equity either to MTN shareholders or to institutions. Financial Times reported that the debt financing has been secured from Goldman Sachs and Standard Chartered. Merrill Lynch and Deutsche Bank are advising MTN, while Bharti is being advised by Standard Chartered. SingTel is being advised by Goldman Sachs.

MTN which has a market cap of US$37.3 bn operates across 21 countries across Africa and Middle East, serving 68m subscribers (Bharti has 62m subscribers). It has a revenue base of US$9.8 bn (almost 50% larger than Bharti) of which 66% comes from its operations in South Africa and Nigeria.


Positive move. While the initial market reaction to the deal was negative – Bharti’s share price fell 2.9% at market open on concerns of risk of overpaying and overstretching of balance sheet, we believe the deal should eventually prove to be positive for Bharti and ultimately for SingTel based on available information. Key reasons for our view: 1) Bharti evolves into an emerging market telco powerhouse; 2) accretive acquisition at fair valuations; 3) higher debt levels are manageable.

I. Bharti becomes an emerging market telco powerhouse. If the deal is successful, Bharti’s earnings base will potentially swell by 50% to US$2.5bn (2007 pro-forma) which at current trailing PE of 25x, translates into a multinational emerging market telco with a hefty US$61 bn market cap. The MTN acquisition will give Bharti strategic access to a robust portfolio of 21 telco markets in Africa and Middle-East. MTN’s 6 largest markets which contribute 82% to its total revenues enjoy a “top 2” market position (market shares range between 23-52%) in their respective markets. Growth opportunity is attractive. Blended penetration rate of markets
MTN operates in is 33% (ex-South Africa)/51% (including South Africa).

II. Accretive acquisition at fair valuations. At R165/share, MTN is valued at 15x CY09 PE (consensus estimates) and 7x CY/09 EV/EBITDA (consensus estimates). We do not consider these valuations excessive for a controlling stake. The deal is also likely to be accretive, ex-potential synergies. The 51% stake in MTN should increase Bharti’s earnings base by around 50% and this will offset the potential 15% dilution from the share issuance to finance the deal. We believe there are synergies and improvements that Bharti can bring to MTN based on its experience/track record in competing in a competitive but high-growth Indian market.

III. Higher debt levels manageable, not excessive. Bharti and MTN are currently under-leveraged with 2007 net debt/EBITDA ratios of 0.35x and 0.5x respectively. The US$12bn implies a proforma of the enlarged Bharti 2007 net debt/EBITDA of around 2.0x which we believe is manageable. EBITDA for Bharti and MTN are expected to grow by 18-33% respectively over the next two years according to consensus estimates. In addition, capex for Bharti and MTN have historically been internally-funded from free cashflow.

Is SingTel on board? We believe so. As a 30.5% stakeholder in Bharti, SingTel clearly has avenues to block the deal especially given the size of the acquisition. However, we believe that Bharti has obtained SingTel’s blessings before pursuing MTN. The appeal for SingTel would be an expanded footprint into Africa and Middle East via a leading player in the region, i.e. MTN.

SingTel’s top priority likely to be preservation of its 30.5% We expect SingTel to negotiate for a deal structure that will not be dilutive to SingTel’s stake in Bharti, i.e. no equity issuance to MTN shareholders but rather a capital raising exercise from current shareholders to co-fund the deal. Under this scenario, SingTel will be required to contribute US$2 bn (30.5% of US$7bn). SingTel has sufficient flexibility to make the contribution by raising debt. This could potentially raise SingTel’s net debt/EBITDA to around 1.5x (from 1.0x currently), at the low end of guided target range of 1.5-2.0x.

Potential walk-away price of R210/share. In a competitive bidding scenario, we do not rule out the possibility that SingTel may not be opposed to Bharti paying up to R210/share (27% above current offer of R165/share) for MTN where the deal is no longer earnings accretive on an ex-synergy basis. This is on account of SingTel’s position as a strategic investor and may be prepared to give up some near-term gains for attractive long term growth & synergistic opportunities.

Valuation and recommendation

Maintain Outperform with unchanged target price of S$4.45. The deal is a potential catalyst for SingTel’s share price. If the MTN acquisition is successful under current terms, it could add S$0.38/share to SingTel’s valuation assuming trailing PE of 25x on proforma 2007 earnings, net of acquisition debt. However, we caution that deal completion risk is high given that MTN has a fairly fragmented shareholder base (free float of just under 75%). We do not rule out the emergence of competitive bids. MTN’s two largest shareholders only have a combined stake of 26%. The next four largest shareholders are institutional investors with combined stake of 28%. Offer price will be the swing factor in winning acceptance from the four institutional investors. SingTel’s share price has not reacted to the news, hence we do not expect SingTel’s share price to be punished if the deal falls through. We see option value for in SingTel shares in light of this transaction and SingTel’s initial share price reaction.

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