SingTel – CIMB

Bharti goes safari hunting, again

Second time lucky?

SingTel’s 35% associate Bharti has reinitiated efforts to acquire MTN Group via a partial cash and share-swap deal. MTN is a South African-listed company with mobile operations in 21 countries (Figures 1 & 2). Bharti and MTN have agreed to discuss the potential deal until 31 Jul 09. This follows failed efforts by Bharti to acquire MTN in May 08.

Bharti is proposing to acquire 49% in an enlarged MTN via:
• Paying R86/share for 36% of existing MTN shares worth US$7.0bn, and
• Issuing 0.5 new Bharti share for every one MTN share acquired. This works out to Bharti issuing 234m new shares or 12.3% of its existing shares or 11% of an enlarged share base.

In turn, MTN and its shareholders will buy 36% of an enlarged Bharti with US$2.9bn in cash and 25% of new MTN shares, where 25% of Bharti will be held by MTN and the balance held by MTN shareholders.

The net transaction is:
• Bharti pays US$4.1bn cash to MTN/MTN shareholders (US$7.0bn paid out less US$2.9bn received)
• Bharti buys 49% of MTN
• Bharti’s share base is diluted by 36%, and
• MTN and MTN shareholders buy 25% and 11% of an enlarged Bharti respectively.

Both telcos stressed that “discussions are at an early stage and may or may not lead to any transaction.” The structure of the deal may be adjusted to reflect further discussions between the parties.

Bharti will be able to consolidate MTN’s accounts fully as it will have substantial participatory and governance rights in MTN. MTN would have certain rights to increase its economic interest in Bharti in the future, but no details were given.


Positive. We are positive on this potential acquisition because:

• Bharti is taking on more risks, in more mature markets. MTN operates in higher-risk countries as a whole vs. India, in our opinion. Also, MTN operates in a total geography where the population is less than half and the penetration higher than that of India. The countries where MTN can be found have a total population of 524m vs. India’s 1.15bn, and an average mobile penetration rate of 41% vs. India’s 33%. This is to say India has much better growth potential than Africa, even before taking economic factors into account.

• But the above is compensated by the lower valuations paid for MTN. We estimate that the valuation proposed by Bharti for MTN is 26-28% below what MTN paid for Bharti in P/E terms, and 45-49% in EV/EBITDA terms.

• This potential transaction should be EPS-accretive for Bharti, by 8-10% based on our initial estimates, even after taking the 36% new shares into account.

• Operationally, Bharti should be able to impart its vast experience in a low-yield operating environment to MTN, and drive greater profitability.

Unlike its previous attempt to acquire MTN, this deal is more palatable, in our opinion. Firstly, valuations have come off sharply. This deal values MTN at US$22bn vs. the previous deal of US$37bn. Secondly, this deal involves a share swap which does not take such a heavy toll on Bharti’s balance sheet, unlike the previous one

MTN’s shareholders cashing out? Bharti is accepting 71% of the purchase in shares of MTN with only 29% in cash, whereas MTN/MTN shareholders are accepting 32% in shares of Bharti and 68% in cash. One could interpret this as MTN shareholders partially cashing out of MTN with this deal.

Ability to consolidate is key. Bharti’s balance sheet will not be overstretched despite the net payment of US$4bn to MTN/MTN shareholders because it can consolidate MTN’s numbers and use MTN’s strong cash flows and balance sheet. MTN has a low gearing. Based on our preliminary estimates, Bharti’s net debt/EBITDA will rise from 0.25x to 0.74x and its net debt/equity from 0.25x to 1.9x proforma after the merger.

According to media reports, Bharti has no plans for a rights issue but will rely on debt financing. Hence, there is no need for SingTel to help fund this acquisition.

SingTel gave the nod, to be diluted. We believe SingTel has approved the reopening of talks for merger. As a 35% 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 the Middle East via a leading player in the region. However, SingTel’s stake in Bharti would be diluted from 35.0% to 25.7% with Bharti’s issuance of 36% new shares.

Valuation and recommendation

Maintain OUTPERFORM. We maintain our forecasts, sum-of-the-parts target price of S$3.20, and OUTPERFORM rating on SingTel. The stock remains our top Singapore telco pick for its earnings turnaround and exposure to emerging markets. We estimate that 51% of its FY10 core net profit is derived from its regional associates. Likely catalysts are continued qoq earnings growth driven by the strong performances of its key associates. Lastly, it is trading near the trough of its historical trading range.

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