SingTel – DMG

Denies fund raising rumours

Fund raising article “misleading”; Maintain BUY. We spoke to SingTel’s spokesperson following a Bloomberg article suggesting that the telco was seeking US$4b in funds to “protect its stake in Bharti Airtel”. He said that the article was “misleading” and “very wrong”. The fact is that SingTel did engage a financial adviser, but it was for the purpose of assessing the potential merger between Bharti and South-Africa based MTN, and not specifically to look into fund raising. We estimate that Bharti would need US$4b for this deal, which will likely be in the form of debt financing. But even if it were to do equity fund raising, SingTel will be in a good position to support. Maintain BUY on SingTel, with price target of S$3.17 based on SOTP. Bharti accounts for 25% of our SOTP.

Recapping the deal. Bharti would acquire 49% shareholding in MTN, and MTN would in turn acquire a 36% stake in Bharti. The combined entity would create an operator with revenue of more than US$20b and combined customer base of 200m users. Both parties have agreed to discuss the potential transaction exclusively till 31 Jul 09, which if successful, will make it the world’s third largest mobile phone company. The deal prices Bharti at EV/EBITDA of 11x, and MTN at 5.5x. Moreover, MTN currently generates free cash flow, while Bharti is only expected to be FCF neutral this year. Hence, the deal appears to favour the latter.

Potential merger impact on SingTel. Post-merger, SingTel’s stake in the Bharti will be reduced from 30% to 19%, while SingTel’s EPS is estimated to slide by 1.5%in FY11. We believe that should Bharti require funds for this merger, SingTel will stand ready to support. Based on our estimates, Bharti may need to raise up to US$4b if the deal goes through. According to the media in India, Bharti will fund the acquisition through debt, but assuming half the amount is through equity, SingTel may have to fork out US$600m.This would raise SingTel’s net gearing from 28% to 32%, still very manageable given its strong balance sheet.

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