SingTel – BT

SingTel’s billion-dollar Bharti dilemma

TO top up or not to top up, that is the question. And for Singapore Telecommunications, that is the billion-dollar question it soon has to answer as Bharti Airtel and South Africa’s MTN Group enter the home stretch of their proposed US$24 billion union.

The exclusive negotiation between Bharti and MTN is scheduled to end on Sept 30, although market watchers expect the deadline to be pushed back for a third time due to unresolved regulatory challenges. A particular moot point is the South African government’s insistence on retaining MTN’s listing in Johannesburg, a condition which contravenes India’s ban on dual-listing among local companies.

The shifting timeline does give SingTel more time to ponder its next move, but the eventuality it faces remains unchanged. If the deal to create the world’s third-largest wireless operator comes through, its 30.44 per cent stake in Bharti will definitely be reduced.

Bharti accounted for 24 per cent of SingTel’s underlying post-tax profits in its first quarter and it has consistently been the firm’s best-performing regional associate.

Estimates ranging from reduced stakes of 19.5 per cent to 25.6 per cent in Bharti have been tossed out by various market analysts. Some industry watchers also believe SingTel could sink in as much as US$3 billion to reclaim its lost ground in Bharti, though the operator has repeatedly declined comment on the issue.

The extent of the Bharti dilution is anyone’s guess given the complex and closely-guarded nature of the cash plus stock-swap arrangement between Bharti and MTN. While the finalised terms for the mega-merger may differ, a significant reduction in Bharti shareholding is definitely not in SingTel’s best interest.

Currently, SingTel uses the equity method to account for Bharti’s earnings contribution. This means it takes a proportionate share of the Indian’s operator’s earnings. This is possible because of its 30.44 per cent stake in Bharti, a number which falls within the 20 to 50 per cent range needed to give an investor ‘significant influence’ on its investee as defined by most accounting principles.

If SingTel’s stake falls below 20 per cent, it may have to re-look its accounting policy for Bharti. SingTel’s chief financial officer Jean Low did previously say that ’20 per cent is not the magic number’, and some local companies do equity account for companies in which they have less than a 20 per cent stake. To do so, investors will need to demonstrate that they have a significant influence. In SingTel’s case, its influence on Bharti will certainly be diminished against MTN’s larger stake.

To be fair, SingTel’s final decision on Bharti will hinge not on accounting nuances but whether a top-up will boost is bottom line in the long run. Using this yardstick, reclaiming its lost Bharti stake becomes an even more compelling proposition.

The Bharti-MTN merger presents SingTel with a rare opportunity to give its overseas sales a major boost. The operator, which has been starved of acquisitions in the past two years, will benefit from a combined operator with more than US$20 billion in sales and over 200 million subscribers across Asia, the Middle East and Africa.

Given SingTel’s track record of being a shrewd dealmaker, it will be seeking to capitalise fully on this opportunity. The exposure to new high-growth markets will make up for lacklustre performances in Bangladesh and Pakistan, while SingTel’s core bases in Singapore and Australia continue to generate much-needed cash flow. Furthermore, SingTel’s strong credit ratings means it should have no shortage of lenders to fund the top-up.

Opportunity rarely knocks twice, and this is already the second time MTN and Bharti have renewed their courtship. For SingTel, this could be an opportunity that is just too good to miss.

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