SingTel – AmFraser
Bharti’s offer for Zain Africa a drag
• SingTel’s 32%-owned associate Bharti Airtel of India has entered into exclusive negotiations (until 25 March) to buy Zain Africa BV (ZA) from Kuwait-based Zain Telecom (ZT). Board of ZT has accepted Bharti’s offer, which will leave ZT with remaining interests in seven markets in the Middle East, and Sudan and Morocco.
• ZA comprises mobile operations in 15 African countries – Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia. Aggregate subcribers of 42 million (at September 2009) would represent a 35% expansion of Bharti’s subscribers base.
• Bharti’s offer at Enterprise Value of US$10.7bil comprises net debt of US$1.7bil. Bharti will pay US$8.3bil upon close of deal, and the rest a year on. With net debt-to-EBITDA at 0.1x, Bharti can gear up; additionally, rumours are abound of a US$5bil rights issue.
• ZA reported revenues of US$2.7bil, EBITDA of US$870mil and net loss of US$112mil for 9-month-to-September 2009. On annualized EBITDA, this works out to EV/EBITDA of 9.2x. By comparison, this measure is 6.4x for Bharti and 7.5x for SingTel.
• Deal is pending due diligence and regulatory approvals. These aside, a shareholding dispute at the Nigerian unit presents the larger hurdle. ZT holds 65.7% in Nigeria, while Econet Wireless owns the rest. Latter is currently pursuing arbitration proceedings against ZT on grounds that it had first rights of refusal, not complied to by previous owners when they sold the stake to ZT in early 2006.
• Uncertainty over Nigerian operations is a major bugbear, as Nigeria is ZA’s largest asset. Nigeria with 15 million subscribers accounts for 36% of aggregate, and Nigeria also has the largest population of 156 million out of aggregate 469 million from the 15 countries. Nigeria’s GDP per capita of US$2,000 is third ranked among the 15, while mobile penetration of 45% still offers potential for growth. ARPU of US$7 is above the US$5 achieved by Bharti in India, while EBITDA margins are a high 34%.
• On the other hand, Nigeria saw net loss of US$88.3mil for 9-mth-to-September 2009, representing 79% of ZA’s net loss. While ZA’s net loss is a sticking point, much of this is due to forex losses taken to ZT’s books. High depreciation charges are also a factor, as these operations are still in expansion mode.
• ZA’s investment needs are high with capex to revenue averaging 31% for 9-mth-to-Septmebr 2009. Total capex of US$844mil for ZA, represents a 28% fall from year-ago period. Although capex for Nigeria at US$356mil, accounts a high 36% of revenues, this was a 27% YoY fall – and lack of support resulted in a 6% YoY fall in subscribers. Nigeria and Kenya (a smaller asset) were the only two operations, which saw a fall in subscribers. Subscriber YoY growth ranged from a healthy 17% to 51% for other operations.
• While the deal presents new avenue of growth for Bharti – which is seeing a fast slowdown in its profit trend from rampant price wars in India – on the other hand the drag on bottomline from ZA mars upside prospects especially in the near to mid-term.
• Some consensus downgrade has started on Bharti, however translated impact on SingTel is marginal at this point (Bharti accounts 18% of EBIT), and we are not revising our SingTel estimates at this stage. Maintain HOLD with fair value at S$3.05/share.