SingTel – BT

Too early to judge Bharti’s Zain deal

FROM questions over the price it paid for the BPL (Barclays Premier League) to criticism surrounding the recent World Cup debacle, SingTel is finding it increasingly difficult to pander to market pundits.

In the latest development, SingTel’s international strategy has been called into question even though it has not done any shopping in the last two years.

In a report issued last week, Deutsche Bank analysts said they were ‘puzzled’ by SingTel’s support for Bharti’s US$10.7 billion bid for Zain Africa. ‘This is one of the few African portfolios potentially available, and it is not clear how SingTel’s shareholders benefit from indirect exposure to Africa’, the analysts said.

This criticism was undoubtedly fuelled by reports suggesting that Bharti may be overpaying for the African operations of the Kuwaiti sovereign wealth fund. In both instances (SingTel and Bharti), I feel market watchers may have been too quick in casting the first stone.

Much ink has been spilt about the merits and ills of Bharti’s bid but little has been said about the impact on SingTel, the Indian telco’s single largest shareholder.

It’s a sense of dejà vu for the Singapore operator, having been presented with an opportunity to dip its toes into African soil only months earlier. However, that fell through with the collapse of Bharti’s US$24 billion mega-merger with MTN Group last September.

Although the target markets are similar in both attempts, the bearing on SingTel shareholders is very different.

In the MTN deal, Bharti tabled a complex cash plus share-swap deal. This would result in an immediate dilution of SingTel’s stake and consequently drag down income contributions from one of its most profitable overseas associates. In the case of Zain, all signs are pointing to debt financing as the way to go for Bharti. If this is the case, the impact on SingTel’s near-term earnings is far less pronounced.

In addition, having a stake in an emerging telecommunications market such as Africa can only be beneficial for Bharti and SingTel in the long run.

Back on its home turf, the Indian operator is facing fierce competition from foreign entrants such as NTT Docomo and Norway’s Telenor. The price war is already taking its toll on the firm’s balance sheet with 10 straight quarters of declining profits.

For the first time in years, Indonesia’s Telkomsel zipped past Bharti to become SingTel’s highest overseas income contributor in the fourth quarter of 2009.

Bharti’s US$300 million investment in Pakistan’s Warid Telecom in January and its third attempt at muscling into Africa clearly show a strong resolve to spread its earnings base.

Furthermore, with China being out of bounds to foreign players, Africa and perhaps Eastern Europe are the only emerging frontiers left for telecommunications expansion.

A decade back, there were similar suggestions that at US$9 billion, SingTel may have overpaid for Australian operator Optus. Fast forward to the present, those market murmurs have now been silenced by Optus’ strong balance sheet.

Going by the prevailing market criticism, the same questions can be asked of SingTel’s loss-making investments in PBTL in Bangladesh and Warid in Pakistan. These will not yield any immediate shareholder benefit but they are clearly bets for the long haul.

Bharti’s overseas diversification should be viewed in a similar light. The fact that Zain’s African assets have attracted multiple suitors over the past six months should be proof of some collective wisdom rather than herd mentality.

And at $10.7 billion, Bharti’s latest bid is not far off from Vivendi’s rejected offer for Zain Africa last September, which was reportedly around US$10.5 billion.

Bharti should move quickly to articulate its funding plan and rationale behind the Zain bid. Until then, its code of silence can only fuel more speculation. Uncertainty breeds fear, as evidenced by Bharti shareholders’ frantic sell-off hours after the announcement.

If SingTel were to shoulder any immediate blame, its failing should lie in the fact that it could not stop its associate from making such piecemeal disclosures.

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