MTN deal may dilute SingTel’s Bharti stake

But larger merged entity will offer exposure to South Africa

Singapore Telecommunications may get to dip its toes in underdeveloped mobile markets in South Africa if the complex share-and-cash swap between Bharti Airtel and the MTN Group goes through. Industry analysts say this may come at the expense of a major stake reduction in its Indian associate.

According to a Citi report, SingTel could see its 30.5 per cent shareholding in Bharti being slashed to 19.4 per cent if the planned Bharti-MTN deal succeeds.

‘SingTel likely becomes a smaller shareholder in a larger entity,’ the Citi note said.

Kim Eng Research analyst Gregory Yap, on the other hand, estimates that SingTel’s stake in Bharti could be cut to 25.6 per cent with the completion of the MTN deal.

‘We do not view this as negative in the long term as Africa and Middle East, where MTN is strong, are the last telecom frontiers and offer strong growth opportunities,’ he explained.

Bharti on Monday announced that it had revived exclusive negotiations with the South African telco in a deal that would result in partial ownership of each other’s companies.

This comes after the failure of the first round of talks, which eventually collapsed last May as the two operators could not agree on how the deal should be structured. MTN subsequently held discussions with Bharti’s archrival Reliance Communications but a consensus could not be reached.

The latest transaction, valued by some industry watchers at nearly US$23 billion, could set the precedent as India’s largest cross-border deal and will result in Bharti owning 49 per cent of MTN. Bharti will pay 86 South African rand and 0.5 newly issued Bharti global depository receipts for each MTN share.

In return, MTN and its shareholders will acquire a 36 per cent stake in India’s largest operator.

‘Bharti has consulted us (on the MTN deal) and discussions are ongoing. SingTel will continue to be actively involved in due diligence and key aspects of the transaction,’ said SingTel spokesman Peter Heng.

‘Consistent with our approach as a strategic investor and equity accounting for our investments, we will continue to equity account for Bharti, in its enlarged form post the transaction if this is successful,’ he added.

When Bharti first held talks with MTN last year, SingTel was reported to have been roped in to help finance the mammoth bid. This time around, however, a Bharti spokesman was quoted as saying in a Reuters report that funding requirements for the MTN deal are not expected to be ‘onerous’.

‘If a merger deal had been struck last year, valuations would have been higher, with estimates as high as US$50 billion. Valuations are now more reasonable,’ said Kim Eng’s Mr Yap.

SingTel shares closed seven cents lower yesterday at $2.74.

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.

Comments

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.

Bharti revives MTN stake talks

SingTel won’t confirm its involvement in the new deal for South African telco

After a failed attempt last year, Singapore Telecom’s Indian associate Bharti Airtel is reviving talks to acquire a major stake in South Africa’s largest wireless operator, MTN Group.

Under the second round of negotiations, Bharti is tabling a deal with MTN that will result in part-ownership of each other’s companies, the Indian operator revealed in a statement yesterday.

Bharti is looking to acquire a 49 per cent stake in MTN by paying 86 South African rand and 0.5 newly issued Bharti global depository receipts for each MTN share.

MTN, on the other hand, will pay US$2.9 billion for a 25 per cent stake in Bharti and its shareholders will lay claim to an additional 11 per cent of the company.

‘Bharti and MTN have agreed to discuss the potential transaction exclusively with one another until July 31,’ Bharti said.

Bharti and MTN are the largest operators in their countries. The proposed union would create a telecom behemoth with more than 200 million subscribers and over US$20 billion a year in revenue.

A merger could also set a precedent as India’s biggest cross-border deal to date – at almost double the value of Tata Steel’s US$12.7 billion purchase of UK-based Corus in 2006, according to Thomson Reuters.

Bharti and MTN floated merger talks early last year but negotiations eventually fell through in May 2008 due to disagreement over how the deal should be structured.

MTN then held talks with Bharti’s local rival Reliance Communications, but the duo also failed to reach a consensus.

SingTel, which owns 30.5 per cent of Bharti, was reported to have been roped in for the first round of talks with MTN. Some media reports also said SingTel and Bharti were mulling a new joint venture for the MTN bid to avoid violating India’s regulations on foreign ownership.

When contacted, SingTel would not confirm its involvement in the new deal. ‘Talks are still in the early stages. SingTel, a major existing shareholder of Bharti, will continue to be a strategic partner and significant shareholder after the implementation of the potential transaction,’ a SingTel spokeswoman said.