Bharti goes safari hunting

Bharti eyes 51% stake in MTN

The Financial Times reported that Bharti (SingTel’s 30.5% associate) has made a bid for control of Johannesburg-listed MTN, a major telco player in 21 countries across Africa and the Middle East. Bharti is said to have tabled an indicative bid of R165/share (MTN’s closing price at May 5 was R150/share) for a 51% stake. This values the 51% stake at US$19bn.

The acquisition will be funded by US$12bn in debt and the balance US$7bn by issuance of equity either to MTN shareholders or to institutions. Financial Times reported that the debt financing has been secured from Goldman Sachs and Standard Chartered. Merrill Lynch and Deutsche Bank are advising MTN, while Bharti is being advised by Standard Chartered. SingTel is being advised by Goldman Sachs.

MTN which has a market cap of US$37.3 bn operates across 21 countries across Africa and Middle East, serving 68m subscribers (Bharti has 62m subscribers). It has a revenue base of US$9.8 bn (almost 50% larger than Bharti) of which 66% comes from its operations in South Africa and Nigeria.

Comments

Positive move. While the initial market reaction to the deal was negative – Bharti’s share price fell 2.9% at market open on concerns of risk of overpaying and overstretching of balance sheet, we believe the deal should eventually prove to be positive for Bharti and ultimately for SingTel based on available information. Key reasons for our view: 1) Bharti evolves into an emerging market telco powerhouse; 2) accretive acquisition at fair valuations; 3) higher debt levels are manageable.

I. Bharti becomes an emerging market telco powerhouse. If the deal is successful, Bharti’s earnings base will potentially swell by 50% to US$2.5bn (2007 pro-forma) which at current trailing PE of 25x, translates into a multinational emerging market telco with a hefty US$61 bn market cap. The MTN acquisition will give Bharti strategic access to a robust portfolio of 21 telco markets in Africa and Middle-East. MTN’s 6 largest markets which contribute 82% to its total revenues enjoy a “top 2” market position (market shares range between 23-52%) in their respective markets. Growth opportunity is attractive. Blended penetration rate of markets
MTN operates in is 33% (ex-South Africa)/51% (including South Africa).

II. Accretive acquisition at fair valuations. At R165/share, MTN is valued at 15x CY09 PE (consensus estimates) and 7x CY/09 EV/EBITDA (consensus estimates). We do not consider these valuations excessive for a controlling stake. The deal is also likely to be accretive, ex-potential synergies. The 51% stake in MTN should increase Bharti’s earnings base by around 50% and this will offset the potential 15% dilution from the share issuance to finance the deal. We believe there are synergies and improvements that Bharti can bring to MTN based on its experience/track record in competing in a competitive but high-growth Indian market.

III. Higher debt levels manageable, not excessive. Bharti and MTN are currently under-leveraged with 2007 net debt/EBITDA ratios of 0.35x and 0.5x respectively. The US$12bn implies a proforma of the enlarged Bharti 2007 net debt/EBITDA of around 2.0x which we believe is manageable. EBITDA for Bharti and MTN are expected to grow by 18-33% respectively over the next two years according to consensus estimates. In addition, capex for Bharti and MTN have historically been internally-funded from free cashflow.

Is SingTel on board? We believe so. As a 30.5% 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 Middle East via a leading player in the region, i.e. MTN.

SingTel’s top priority likely to be preservation of its 30.5% We expect SingTel to negotiate for a deal structure that will not be dilutive to SingTel’s stake in Bharti, i.e. no equity issuance to MTN shareholders but rather a capital raising exercise from current shareholders to co-fund the deal. Under this scenario, SingTel will be required to contribute US$2 bn (30.5% of US$7bn). SingTel has sufficient flexibility to make the contribution by raising debt. This could potentially raise SingTel’s net debt/EBITDA to around 1.5x (from 1.0x currently), at the low end of guided target range of 1.5-2.0x.

Potential walk-away price of R210/share. In a competitive bidding scenario, we do not rule out the possibility that SingTel may not be opposed to Bharti paying up to R210/share (27% above current offer of R165/share) for MTN where the deal is no longer earnings accretive on an ex-synergy basis. This is on account of SingTel’s position as a strategic investor and may be prepared to give up some near-term gains for attractive long term growth & synergistic opportunities.

Valuation and recommendation

Maintain Outperform with unchanged target price of S$4.45. The deal is a potential catalyst for SingTel’s share price. If the MTN acquisition is successful under current terms, it could add S$0.38/share to SingTel’s valuation assuming trailing PE of 25x on proforma 2007 earnings, net of acquisition debt. However, we caution that deal completion risk is high given that MTN has a fairly fragmented shareholder base (free float of just under 75%). We do not rule out the emergence of competitive bids. MTN’s two largest shareholders only have a combined stake of 26%. The next four largest shareholders are institutional investors with combined stake of 28%. Offer price will be the swing factor in winning acceptance from the four institutional investors. SingTel’s share price has not reacted to the news, hence we do not expect SingTel’s share price to be punished if the deal falls through. We see option value for in SingTel shares in light of this transaction and SingTel’s initial share price reaction.

SingTel may get a line to Africa, via Bharti

Telco’s Indian associate values MTN at US$39b, eyes a takeover

Singapore Telecommunications associate Bharti Airtel is eyeing South Africa’s MTN Group – a deal which, if successful, would make it the biggest takeover involving an Indian company.

There is speculation that the takeover which has valued MTN at a reported US$39 billion might see SingTel get involved either as a co-buyer or increasing its stake in Bharti. It is already its biggest shareholder with a 30.5 per cent stake.

Bharti may have to raise debt or sell shares to fund a takeover of MTN, according to reports.

Bharti said in a statement yesterday that it had ‘entered into an exploratory discussion with MTN Group Ltd, South Africa’. It added that discussions are still at an early stage and may or may not lead to any transaction.

Getting into Africa via Bharti would tie in with SingTel’s acquisition strategy; it has been increasingly looking at markets outside Asia. In February, SingTel chief executive Chua Sock Koong said it ‘decided not to proceed in Ghana’, where it had reportedly been keen on a majority stake in Ghana Telecom.

Apart from in South Africa, MTN has a presence in Ghana as well as almost 20 other countries in Africa and the Middle East. It could provide a springboard for investors looking to strike deeper into the African continent.

Meanwhile, Ms Chua, who took over as chief in April 2007, has said that SingTel’s focus remains in the region, where it has significant know-how. It is also learning about new markets in Central Asia, the Middle East and Africa.

She has also said that SingTel is keen on increasing its stakes in its associates under the right terms and conditions.

SingTel spokesman Peter Heng yesterday said ‘no comment’ when asked if the group would get involved with the proposed deal.

The Financial Times said that Bharti has arranged US$12 billion in financing and may seek to buy 51 per cent of MTN, valuing the company at about US$39 billion.

The acquisition would be the biggest by an Indian company, eclipsing Tata Steel Ltd’s US$13 billion takeover of Corus Group Plc last year.

‘SingTel is the largest shareholder in Bharti with a 30.5 per cent stake and consequently has interest in this transaction anyway,’ said Citi analysts Anand Ramachandran and Rhys Summerton in a report yesterday.

‘That said, given the size of any potential acquisition, we see a reasonable probability that SingTel would get directly involved with Bharti as a co-buyer as well,’ they added.

But they also said ‘history indicates markets worry about overpayment and dilution first before looking at synergies and extended growth opportunities’, referring to Tata Steel’s takeover of Corus.

Tata Steel fell 10 per cent in the fourth quarter of 2006 as it had to raise its bid for Corus to fend off a rival takeover offer for the UK-based steelmaker.

According to Citi, MTN’s market cap of US$35 billion is just slightly lower than Bharti’s US$42 billion. MTN had a 68 million wireless subscriber base across Africa and the Middle East in March while Bharti had 62 million subscribers.

MTN posted US$4.2 billion in earnings before interest, tax, depreciation and amortisation (Ebitda) for 2007. Bharti reported Ebitda of US$2.8 billion for its financial year ended March this year.

SingTel closed at $3.86 yesterday, down one cent.

Bharti’s 4QFY08 results beats expectations

Above expectations. Bharti’s (SingTel’s associate, 30.5% stake) 4QFY08 earnings of Rs18.5bn (+37% yoy) beat consensus expectations by 5%. Full year FY08 earnings of Rs67.0 bn (+57% yoy) was 2.2% ahead of consensus. Key positive for this set of results was robust mobile subscriber growth (+67% yoy) which more than offset the ARPU decline (-12% yoy, flat qoq) as Bharti pursued first-time mobile subscribers in rural India. Group EBITDA margin for 4QFY08 held steady yoy. It should be noted that the 360bps yoy EBITDA margin slippage for mobile operations was primarily (approx 90%) due to the de-merger of passive infrastructure effectively converts passive infrastructure capex for mobile operations into opex.

Continues to pull ahead of rivals. Bharti extended its subscriber market leadership with a 23.8% (+140 bps yoy) share, bringing its mobile subscriber base close to 62m. Bharti’s subscriber market share is now ahead of Reliance and Vodafone by 6.4% pts and 6.9% pts respectively. The push to rural areas has been rewarded as rural subs now constitute 25% of overall customer base and 36-37% of net adds.

Passive infrastructure de-merger. Bharti hived off its passive infrastructure assets into its subsidiary, Bharti Infratel with effect from Jan 31, 2008. Bharti Infratel has over 52k towers, out of which 30k are transferred out into Indus Towers (a JV between Bharti Infratel, Vodafone & Idea Cellular) for 16 circles. Bhart Infratel owns 42% of Indus Towers. Bharti Infratel recorded a maiden two-month revenue contribution of Rs6.0bn and EBITDA margins of 37.1% on a 1.22x sharing factor.

Regulatory updates. Bharti has been granted additional spectrum in 6 of the 13 circles it is eligible in which is highly positive for the firm. Apart from that, the ADC charge removal and possible removal of AGR and USO fees is also positive as it would make services more affordable.

Comments

This set of results does not raise any key concerns over Bharti’s growth prospects in the near term. Instead, Bharti’s sustained market share gains over its key rivals, Vodafone and Reliance continues to highlight its unrivalled advantages in branding, distribution network and economies of scale. We believe that this positions Bharti to be the most likely winner with the rise of tower-sharing in India. Tower-sharing results in network infrastructure cost and coverage becoming common denominators in the competitive landscape, leaving branding, distribution network and economies scale as the key sources of competitive advantage.

No change to our earnings estimates and view that Bharti is the most reliable growth driver at SingTel. We are expecting Bharti to contribute 20% of SingTel’s pre-tax profits in FY09, up from 17% in FY08.

Valuation and recommendation

Maintain Outperform with unchanged sum-of-parts valuation of S$4.45. SingTel remains attractive for its reliable associates-led earnings growth following Bharti’s strong results and growth outlook. We also continue to like SingTel for strong prospects of attractive dividend announcement (CIMB est: 16 cts/share, 4.2% yield) in the upcoming results announcement on May 14. The key risk at SingTel lies with earnings delivery at Telkomsel which is facing increased competition on the back of aggressive price cuts by Excelcomindo.