The Bharti overhang is back

What has changed?

• Bharti Airtel (Bharti) (BHARTI IN, Rs310.85, 4), an associate company of Singapore Telecom (SingTel), has signed an agreement to acquire Zain Africa.

Impact

• Our telecoms analyst, Ravi, published Bharti Airtel: Deal signed to acquire Zain Africa today. Ravi estimates the acquisition of Zain Africa could lead to a 15% downward revision in Daiwa's FY11 EPS forecast for Bharti. The downward revision in FY11E EPS could be as much as 20% if Bharti were to win the pan-India 3G spectrum bid as well.

• If there were a downward revision of Bharti's FY11 EPS forecast, it would reduce our FY11 net profit forecast for SingTel by 5% to S$3,939m, or a 0.5% YoY decline.

• The deal is perceived negatively by the market, in our view, as we believe the acquisition EV/EBITDA multiple is high at 8.4x, while Zain Africa's recurring earnings was still negative last year.

Valuation

• Bharti's target price of Rs280 is unchanged pending more information on the deal, which we use for our estimated sum-of-the-parts (SOTP) valuation of SingTel (S$3.09/share). Bharti currently accounts for 21% of our estimated SOTP value for SingTel.

Catalysts and action

• We maintain our 3 (Hold) rating and six-month target price of S$3.09 for SingTel pending more information on the Zain Africa deal. Nevertheless, the risk is on the downside, in our view. We prefer MobileOne (M1) (M1 SP, S$2.09, 2) in the Singapore telecoms space, on the back of its high dividend yield and growth potential of broadband business.

Bharti-Zain deal edges towards finishing line

2 special purpose vehicles formed, in Singapore and the Netherlands

BHARTI AirTel has reportedly formed two special purpose vehicles (SPV), in the Netherlands and Singapore, for the acquisition of Zain's assets in South Africa.

India's Economic Times said that Bharti officials are expected to make their way to the Netherlands in the next few days to finalise this SPV arrangement.

SPVs are typically used to acquire and finance specific assets and companies tend to use them to bankroll large projects to avoid putting the entire firm at risk.

Beyond the establishment of these SPVs, the report said that Zain has also agreed to reimburse Bharti for the legal costs incurred for its ongoing dispute between its Nigerian unit and Econet Wireless Holdings.

This could remove the final hurdle in the acquisition talks between the two operators.

Bharti on Wednesday said that it had completed due diligence for its US$9 billion bid to acquire Zain Africa and the official paperwork for the deal is 'expected to be signed soon'.

This comes after a month of exclusive negotiations between the two parties. Once completed, Bharti, in which Singapore Telecommunications has a 32 per cent stake, will gain some 42 million mobile subscribers across 15 African markets.

Their combined operations will have a revenue base of nearly US$13 billion and Ebitda (earnings before interest, taxes, depreciation and amortisation) of around US$5 billion.

Bharti failed in its two previous attempts to expand to the African continent. The first opportunity surfaced in 2008 when it engaged in merger talks with South African telecommunications conglomerate the MTN Group but a deal could not be reached then.

Bharti and MTN entered into exclusive merger negotiations for a second time last year but the proposed US$24 billion cash plus share swap deal was eventually canned due to regulatory hiccups.

Bharti set to wrap up US$9b Zain Africa deal

(NEW DELHI) Bharti Airtel looked set to wrap up its US$9 billion deal to buy most of Kuwaiti telecom group Zain’s African assets, giving India’s top mobile operator a foothold in the frontier market in its third attempt.

Bharti, which failed twice to acquire African telecoms operator MTN Group, is desperate to expand in new markets, as cut-rate competition in its home turf – the world’s fastest growing – squeezes margins and clouds growth outlook.

Controlled by billionaire Sunil Bharti Mittal, who started his career selling bicycle parts in India, Bharti is battling newcomers such as Norway’s Telenor and Tata Teleservices, part owned by Japan’s NTT DoCoMo.

‘It’s a good deal because Africa is the last bit left among emerging markets. And Bharti gets access to a lot of synergies in value-added services,’ said Girish Trivedi, deputy director of the South Asia and Middle East technology team at consultancy Frost & Sullivan. ‘Imagine the time it would have taken them to build a leadership position in so many countries through greenfield expansion?’

Zain’s board approved the deal on Wednesday and the company expects to sign the deal in the next few days. Africa has already attracted global players such as Vodafone and France Telecom, while China Unicom, China’s No 2 mobile carrier is keen to participate in the privatisation of a Nigerian telecoms company.

Bharti, 32 per cent owned by Singapore Telecommunications, will also battle with MTN, with which it tried to seal a US$24 billion deal before tie-up talks collapsed in October.

Bharti is expected to make an announcement as the deadline for exclusive talks with Zain ended yesterday.

‘The reaction of the stock price reflects the deal being done at attractive financing terms. But how Bharti is going to benefit from it will only be known in the next 2-3 quarters,’ said Deepak Jasani, head of research at HDFC Securities.

Due diligence for the deal, the second-biggest overseas acquisition by an Indian buyer after Tata Steel’s US$13 billion purchase of Corus in 2007, has been completed successfully, Zain said on Wednesday.

Bharti, with 125 million subscribers, has thrived on low incomes and tariffs and a large rural population – characteristics shared by African nations – and is keen to replicate its Indian model in the 15 African countries where it is buying Zain’s assets.

But some analysts have said Bharti is paying a high price for the deal, with enterprise value of US$10.7 billion at around 10 times Ebitda, and may be a drag on the Indian firm’s earnings.

‘We can know whether the valuation was right only after some time. So yes, there are opportunities, but there are also mine-fields and pitfalls ahead. We have to see what comes first,’ Mr Jasani said.

The shares, valued at about US$26 billion, were the second-worst performer in the benchmark index in 2009. So far this year, the shares have lost more than 5 per cent.

Bharti would pay US$9 billion in cash to Zain, including US$700 million to be paid one year after the deal closes. Bharti will also assume US$1.7 billion debt on the target firm’s books.

Bharti said on Sunday it had secured US$8.3 billion in loans from a clutch of lenders, led by Standard Chartered, Barclays and State Bank of India. Banking sources said Bharti was getting an attractive interest rate of around 200 basis points over Libor.

Standard Chartered and Barclays were advising Bharti on the deal, while Zain was being advised by UBS. — Reuters

SingTel offers cheaper broadband solution for ships

SINGTEL is making innovative use of technology to bring down the cost of high speed broadband services at sea which can potentially save up to US$120,000 in infrastructure costs per vessel.

The first in Asia solution was launched this week and aims to reach out initially to the existing fleet of at least 1,500 vessels in the Asia-Pacific region that are already equipped with television receive only (TVRO) antennae with an expected market share of 5 per cent to 10 per cent within three years. Other potential users include floatel operators and interest may even extend down to the so-called middle segment of smaller bulk carriers and high-end yachts.

The solution offers unlimited broadband connectivity with a download speed of 2Mbps, and is available on a subscription basis from US$1,999 per month. Its development was co-funded by the Maritime and Port Authority of Singapore’s Maritime Innovation and Technology Fund.

‘In the past, the cost of satellite infrastructure prevented many maritime companies from equipping their ships with high-speed broadband services,’ said executive vice-president of Business Group Bill Chang.

Not only will the cost of equipment be reduced but data costs will also come down with SingTel offering an affordable package. ‘We are the only telco and satellite operator that has now integrated this in a commercial offering,’ said vice-president of Satellite Titus Yong.

SingTel’s current satellite provides good coverage in the Asia-Pacific and with the launch of its new satellite within a year, this will be extended to the Mediterranean area as well. SingTel is in talks with another satellite operator to provide North American coverage, which should be tied up soon, Mr Yong revealed.

Among the services that will become possible with the new service is SingTel’s recently launched suite of entertainment services including the first-of-its-kind Karaoke-On-Demand service. In addition, seafarers can also enjoy a wide selection of movies and content with SingTel’s maritime video-on-demand service.

Other possible applications include e-learning programmes, downloading of e-books and web-based TV content.

SingTel is also working with local content providers from the countries where ships’ crews predominantly come from such as the Philippines to provide more programming from home.

Bharti to seek cover from Zain's Nigeria dispute

BHARTI Airtel Ltd, the Indian phone company planning a US$9 billion purchase of Zain's African assets, may ask Zain for legal protection from a dispute in Nigeria, according to a source familiar with the negotiations.

The proposal, to be considered by Bharti's board today, will seek an indemnity from Zain against ongoing litigation involving operations in Nigeria, the source said. Econet Wireless Holdings Ltd, based in a suburb of Johannesburg, is disputing control of Zain's unit in Nigeria.

The Nigerian operations are the single largest revenue producer for Kuwait's Zain, and have been described by Bharti chairman Sunil Mittal 'as the most important piece' of its planned acquisition. Econet chief executive officer Strive Masiyiwa said in an interview on Thursday that there has been no agreement or settlement in the dispute over the Nigerian unit.

Econet has 'not heard from Zain or Bharti' on Nigeria, Mr Masiyiwa said, adding that he's 'cheesed off' about reports that a settlement has been reached.

India's largest wireless company's plan cannot include the purchase of Zain's Celtel Nigeria BV unit, Econet has said. For Bharti, troubles in Nigeria, Africa's most populous nation and its fastest growing telecommunications market, are among hurdles that the company faces as it seeks to take over Zain's operations in 15 African countries.

Kuwait's Mobile Telecommunications Co, or Zain, and Bharti said on Feb 15 that they would hold exclusive talks until March 25 on the assets.

Econet is seeking to overturn a 2006 deal in which Celtel bought a 65 per cent stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria. Econet, with 5 per cent of Zain Nigeria, said that it should have had the right of first refusal on those shares.

Econet's Mr Masiyiwa has said that the case is still in arbitration and that until that process has been completed, 'Nigeria cannot be sold, it is not for sale, there can be no due diligence by Bharti or any other party.' — Bloomberg