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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.

SingTel fully supportive of Zain deal: Bharti

Bharti reportedly in talks with banks; funding not an issue, says chairman

IT COULD be third time lucky for Singapore Telecommunications in its quest to expand beyond Asia as the company is reportedly putting its weight behind Bharti Airtel’s latest attempt at muscling into Africa.

SingTel’s Indian associate on Monday announced that it was in exclusive talks with Kuwait’s Zain group to buy over its mobile assets in the African continent.

The negotiations, which end on March 25, could result in a US$10.7 billion deal that would give Bharti access to some 42 million mobile subscribers across 15 African markets.

‘SingTel, as a partner of Bharti, is fully supporting us on the deal,’ Bharti chairman Sunil Mittal said in an Economic Times of India report.

When contacted, SingTel did not confirm its involvement in the Bharti-Zain deal.

‘As a strategic investor, we have significant governance and shareholder rights and we are actively involved in key decisions including major investments. We always seek to add value to our associates through both organic and inorganic means,’ a company spokesman said.

Singapore’s largest operator – which owns 32 per cent of Bharti – has repeatedly singled out Africa and the Middle East as the two continents that it would be keen to expand into.

It was presented with two such opportunities – to no avail – in 2008 and last year when Bharti engaged in merger talks with South Africa’s MTN Group. In September last year, the proposed US$24 million cash plus share swap deal between Bharti and MTN was again scuppered due to regulatory hurdles.

This time around, Bharti said in a statement that it is likely to pay Zain US$9 billion based on its estimated net debt of US$1.7 billion at the end of last year. US$700 million of the the payable amount will be paid a year after closing the deal.

Bharti is reportedly in talks with a few banks, including Standard Chartered and Barclays, on funding the purchase.

‘The financial plans will be laid out in totality over the coming days. All I can say is that funding has never been an issue and will never be an issue for Bharti,’ Mr Mittal was quoted as saying.