/ 25 February 2010

Bharti: Africa’s potential makes Zain deal value fair

Bharti Airtel said $9-billion was not a high price for Kuwaiti telecom Zain’s African assets given the growth opportunities, though it could dilute earnings in the short-to-medium term for India’s leading telecom.

In their first detailed comments to analysts since confirming the talks with Zain, Bharti officials said Africa had good growth opportunities among emerging markets, given its high population, lower cellphone penetration and relatively less competition.

“Nobody is doubting their ability to turn around businesses,” said Gajendra Nagpal, CEO of brokerage Unicon Financial Intermediaries.

“But if it is going to be a load on their balance sheet, if it is going to be an earnings-dilutive transaction, obviously the market will be concerned,” he said, but added Bharti’s current stock price had factored in much of the potential risks.

Bharti’s stock has fallen 12% since it confirmed the talks, with analysts worried the debt needed to buy Zain’s operations in 15 countries would stretch its balance sheet, and as turning around the loss-making assets would take time.

“We have very carefully evaluated the financial aspect of the deal as well as valuation,” Akhil Gupta, deputy group CEO at the operator’s parent Bharti Enterprises, told a conference call with analysts.

“The valuation is fair and reasonable and the financial impact would be well within accepted and prudential norms”, even if fully funded by debt, he said.

Bharti is yet to detail its financing plans. Bankers have said the company is looking to raise debt from offshore as well the local markets to fund the deal.

Gupta also said equity raising through the firm or its tower unit was a possibility to cut debt after a deal.

“We are a bit debt-averse and we would definitely want this debt level to come down,” he said.

“It does remain a possibility, to raise more equity at Airtel or at passive infrastructure [unit], but we have not taken any decision at this point of time.”

Though there could be some pressure on the company’s earnings per share in the short-to-medium term to funds the huge deal, Gupta said it was not a cause of worry.

“I must point out that when you look for growth stories like this, I think earnings-per-share dilution should for sometime take a backseat,” he told analysts on the call.

Bharti shares rose 0,2% on Thursday in a flat market.

Minutes factory
Chairperson Sunil Mittal said he was confident the company he founded would be able to apply its “minutes factory” model in Africa, referring to a low-cost, high-volume model that has made it the market leader in India with about 120-million subscribers.

The total population of the 15 African countries Zain operates in was just under 500-million, and about 35 people in every 100 used cellphones, Mittal said.

“We can substantially increase usage as well as achieve deeper penetration, resulting in rapid increase in overall traffic and improvement in margins,” he said.

Mittal said Bharti was still doing due diligence but was hopeful of clinching a deal by March 25, when a period of exclusive talks end. Gupta said they had not yet come across any “extraordinary regulatory issues” that would threaten the deal.

CEO Manoj Kohli, who becomes head of Bharti’s new international unit in April, said the telecom would aim to replicate its outsourcing, infrastructure sharing and distribution strategies in Africa.

Bharti should be able to integrate Zain’s operations within six months of closing the deal, he said. – Reuters