Credit rating firm Standard & Poor's (S&P) today placed telecom leader Bharti Airtel on a negative credit watch after it placed a $10.7-billion bid to acquire the Kuwait-based Zain Telecom's African operations.
S&P placed its 'BBB-' long-term corporate credit rating on Bharti Airtel on credit watch with negative implications, following the company's proposed bid for Zain Africa, a statement from the rating agency said here today.
"The credit watch reflects our expectation of a significant deterioration in Bharti's cash flow protection measures and a weakening of its business risk profile if it acquires Zain Africa," S&P's Credit Analyst Yasmin Wirjawan said.
Reacting to the report Bharti shares plunged more than 4 per cent but later recovered marginally to close down 1.01 per cent to Rs 278.25 on the Bombay Stock Exchange (BSE) on a day when the main index fell 0.83 per cent or 136 points.
Following the Zain bid, the Bharti share has shed close to 15 per cent on the BSE.
Bharti's business risk profile could weaken because of the macroeconomic and political risks associated with, and the lower profitability of Zain Africa's operations, Wirjawan added.
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However, the agency added in the long term, the proposed transaction could provide Bharti meaningful growth opportunities in Africa, as that market has a relatively low mobile penetration. Zain Africa has close to 42 million subscribers in the continent.
S&P in its report said, "We expect the combined entity to benefit from economies of scale (in the long term) as it would have a leading position in many of the African markets as well as India."
Zain Africa would also gain from Bharti's experience of running efficient operations in a highly competitive environment and generating good margins, the agency said adding, "we believe the transaction will face limited integration risk as the two companies have almost no overlapping operations."
On the Bharti's liquidity, the agency said, "In our view, Bharti's liquidity is adequate, and we expect the company to be able to raise funds for the proposed acquisition."
It can be noted that S&P is the second rating agency to downgrade Bharti for the Zain bid, which is considered to be too pricey a deal.
On the day when Bharti confirmed the bid on February 15, Bank of America-Mrrill Lynch downgraded Bharti shares to "under-perform" from buy, citing rich valuation of the potential deal ($10.7 billion deal)and unexciting growth outlook fro Zain's African portfolio.