While the Bharti Airtel-MTN alliance will create a telecom giant, the price paid for the deal will mean a dip in earnings in the short term for shareholders.
Sunil Bharti Mittal is taking a second shot at making Bharti Airtel, India’s largest mobile phone company, a global telecom powerhouse. The last time around, its negotiations with MTN, one of the largest telecom players in the African and West Asian markets, that took place in May 2008, broke down after both parties failed to agree on the question of control.
While Bharti has been looking at organic growth in countries such as Sri Lanka, and bid unsuccessfully in various countries for licences, its operations has largely been confined to India.
All that, however, will change if it is able to seal the deal with MTN over next two months. The new entity in which both parties will have cross holdings will have a combined subscriber base of 200 million and will be the third largest global mobile operator (in terms of subscriber numbers) after China Mobile and Vodafone.
The arrangement
The deal involves Bharti Airtel taking a 49 per cent stake in MTN while the latter is to pick up a 36 per cent in the Indian operator. The deal will require Bharti Airtel to pay a cash of Rs 34,500 crore to MTN to get the 49 per cent stake in the African telecom company; balance through issue of equity. Net of the Rs 14,500 crore of cash it will receive from the African company for its stake, the deal will entail a cash outflow of Rs 20,000 crore for Bharti Airtel.
While it will mean that Bharti will have to raise debt in the near-term, its projected operating cash flow of Rs 35,000 crore in FY10 and FY11 should help it repay the borrowings and meet its fund requirement (including for 3G) going ahead. For the equity part, the GDRs and the allotment of fresh equity to be issued by the Indian company to MTN would dilute Bharti Airtel’s equity to the tune of 57 per cent.
Premium justified?
Analysts estimate the deal values MTN at an enterprise value (EV) to earnings before interest, tax and depreciation (Ebidta) of 5.5 times and Bharti at 10.1 times their CY09 and FY10 estimated revenues. The implied EV per subscriber is pegged at $367 for MTN and is at par with $381 for Bharti. MTN is valued lower than Bharti due to the geo political risks (Africa) and multi-country operations.
Analysts believe that the valuations are reasonable considering MTN’s presence in high growth markets, high ARPUs and financial performance in the recent past.
According to Macquarie Research, over the last two years, MTN has performed better than Bharti with revenues, EBIDTA and PAT growth between 34-36 per cent while Bharti’s growth numbers range between 28-29 per cent.
The benefits
Analysts identify three key benefits of the deal for Bharti. The arrangement is perfect fit as there are no overlap in operations and thus no danger of subscriber cannibalisation. The deal will help Bharti expand its presence in the 21 countries of the West Asia and Africa.
MTN’s EBIDTA margins are slightly better than Bharti’s due to its presence in West and Central Africa, which includes Nigeria, the region’s biggest market, where the company makes EBIDTA margins of 58 per cent.
MTN’s presence in high growth markets such as Nigeria will help Bharti to maintain overall growth rates. Finally, MTN’s experience in 3G will help Bharti in rolling out its 3G network if it manages to win the upcoming auction.
| GLOBAL POWERHOUSE | |||
| in Rs crore | Bharti FY09 | MTN CY08 | Combined entity FY10/CY09 |
| No of subscribers (mln) | 100 | 100 | 250 |
| Revenues | 36,962 | 61,000 |
1,17,500 |
| EBIDTA | 15,168 | 25,500 | 49,000 |
| EBIDTA margin (%) | 41.04 | 41.80 | 41.70 |
| Net profit | 8,470 | 10,500 | 22,500 |
| Net profit margin (%) | 23 | 17 | 19.15 |
| Net Debt/Equity (x) | 0.41 | 0.52 | --- |
| Cash outflow due to deal | 34,500 | 14,500 |
20,000* |
No gains in the short term
The 57 per cent dilution of Bharti’s equity and the higher interest costs due to increase in the company’s debt would mean that the consolidated EPS (including 49 per cent of MTN’s profits) will decline in the current fiscal.
Analysts estimate this drop to be between 3 and 11 per cent. Taking an average 7 per cent dip would peg FY10 estimated EPS at Rs 46.5. While the near term is not EPS accretive, if the company can bring down costs due to scale of operations, share their expertise (low-cost model of Bharti/3G experience of MTN), the new entity will be able to maintain their margins going ahead.
Among cost savings, the immediate gains could accrue on account of collective bargaining with equipment vendors by both the entities. Meanwhile, things should get clear over the next two months, by when a decision on the deal is expected. Investors with a two-three year perspective can consider investments in the stock.
