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Bharti Airtel At Important Support Line

Bharti Airtel decided to acquire Kuwaiti telco Zain’s African Assets for $10.7 billion – nearly 50,000 crores. Since then the stock has tanked:


There are those that say Bharti has overpaid. Livemint says they’re desperate to deploy cash and are paying a 55% premium for Zain in comparison with Bharti’s own valuations. (EV/Ebidta wise; it sounds like mumbo jumbo but in acquisitions it’s a useful comparable ratio)

Yet, it’s mired in controversy. The EV figure – Enterprise Value for the curious – contains nearly 40% as “goodwill”. The wool is hurting my eye now. Otherwise, the operations are still not profitable: The African assets reported a loss of $35 million in 2008! To add to the misery, the ownership of the Nigerian unit is up in the air; there’s a legal battle on. Nigeria accounts 21% of Zain’s worldwide customers and 16% of its revenue – the largest customer concentration for it, even greater than the home base of Kuwait.

[Goodwill is real mumbo jumbo – you can “invent” it through acquisitions. Acquire a company, say you got so much goodwill because you paid higher than what you should have paid, and capitalize that amount on the balance sheet. Companies have done this forever, and it works until…it doesn’t. ]

  • Zain’s entire operations have slumped – the first nine months of 2009 have seen a 17% drop in net profits from 235m KWD to 196m KWD.
  • 9 months in USD: Revenue: $6.1B, EBIDTA: $2.6B, Net Profit: $677 million.
  • 47-50% of all Zain revenue comes from non-African sources (source: Q3 presentation)
  • In Nigeria, they lost 6% of their customers year on year as of September 2009
  • The ARPUs for Africa lie between $3 and $13 – Nigeria is halfway at $7. In India it’s ARPU is Rs. 230 or $5.
  • Zain has 42 million customers in Africa.

More stats coming up in another post.

  • Bharti supposedly has $1.5B in cash – about 7,000 crores – and the African unit has around $2 billion in debt; so they have to pay about $8 billion – 35,000 crores. Assuming they put in 5,000 cr. as equity, they have to raise 30,000 cr. as debt.
  • Adding that to current debt will mean 39,000 cr in debt; say at 6% they will pay Rs. 2,400 cr as interest costs.
  • For a set of assets that are at this point not even EBIDTA positive, this means Bharti will have to absorb it from its profitable India operations.
  • The India operations will do about 10,000 cr. in net profits this year – that’s a hit of 25% on its profits (until the African operations scale to absorb the losses)

With annualized EPS expected around Rs. 25, I’d imagine that 10 P/E is where it should stop falling. But Bharti has no choice really – with Indian competition eating into its profits and market share, it has to go abroad. A few years of pain will happen. How they respond will determine if they become a great entity or simply become irrelevant.

Without taking a fundamental call on Bharti, the charts indicate serious dramatic damage. A pull back rally will happen, but I have no idea from where; if it breaks this support level, there’s hardly anything in there till the 200 levels. (229, the 1 year low, was an intraday low in November – doesn’t quite count as a support)

Disclosure: No positions.

  • Yogi says:

    >Hi Deepak,

    Can this be a good opportunity for fundamental/longterm investor?

    Yogesh Tiwari

  • Gharoa Adda says:

    >Zain has 42 Million Customers, not 4.2 Million.

    Quote from Religare Report :

    Deal valuation: Bharti has valued Zain Africa on 7.7x and 9.2x CY08 and CY09E
    EBITDA of the company (full value) against 7x for its own domestic operations.
    This valuation, we believe, is fair taking into consideration the premium attached
    to the controlling stake as well as the high growth profile of the African territory.
    However, adjusted for the minority interest in Zain Africa, the deal becomes
    expensive at 9.8x and 11.6x.
    Zain’s African operations, after reporting strong growth in CY07 and CY08, have
    deteriorated in CY09. Turning around Zain’s Africa operations thus assumes
    critical importance for Bharti to make this acquisition value accretive. This
    turnaround, we believe, is at least two years ahead. The Bharti management has
    been accredited for its execution capabilities in the Indian territory; however, it
    has little experience in managing cross-border operations. It therefore remains to
    be seen if Bharti is able to replicate its domestic growth story in Africa.
    An EPS neutral deal: We find the deal to be EPS neutral for Bharti as Zain’s
    EBITDA (US$ 1.4bn) would be sufficient to offset the increase in depreciation
    and interest cost for Bharti post acquisition ($1.2-$1.4bn). Lower-than-estimated
    interest costs, higher tax shields, and operating synergies would thus be positive
    for Bharti. In contrast, the investment banking fees and merger / re-branding cost
    would have one time negative impact.
    Balance sheet stretch to be comfortable: Assuming that Bharti funds the entire
    deal through debt, its net debt would rise from nil currently to US$ 10-12bn.
    Even at this elevated level, Bharti’s D/E would stand at 1x and D/EBITDA of 2-
    2.4x (inclusive of Zain Africa) – a comfortable zone. The IPO of Infratel / Indus
    tower would further help de-leverage Bharti’s balance sheet, mostly in FY11.
    Valuation & rating: Bharti will hold exclusive talks with Zain till 25 March ’10.
    Deal closure remains subject to due diligence and regulatory approvals. In the
    past, Bharti made two failed attempts to close the deal with MTN. We maintain
    our estimates and Buy rating on Bharti with target price of Rs 380.

  • Shailender says:

    >Bharti is facing margin pressure in home Mobile market because of intense competition and price wars.

    Bharti 's Action ( buying 70 percent of Bangladesh's Warid Telecom) and now African business of Zain shows thatit want to replicate its low-price, high-volume model in other emerging markets.
    I believe it makes sense to do so as a part of long term stratgey.
    Also $10.7 billion looks like a nice premium for Zain but then Zain have spent more than that to establish the business in Africa.

  • NPR says:

    >With Nifty stocks, with so many brokerages setting "targets" , one may not obtain good price, unless there is some amount of doubt, uncertainty associated with the stock/company.

    As the pundits say, DUF are needed for these frontline stocks.

    I would put faith in Management as they have executed in India (against competition like Tata, Reliance).

    My 2c.

  • Deepak Shenoy says:

    >Yogi: I don't know. Fundamentals still being looked at.

    Gharoa Adda: Thanks – corrected. I don't believe the religaer report – they seem to have simply pro-rated the EBIDTA which isn't correct, IMHO. But doing the analysis

    Its probably a good deal – I don't know yet. All I'm looking at right now is price; let's see if things look better for the stock

  • Saif says:

    >what happens if they dilute the equity and raise the money…of the 380 crore shares ..promoters stillhold 67% approx..
    yes eps will get diluted this way too but wont it save them interest costs by part financing from the equity..why dont companies like tata steel etc go this way for atleast part finance..

  • Arghya says:

    >Hats off !!

    Great. That is what exactly I like, fundamental analysis with technical analysis to time the entry-exit.

    Expecting more like this in future.

    (I would not touch any telecom companies right now. Intense competition is definitely going to squeeze the profit margin. My mobile bill has declined by more than 50% ever since the second pulse has been introduced. So whatever the cooked financial reports numbers tells me, I would try to be overall short on any telecom stock. Bharti Airtel was a good short option but at this point it not a good short. Better to avoid this one.)

  • York says:

    >These are all very interesting things to think about.