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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:

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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.

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