New Delhi: Bharti Airtel Ltd’s plan to acquire the African assets of Zain Group, which has been severely rebuffed by shareholders for being too expensive, has got analysts wondering why the company is paying a 40% premium for intangible assets such as goodwill, especially since at least one of the units is mired in an ownership dispute.
India’s biggest phone company by subscribers tumbled further on the Bombay Stock Exchange on Tuesday, dropping 4.45% to Rs272.45, following Monday’s 9.22% decline.
Of the $10.7 billion (around Rs49,400 crore) enterprise value put on the acquisition, “around 40% of the valuation of the deal is of intangible assets, which is primarily made up of goodwill,” said a Dubai-based analyst working with an international brokerage firm on condition of anonymity as he is not authorized to speak to the media. Two other analysts also voiced similar views, pointing out that the operations are still not profitable. The African assets reported a loss of $35 million in 2008, with the biggest coming from Ghana, Kenya and Nigeria.
Intangible assets are generally defined as anything that does not include plant and machinery and includes intellectual property rights. Goodwill is listed in the assets part of a firm’s balance sheet and usually arises when one firm buys another at a premium over the book value of the firm.
The disputed nature of any part of a company’s assets would undermine this goodwill. For example: Zain is battling a court case over control of its Nigerian unit.
Kuwait-based Zain became one of the largest mobile telecom service providers in Africa through a combination of organic as well as inorganic growth. It purchased Celtel in April 2005 for $3.4 billion giving it presence in 13 African countries, after which it made other acquisitions in the continent, including Nigeria.
Celtel bought a 65% stake in Vmobile before being renamed Zain Nigeria but Econet, which has 5% of Zain Nigeria, has been in court fighting to overturn the purchase. Econet believes that it should have had the right of first refusal on the shares.
The CEO of Econet, Strive Masiyiwa, said in an interview that Zain Nigeria is not for sale until the ownership dispute is resolved. Masiyiwa also said Zain had given an undertaking that it would not sell the Nigerian operations till the court case was decided.
Zain’s African assets contributed 37% of consolidated revenue and 30% of consolidated Ebitda (earnings before interest, taxes, depreciation and amortization, a measure of profitability) in 2008. It’s the market leader in 10 of the 15 countries that it’s present in, and No.2 in four.
Bharti issued some details on the payment schedule on Tuesday.
“The total agreed enterprise valuation of $10.7 billion is likely to result in a total payout of around $9 billion (which includes any loans payable by the operating companies to Zain Group) based on the estimated net debt of approximately $1.7 billion as on 31 December 2009,” the company said in a press release. “It has been agreed that a sum of $700 million out of the total payable amount would be paid after one year from closing. The parties have also agreed to a break-fee of $150 million payable by either side on terms and conditions customary to a deal of this nature and size.”
Bharti had said on 15 February that it was in exclusive talks, till 25 March, with Zain for its Africa operations. The transaction will give Bharti a presence in 15 African countries with almost 42 million customers.
Some brokerages downgraded their ratings on Bharti following the announcement.
“Quick comparisons with MTN (which Bharti failed to acquire) suggests that this business is significantly inferior in terms of profitability, operating metrics and growth outlook,” Shubham Majumder, regional head of telecoms research, Asia, Macquarie Capital Securities, wrote in a 15 February report. “Sale of these assets to Bharti underscores the difficulty in operating profitably in these markets. We know that Zain had net debt of $4.6 billion on its balance sheet as of September 2009.”
The Dubai analyst says Zain’s African operations carry a little over $2 billion in debt. This translates into a cash component of around $8 billion with a substantial part of this being raised through debt. Bharti, with at least $1.5 billion surplus cash on its books, could plough in around $1 billion.