New Delhi: A day after Bharti Airtel Ltd announced it was in talks to buy half of South Africa’s MTN Group Ltd, analysts were near-unanimous in their prognosis: A deal would be positive for India’s largest phone firm by sales and open up an opportunity to accelerate profit growth.
But that did not stop investors from hammering the shares of Bharti Airtel by 4.95% to Rs771.20 at the end of trading on Tuesday, 10.95% weaker from Friday.
Greater risks: Bharti Airtel chairman Sunil Mittal. Bharti Airtel’s share price will probably fall from the valuation of a price-to-earnings multiples of 18.9 for the fiscal year gone by. Madhu Kapparath / Mint
Reason: worries that the New Delhi-based firm may be expanding its equity base too fast and was paying a premium for MTN in the transaction. Estimates of the equity dilution toted up to 57%, meaning that Bharti Airtel shareholders could see their earnings per share (EPS) dropping significantly in the current fiscal year.
EPS is the share of net profits apportioned to each share. A fall in EPS consequent to equity dilution, unless made up by an immediate growth in profits or at least expectations of such growth, typically results in a fall in share price.
“The fall is mainly due to short-term investor concerns on the dilution of the stake,” said Harit Shah, a telecom and technology analyst at Angel Broking Ltd. Gains from the potential Bharti Airtel-MTN deal will play out in “a long term of two to three years,” but even then the stock would be benchmarked against “global valuations which are relatively lower”.
Also See Proposed Changes (Graphics)
Bharti Airtel’s share price will probably fall from the valuation of a price-to-earnings multiples of 18.9 for the fiscal year gone by.
“The risks are greater as you go global,” Shah said, adding he had not changed his rating of “accumulate” or “buy” on the stock because it was too early to factor in the MTN transaction.
Also See Taking a Beating (Graphics)
Shares of MTN were trading at 8pm India time on Tuesday at 124 South African rand (around Rs710) each, a fall of 4.5% from Monday’s 129.90 rand and 2% stronger than Friday’s 119 rand.
Credit assessor Standard and Poor’s Ratings Services, or S&P, on Tuesday affirmed its BBB long-term corporate credit rating on Bharti Airtel, with a stable outlook.
“The combined company is expected to benefit from economies of scale as it would become a leading emerging market telecom operator,” S&P credit analyst Suzanne Smith said in a statement. “Bharti would also benefit from MTN’s operating experience in 3G and number portability, which is expected to be soon introduced in India.”
“Nevertheless, after the proposed partnership with MTN, Bharti would face higher country risk,” Smith said, noting that only about 25% of MTN’s 2008 earnings before interest, taxes, depreciation and amortization, or Ebitda, a key measure of profitability, came from South Africa. MTN’s other operations include Nigeria, Ghana, Syria and Iran.
Bharti Airtel and MTN said on Monday that they were in talks to buy 49% and 36% in each other, respectively, to be paid in a complex combination of cash and equity, in a deal “in excess of $23 billion” (Rs1.09 trillion). The exclusive nature of the negotiations runs until 31 July.
Both sides expect the talks — which mark a revival of similar negotiations between the two sides a year ago—to be the first step towards a full merger.
The deal is attractive to Bharti Airtel because it would allow it access to telecom markets with high monthly customer billings.
For MTN, it would bring access to India, the second largest wireless market in the world, and potentially enable it to leverage the Indian firm’s low-cost business model across networks in 21 countries, from South Africa to Afghanistan.
But for now, the terms of the deal, according to analysts Bhuvnesh Singh and Sunil Tirumalai at Credit Suisse’s Singapore and Mumbai offices, favour shareholders of the Johannesburg-based firm. “Taking Friday’s closing price for the two companies, we find that the deal results in a transfer of $3.8 billion of value from Bharti shareholders to MTN shareholders. This reflects an 11% value loss,” the analysts wrote in a Tuesday report.
Brokerage KR Choksey (short for Kisan Ratilal Choksey Shares and Securities Pvt. Ltd) said it saw EPS dilution for at least two years at Bharti Airtel should the transaction go through. “Even in fiscal year 2010 and fiscal year 2011, Bharti’s EPS could dilute by 6.9% and 8.4% and we expect synergies to be visible in fiscal year 2011 only,” the firm’s three analysts, led by Kevin Trindade, wrote in a report on the proposed transaction.
Still, even with such a dilution, the deal terms are unlikely to be changed, another analyst said. “Over a longer term, the stock will come back to its normal levels. The fall in share price will not cause a change in the deal numbers,” said Nishna Biyani, a Mumbai-based analyst with Prabhudas Lilladher Pvt. Ltd.
In New Delhi, Bharti Airtel said in a statement it does not expect “the funding requirements to be onerous”.
Another drag on the deal, some analysts pointed out, is regulatory risk. While noting that the proposed deal will not run into a hurdle of foreign ownership limits in India, Credit Suisse analysts said job concerns in South Africa, reeling under a downturn in commodity prices, could trip the deal.
“In addition, South Africa has black economic empowerment (BEE) regulations, due to which companies that do business with various government entities (with respect to licences, concessions, etc.) are required to maintain a fair amount of black representation in equity ownership and management,” Singh and Tirumalai wrote. “Thus, we would not take this deal as closed until all regulatory clearance is obtained.”
Bharti Airtel and MTN “will be actively engaging with the appropriate regulatory bodies to ensure that the necessary approvals are obtained,” a company spokesman said in an emailed reply to queries.
Graphics by Sandeep Bhatnagar and Ahmed Raza Khan / Mint