Bharti and MTN have announced mutual acquisition of stakes which can eventually lead to a full-scale merger of the two dominant emerging market incumbents in a $23 billion deal.
This represents second attempt by Bharti, after talks broke down with MTN a year ago, to capture the fast-growing and potentially one of the last under-penetrated telecom markets of Africa and Middle East.
We present reactions and analysis on the deal from top brokerage houses across the country.
India Infoline research team
Bharti Airtel would buy nearly 36% stake in MTN in a cash-cum-stock offer. It would pay ZAR86.0 per share in cash and 0.5 newly issued Bharti shares in the form of GDRs for every MTN share acquired.
Bharti’s offer values MTN at a 36.6% premium to its 22 May closing price. In turn, MTN and its shareholders would acquire 36% stake in Bharti.
MTN would acquire approximately 25% of Bharti for a consideration of $2.9 billion in cash and a fresh issue of ~25% MTN shares.
Coupled with fresh MTN issue and 36% stake buy, Bharti’s total stake in MTN would be about 49%. The two companies have agreed to discuss the potential deal on an exclusive basis with one another till 31 July.
We estimate Bharti may have to raise debt to the tune of $3 billion as net cash outgo of $3.9 billion on the deal may require additional borrowings.
However, FCF of ~ $500 million and comfortable net D/E of 0.2x in FY10E leaves sufficient headroom for the company.
Considering the scope of MTN’s operations, integration issues and the need to avoid open offer in India may further complicate the deal.
For now, we retain our MARKET PERFORMER rating on the stock with a target price of Rs776.
In terms of long-term strategy, the deal makes sense for Bharti as it provides the company entry into 13 fast growing and under-penetrated countries of Africa.
The company is also poised to benefit from the huge scale and operating metrics (higher average revenue per unit [ARPU] and margins) of MTN, which is better than that of Bharti.
However, the broad contours of the deal leaves ambiguity about the extent of dilution in Bharti’s equity capital to acquire 49% stake in MTN.
Also, the deal will result in around $4 billion of net cash outflow from Bharti (this is in addition to $4-5 billion the company will require for 3G auction and other normal capital expenditure in the current year).
Another area of concern is that the deal would be earning per share (EPS) dilutive for Bharti in the next couple of years.
We would wait for further and finer details of the deal. In the meantime, we maintain Buy on the stock and putting price target under review.
At the current market price, the stock is trading at 15.5x its FY2010E earnings and 8.6x its enterprise value (EV)/earnings before interest, tax, depreciation and amortization (EBITDA).
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