Looks like Bharti Airtel Ltd is caught between the devil and the deep blue sea. The Indian telecom story is far from exciting any more, almost forcing the company to look for growth opportunities in overseas markets. The catch is, there are hardly any decent telecom assets available globally, making the acquisition-led growth route expensive.
The company’s attempt to buy Zain Group’s African assets seems to make complete sense, as it provides considerable growth prospects. But most analysts say that the enterprise value (EV) of $10.7 billion (around Rs49,650 crore) is frightfully expensive. Based on last week’s closing share price, Bharti Airtel itself was valued at an EV/Ebitda (earnings before interest, taxes, depreciation and amortization) valuation of 7.5 times. Zain Africa has been valued at 11.6 times annualized Ebitda for the first three quarters of 2009, representing a 55% premium to Bharti’s valuations.
Graphic: Yogesh Kumar / Mint
According to some analysts, Zain’s African assets could turn out to be an interesting acquisition and it makes sense for them to be valued at a premium to Bharti. For one, mobile penetration in most of these countries is relatively low. Besides, their aggregate Ebitda margin is relatively low at 32%, leaving some room for margin improvement. If Bharti Airtel is able to capitalize on both these factors, earnings growth of the acquired assets could be considerably high.
But a 55% premium seems outsized. Bharti’s shares fell by more than 9% in Monday’s trading session, factoring in much of the pain related to the possible acquisition. In terms of market capitalization, the company has lost $2.4 billion in value after it announced its intent to buy Zain’s African assets.
One way to interpret the markets’ response is that Bharti’s overpaying around $2.4 billion for Zain Africa. In other words, the markets may be comfortable with an EV of $8.3 billion ($10.7 billion less $2.4 billion), or an EV/Ebitda of nine times. That would represent a premium of about 20% to Bharti’s valuations, which seems reasonable given Zain Africa’s better growth prospects. So while there’s a near consensus that Bharti would be overpaying for Zain Africa, it’s also true that much of this is already reflected in its share price.
As far as Bharti Airtel’s domestic operations go, increased competition led to a year-on-year decline in its Ebitda last quarter, a first for the company. But although profit growth has come under pressure, cash generation is getting stronger. In the first three quarters of the current fiscal year, the company generated Rs4,550 crore of free cash flow (after deducting capex), amounting to around 16% of revenue for the period.
Barring the 3G bid, the company is hard-pressed to find decent avenues to invest its cash, and this seems to be fuelling its mergers and acquisitions policy. Bharti had tried hard to conclude a merger with South Africa’s MTN Group, but was unsuccessful. Its high bid for Zain’s Africa assets suggests that it is getting increasingly desperate to deploy excess cash.
Write to us at email@example.com