What exactly is the deal being stitched together between MTN Group Ltd and Bharti Airtel Ltd? The terms are complex, but the bottom line is that Bharti will be acquiring 49% of MTN should the deal go through. In turn, MTN and its shareholders will be taking a 36% stake in Bharti.
According to computations made by Sharekhan Ltd’s head of research Gaurav Dua, Bharti will be paying around $13.1 billion (Rs61,832 crore) for the 49% stake, with $7 billion in cash and $6.1 billion in equity.
Also See On Merger Track? (Graphics)
MTN, on the other hand, will be paying around $9.6 billion for its 25% stake in Bharti (the remaining 11% will be held directly by MTN shareholders). Since MTN will be paying $2.9 billion in cash as part payment for its stake, the net cash outflow for Bharti will be around $4.1 billion (that is, the $7 billion that Bharti is required to pay less the $2.9 billion it will get from MTN).
Bharti will also be required to dilute its equity, as will MTN. Dua said, however, that the upshot of all this is that Bharti will be getting MTN at a valuation of about 5.5 times EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortization), which is cheap.
So, why then did Bharti’s stock fall on Monday? The explanation probably is that the market is less bothered about the long-term benefits of the deal, but is instead focusing on the impact it will have on Bharti’s balance sheet in the near future.
Analysts point out that Bharti will have to pay for 3G, or so-called third-generation, spectrum, and will have to incur capital expenditure (capex) for rolling out new services in addition to its normal capex, which could be as high as $9 billion this year alone. Where will that money come from? The market is probably worried about the effects of Bharti taking on additional debt on its balance sheet and about the dilution in earnings.
The equity dilution is another dampener. Note that the market had reacted in a similar fashion last year, too, when talks had been held between MTN and Bharti. The worries then were exactly the same, with the added problem that the deal was expected to be expensive.
While much has been made of Bharti being able to replicate its low-cost model, that optimism needs to be tempered by the fact that some of the markets MTN is in have a population of less than a million, while some others have a population of less than five million. It’s unlikely that Bharti can expect the same benefits of economies of scale it does in India. Moreover, since there is no change in management control, there’s unlikely to be any open offer.
But taking on additional debt may not be much of a problem. MTN’s balance sheet is strong with low debt, and Bharti will be able to consolidate MTN’s accounts, which would enable it to borrow more. Interest costs, of course, will rise substantially. But MTN’s revenue has been growing at 40%, compared with a revenue growth of 28% for Bharti. Ebitda margins are higher for MTN compared with Bharti, as is average revenue per user.
In short, analysts say that the long-term benefits to Bharti will be substantial and the ability to expand in countries such as Nigeria and Iran should provide an answer to slowing growth in India.
Graphics by Ahmed Raza Khan / Mint
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