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Business News/ Money / Bharti’s market cap recovers as investors revisit Zain deal
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Bharti’s market cap recovers as investors revisit Zain deal

Bharti’s market cap recovers as investors revisit Zain deal

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This is despite the twin blows of increased spectrum charges and higher tax rates dealt to the company last week. Bharti pays minimum alternate tax, which will be charged at 18% next year, up from 15% currently. Besides, the government has raised spectrum charges from the current range of 2-6% to 3-8% for the next year. But for these measures, which will impact earnings marginally, the rise in Bharti’s share price may have been even more.

The improvement in investor sentiment has come about primarily after Bharti’s conference call with analysts in end-February on the Zain acquisition. The primary concern on the street was that the valuation of the deal at 11.6 times estimated 2009 Ebitda (earnings before interest, taxes, depreciation and amortization) was far too high. This represented a premium of around 55% to Bharti’s enterprise value/Ebitda valuation. One of the clarifications by the company was that the $1.7 billion debt component in Zain Africa’s enterprise value (EV) is inclusive of the share attributable to minority shareholders. Besides, Zain has recently started operations in Ghana, and being in a start-up mode, the operations are running losses even at the Ebitda level. Excluding Ghana, Zain Africa’s Ebitda margin improves to 33.3% from the reported level of 31.4%.

According to Anand Rathi Research, “Assuming zero equity value for Ghana and adjusting for the minorities’ share of debt, the EV/Ebitda valuation works out to 10.8 times versus 11.6 times earlier." This still represents a high premium of 45% to Bharti’s valuations.

Bharti’s management also indicated in the call that tax rates in Africa are relatively lower, which justifies some premium in the valuation. Besides, Zain Africa has had a capital infusion of $9 billion till date, which again makes the valuation of $10.7 billion look reasonable.

Moreover, there’s the possibility of a sharp turnaround, given that Zain Africa now operates on relatively high call rates and low minutes of use. This leaves ample room for improvement in capacity utilization. The fact that margins are lower than Bharti’s also leaves room for cost containment. What’s more, while it was originally felt that Bharti may have to bear an interest burden on debt of $9 billion to fund the equity portion of the deal, it is now understood that Zain Africa’s holding company would be using $4 billion of the proceeds to retire debt on its books. The interest burden on this $4 billion debt is already reflected in Zain Africa’s financials. Hence, the incremental interest burden would only be on $5 billion of debt.

This reduces the extent of earnings dilution analysts had factored in at the time of the deal announcements.

All of these factors have led to the improvement in sentiment for Bharti’s shares in this month. Still, most analysts feel that Zain Africa’s valuations are high and, as Anand Rathi Research puts it, “While Bharti’s strategy makes sense, the higher macro/political risks in Africa should not be ignored."

Write to us at marktomarket@livemint.com

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Published: 07 Mar 2010, 09:09 PM IST
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