Bharti Airtel Ltd has announced a deal to purchase 70% of Warid Telecom International Ltd of Bangladesh. Warid telecom has 2.9 million subscribers, and as per reports, revenues of $80 million (Rs366 crore). Bharti will invest around $1 billion, of which $300 million is capital expenditure (capex), and around $700 million is through purchase of a mix of new and existing shares.
Bangladesh has a population of 160 million and a tele-density of 32%. By this measure, Warid has a subscriber share of 5.6%, and is reported to have a revenue market share of 5%.
Reports suggest that Bharti’s purchase of shares from promoters is for around $0.1 million. Hence, almost all of the $1 billion (including $300 million capex) would be an infusion into Warid. The non-capex infusion would be around $700 million, which may be used to pay off debt. This is plausible as reports suggest that Warid has $900 million debt. Hence, Bharti’s acquisition enterprise value (EV) is $700 million/70% = $1 billion.
Also See | Vital Stats (Graphics)
This implies, for Warid, an EV/sales ratio of around 12x, which is far higher than Bharti’s own level of around 3x. At 7% rate of interest, $700 million would be equal to $50 million interest cost, and post-tax, about $40 million, implying an impact of about 2.5% on earnings. This excludes the interest cost implied by the $300?million?capex?that?Bharti?has to do, as well as any spending on 3G auctions in Bangladesh. If we were to work with a 25%?earnings before interest, taxes,?depreciation and amortization (Ebitda) margin for Warid, there would be a 1% positive impact on the earnings per share (EPS).
With $80 million revenue and 2.9 million subscribers, Warid has an average revenue per user of about Rs110, which suggests that assuming similar cost structures as in India, Warid should be Ebitda negative, unless it has an extremely efficient and low cost operation, which is unlikely. But considering that Bangladesh’s gross national income (per capita) is $1,440 compared with $2,960 in India, Warid could be Ebitda positive. A 25% Ebitda for Warid would imply a 1% addition to Bharti’s EPS.
To raise earnings by an equal amount, Bharti would have to bring Warid’s profitability to its own level, besides raising revenue.
We would wait for more detailed management commentary before revising earnings. Currently, due to volatile regulatory environment and irrational competition, we maintain a “reduce” rating on Bharti with a target price of Rs312.
Graphics by Yogesh Kumar/Mint