Late on Monday, Bharti Airtel, which has operations in 17 African countries, said it was in exclusive talks with Orange of France to sell its business in Burkina Faso, Chad, Congo Brazzaville and Sierra Leone in a deal estimated to be valued at a combined $800-900 mn. Photo: Pradeep Gaur/Mint
Late on Monday, Bharti Airtel, which has operations in 17 African countries, said it was in exclusive talks with Orange of France to sell its business in Burkina Faso, Chad, Congo Brazzaville and Sierra Leone in a deal estimated to be valued at a combined $800-900 mn. Photo: Pradeep Gaur/Mint

Africa talks may offer only a breather in Airtel’s efforts to fix losses

Bharti is the market leader in three of the four markets that it is looking at exiting

New Delhi: Bharti Airtel Ltd’s announcement that it’s in talks to sell its business in four African countries may be sending the right signals to investors, but the move may offer no more than a breather in the telco’s efforts to fix its loss-making operations in the continent.

Late on Monday, Bharti Airtel, which has operations in 17 African countries, said it was in exclusive talks with Orange of France to sell its business in Burkina Faso, Chad, Congo Brazzaville and Sierra Leone in a deal estimated to be valued at a combined $800-900 million.

Bharti, the world’s third largest telco by subscribers, is the market leader in three of the four markets that it is looking at exiting. The telco’s market position in Sierra Leone could not be ascertained.

These markets contribute around 15% (about $600 million) of Bharti’s total Africa revenue and generated $23 million in profit in the 2014 financial year (vs an overall Africa loss of $329 million), according to a report on Tuesday by Sachin Salgaonkar and Karan Parmanandka, research analysts at DSP Merril Lynch Ltd.

French telco Orange, which is present in 29 countries, expects to sign an agreement with Bharti by the end of the current year, with a closing in mid ­2016, a Monday report from Barclays Capital Inc. said.

The four markets that Bharti plans to exit are Francophone, or French-speaking, nations.

Bharti said it was looking at selling the assets so it could focus on the rest of the Africa business and turn that around.

“These countries represent a relatively small percentage of our overall Africa business. Airtel will be able to establish a sharper focus on the remaining countries, further reduce the debt on our balance sheet and move faster towards building a profitable business in Africa," a Bharti spokesperson said in an emailed reply.

Bharti had a net debt of $8.4 billion as on 31st March. The telco raised as much as $9 billion in debt for the Africa buy in 2010.

Bharti shares rose 3.68% to close at 445.25 in Mumbai trading on Tuesday, as investors cheered news of the talks, while the benchmark Sensex fell 0.84% to close at 28,182.14 points. The Bharti scrip hit an intraday high of 452.45, its highest in 12 months.

At 2.45pm on Wednesday, shares of Airtel were trading at 440.10, down 1.16% from Tuesday’s close. The Sensex was up 1.18% at 28,515.49 points.

However, the fact that Bharti is not currently looking at selling its other assets, especially the larger loss-making ones, has some analysts worried.

“What can they do differently that they have not tried already? It will be difficult for them to find a buyer for these markets—like Nigeria—that are taking some time to become profitable. This selling off is just buying time before the inevitable," a Mumbai-based analyst with a multinational brokerage firm said.

He declined to be named as he is not authorized to speak to the media. “At this time, I don’t think they will even get the same price they bought the assets for, despite putting in the $5 billion capex that they have," he added.

The sell-off is being seen by some analysts as a step in the right direction, with many looking forward to the upward rerating to the stock once a sale is done.

“The operations have deteriorated due to adverse macro conditions in Africa and hence Bharti has been exploring the sale of some of these assets. In our view, potential buyers may be interested in cherry-picking the more profitable assets, and their preference would be skewed towards Franco markets, rather than Anglo markets or Nigeria," the DSP Merril Lynch report said.

As reported by Mint on 9 June, five years after the $10.7 billion acquisition of the Africa assets from Kuwait-based Zain, the operations have far from borne fruit for Bharti Airtel.

Airtel’s Africa operations have missed its internal targets of 100 million subscribers, up from 42 million at the time of acquisition, $5 billion in revenue, up from $3.6 billion, and $2 billion of Ebitda by March 2013, in less than three years after the acquisition.

Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability.

Two years after the targeted date, things are not much better. At the end of March 2015, as per the latest earnings data available, Bharti Africa had a net loss of $585 million on revenue of $4.2 billion from its African operations.

“Africa is proving to be a $1billion Ebitda business against an expectations of $2 billion at the time of acquisition," Suresh A. Mahadevan, analyst with UBS Securities Pte. Ltd said in a 21 July report.

Analysts believe the company still has to exit the Africa market.

“The market will be okay with a 15-20% discount to the price that they (Bharti) bought the business at. This does not include the $5 billion that he (Bharti founder and group CEO Sunil Mittal) has already spent in the continent. That they can never get back. But it does include the $2 billion that they might get from tower deals across the various countries. They have taken a country-by-country approach, perhaps to get better valuations but it comes down to the haircut he will have to take," said the Mumbai-based analyst quoted above.

Bharti has been trying to pare its debt due to the acquisition for some time now. The company had announced various towers sales in the continent but was unable to complete a tower asset sale in the Democratic Republic of Congo, Chad and Tanzania to Helios Towers Africa.

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