Zain deal to strain Bharti's finances; stock ends 9% lower

MUMBAI: Shares of Bharti Airtelplunged nearly 10 per cent Monday as brokerages gave a thumbs down to thecompany’s deal with Kuwaiti telecom Zain for its African cellular assets.Brokerages were concerned that the company’s $10.7 billion offer couldstrain its finances. (Watch)

Bankof America-Merrill Lynch cut Bharti Airtel to ‘underperform’ from‘buy’ after the mobile operator began its exclusive talks with Zain.The investment bank said the valuation seems rich, the growth outlook for Zain'sAfrican portfolio appears unexciting and a potential deal could materiallystress Bharti's balance sheet.

Bharti announced Monday an offer tobuy the African assets of Kuwait's Zain telecom for $10.7 billion. Bharti Airteland Zain Africa "have agreed to enter into exclusive
discussions until 25March, 2010 for the acquisition of Zain's African unit based on an enterprisevalue of $10.7 billion," Bharti said in a statement.



A consortium of Asian investors has formonths been trying to buy Zain's stakes estimated to be worth $13.7 billion fromKuwaiti family conglomerate Kharafi Group, which is one of the main shareholdersin Zain.

Meanwhile, Telecom Minister A Raja commented that theBharti-Zain deal is good for the industry.

Ambareesh Baliga, vicepresident at Karvy Stock Broking feels that the deal seems too expensive forBharti and although the stock may stand to benefit in the long term, the shortterm is negative. “This looks a bit expensive for Bharti considering theseare not extremely profitable operations. Those are future growth areas. But thegrowth will come only in 5-8 years time and in the short-term there is a risk ofstraining Bharti's balance sheet," said Baliga.

Giving a fundamentaltake on the deal, Romal Shetty, head- telecom, KPMG said, “Bharti’sbid is a step in the right direction to make its footprint in Africa. This iswhere the next round of growth is going to happen. India is becoming more andmore saturated in the coming years. Africa is under-pentrated and has lessercompetition thus making the Zean deal an attractive buy for Bharti.”

Emkay Global FinancialServices has retained ‘Reduce’ rating on the stock of Bharti Airtelafter the telecom major’s announcement. The brokerage is of the view thatthe deal appears expensive and has set a price target of Rs 250 per BhartiAirtel share.

“In yet another attempt to gain entry inAfrican market (after MTN), Bharti Airtel has announced that it has entered intoexclusive discussions till 25th March 2010, with Zain group for acquisition ofZain Africa BV for an EV of $10.7billion.

While lower penetrationof <40% in Africa offers healthy scope for growth, we highlight thatZain’s African operations have recorded revenue and EBIDTA decline of 11%and 16% and net loss of $112mn for the period 9mCY09 v/s net profit of US$169mnin corresponding period 9mCY08.

Based on EBIDTA of $870million for9mCY09, the deal values Zain’s African operations at 9.2x annualizedEBIDTA of US$1.16bn, which we believe are at 28% premium to Bharti’scurrent valuations of 7.2x FY10 EV/EBIDTA. The declining Revenue and EBIDTAtogether with high capex at ~1x EBIDTA (v/s 0.5x for Bharti’s Indiaoperations) and also higher valuations make the acquisition unattractive.

We believe that the deal appears to be very expensive and the funding ofthe same would strain the balance sheet and would hence result in overhang onthe stock. We continue to retain REDUCE rating on Bharti Airtel with targetprice Rs 250,” the report said.

On Monday, in reaction to thedeal, shares of Bharti Airtel settled at Rs 285.40, down 9.25 per cent or Rs29.10 on the NSE.