Bharti Airtel offers $10.7 billion to pursue dream

February 15, 2010

Bharti Airtel may be about to realize its dream of becoming an emerging market telecom giant. India’s largest cellphone operator has made a $10.7 billion non-binding offer to buy most of Kuwaiti rival Zain’s African assets. The deal would add 40 percent to Bharti’s current enterprise value.

The potential transaction appears to have the support of Zain’s board. Bharti’s challenge, however, will be convincing its own investors that the African adventure is worthwhile. They wiped 9.2 percent off the company’s shares on Monday following the announcement that the two companies were in talks.

That reaction might seem excessive. The valuation for Zain, eight times the company’s expected $1.3 billion earnings before interest, tax, depreciation and amortization (EBITDA) for 2010, is roughly in line with recent comparable transactions. Global giant Vodafone paid around that multiple for South Africa’s Vodacom in 2008 and the Cambodian operations of emerging market operator Millicom fetched around seven times EBITDA in November.

And Bharti could raise the funds for the purchase without breaking its balance sheet. The company currently has debt of only 0.4 times its $3.5 billion estimated 2010 EBITDA. It could raise roughly $13 billion and still end up with the same leverage – three times the enlarged group’s EBITDA – as smaller Indian rival Reliance Communications.

Yet that level of leverage could prove too high for Bharti. Zain’s African operations need heavy investment. In Nigeria, the continent’s fastest growing market, Zain has been losing customers and is struggling to turn around the business. The management of Bharti, experienced in rolling out networks in low-cost markets, is well placed for the challenge – but it will be expensive.

If Bharti decides to settle on a lower level of debt – say twice its EBITDA – it will have to raise roughly $2.4 billion selling stock in order to fund the purchase of Zain. Bharti has until March 25, when its exclusivity period with Zain expires, to square the financing circle.

Singapore Telecom, Bharti’s second largest shareholder with an indirect 30 percent stake, could play a role. But investors are worrying that the Indian operator, which twice failed to seal a deal with South Africa’s MTN, will stretch too far for an African deal.

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