Zain deal could generate free cash flow of $11 billion for Bharti

Analysts suggest Zain deal high priced

Sanjeev Sharma & Bhaskar Hazarika

New Delhi: Telecom major Bharti Airtel’s $10.7 billion proposed transaction to buyout Kuwait-based telecom company Zain’s African assets could generate free cash flow of $11 billion in five years. Morgan Stanley report states, “The consolidated entity would address 1.5 billion population with over 164 million subscribers, with Ebitda 26 per cent higher than Bharti standalone, growing at 11 per cent per year (financial year 2010-2012E).

Analysts say that Bharti would be able to de-leverage itself in a couple of years. The report says the consolidated entity’s cash flows would be $13 billion in five years.

Bharti in an official statement said, “The total agreed enterprise valuation of $10.7 billion is likely to result in a total payout of around $9.00 billion (which includes any loans payable by the operating companies to Zain Group) based on the estimated net debt of approximately $1.7 billion as on December 31, 2009. It has been agreed that a sum of $ 700 million out of the total payable amount would be paid after one year from closing.”

Just after Bharti and Zain announced payment milestones, Econet Wireless, which holds 5 per cent stake in Zain’s Celtel Nigeria BV unit, has clearly opposed the deal, citing first right of refusal over the Nigeria operations. Official statement from Econet said, “It is currently pursuing arbitration proceedings against Celtel (now Zain) and others to challenge the transaction. Under the terms of the original VNL shareholders agreement, Econet had a right of first refusal over the stake, a right, which was denied in 2006. Econet made an application for interim measures to prohibit Celtel (now Zain), from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until such time as the Arbitral Tribunal has published its final award.”

According to Macquarie report, “The valuations look very expensive, in our view, even assuming no debt is being acquired by Bharti. This is a loss-making business at the PAT level, even while it makes an Ebitda margin of 31.4 per cent with average blended ARPU of $6.2. Bharti may be banking on significant improvements in capital expenditure efficiencies and better financing terms for this business, but quick comparisons with MTN suggest that this business is significantly inferior in terms of profitability, operating metrics and growth outlook.”

Bharti stock has fallen almost 14 per cent in the last two days.

Talking about regulatory hurdles Morgan Stanley states, “We suspect some licenses in Africa will face change of control reviews, but we do not see this as a major stumbling block for a potential deal. We are waiting on clarity on the Kuwait Investment Authority – a 24 per cent shareholder – position on the deal though in the past it has been supportive of such a transaction.”


© Financial Chronicle

Zain board approves Bharti's bid for Africa

Bharti eyes high-growth markets to beat competition at home

Bhaskar Hazarika & Sanjeev Sharma

New Delhi, February 14: Kuwait-based Zain telecom could be the second major overseas expansion plan for the largest Indian telco, Bharti Airtel after it failed to ink the deal with South African telecom operator MTN. Zain board on Sunday unanimously accepted the bid from Bharti Airtel to buy Zain's African assets.

Kuwait Investment Authority (KIA), which has a 24.6 percent stake in Zain has put its stake on the block. Bharti has offered a bid of $10.7 billion to buy a stake in the company for its African assets excluding except for Sudan and Morocco.

When contacted Bharti Airtel spokesperson declined to comment. An email sent across to Zain failed to elicit any response.

Director telecom, KPMG, Romal Shetty said that Africa is one of the lucrative markets for operators. "In the next 3 to 4 years India will continue to be the most difficult market with 12 to 13 operators. For Bharti getting in Africa market, it could be the right time. As the company has pioneered the low cost concept, it can replicate the India success in Africa," Shetty said. He said that the compared to India the ARPUs in African market is around Rs 480 to Rs 500 ($8-10) compared to India, where ARPUs stand at sub- Rs 200.

According to Citigroup report, net debt for Bharti reduced by Rs 23 billion to Rs19 billion during the third quarter. "Overall net debt is down Rs 50 billion this fiscal, indicating strong free cash flow generation with lowering capital expenditure intensity. In the third quarter capital expenditure stood at Rs 17 billion," the report stated.

Managing director, Taurus mutual fund, RK Gupta said, "Costumer growth in India will be become stagnant in 3-4 years and Bharti has to look out for growth beyond Indian geography. African is an unexplored territory where growth can happen, compared to other geographies such as South East Asia, Europe where growth has declined. In case of Bharti, picking up a stake in Zain will add to the subscriber numbers and will boost the revenue. Only major area of growth in India is adoption of 3G."

An investment banker close to the development in condition of anonymity told Financial Chronicle, "Bharti had earlier said that it would continue to pursue international expansion. The company had clearly mentioned that Africa remains to be an important geography for expansion. Zain will offer Bharti access to one of the growth markets globally, with only three operators. This would also help Bharti to beat the pressure on their margins, which has witnessed a decline."

In December Bharti has picked up 70 per cent stake in Bangladesh telecom operator, Warid Telecom with an initial investment of $ 300 million.

Zain is the third-largest telecom operator in the Arab world. Last year a consortium n October halted talks to sell the African assets to appease potential buyers of a 46-percent stake in the parent company, Zain Group.

In October 2009, Indian telecom PSUs BSNL and MTNL joined the consortium with an Indian firm, Vavasi expressing their keenness to take a majority stake in a joint special purpose vehicle (SPV) to buy 46 per cent in Zain, along with Malaysian billionaire Al Bukhary.

Bard al-Khorafi, whose Khorafi Group holds 20 per cent in Zain, announced in September that they, along with other shareholders, were selling 46 per cent of Zain to a consortium made of Malaysia’s al-Bukhari Group, BSNL, MTNL and the Indian group called Vavasi.


© Time

Mobile customers shying away from post-paid

Only 3 per cent of the subscriber base is in post-paid

Bhaskar Hazarika

New Delhi, Dec 16 2009

India is set to cross 500-million mobile phone users by the end of the year. But just about 3 per cent are still logged onto the post-paid story. This means a mere 15 million consumers actually pay regularly on a monthly basis for their connection. The rest, a staggering 485 million, are literally free birds who charge their phones with denominations they deem fit.

This explains the steep fall during the past five years in postpaid connections. The prepaid subscriber base has grown from 84 per cent five years ago to more than 97 per cent today. Majority of the 15 million existing postpaid connections fall in a particular socio-economic category that pre-supposes a mid to high-income level segment.

The 15 million figure is an interesting pointer to the actual size of the Indian middle income groups, especially viewed in context of the fact that India as of today has close to 35 million income tax payers (as on March 31, 2009), 10.2 million Demat account holders and 12 million registered passenger vehicles.

The shift from post-paid to prepaid has an explanation. T R Dua, director general of Cellular Operators Association of India, in an email communication, told Financial Chronicle, “There has been an increase in prepaid subscriber base as the service providers are increasingly expanding to the rural areas and are acquiring more and more subscribers from the bottom of the pyramid.”

He predicted the migration trend to continue arguing, “Prepaid would continue to be the preferred choice, as it is economical and enables the rural subscribers to control their costs. Prepaid also enables service providers to reduce their bad debts.” Easy availability and accessibility of prepaid mobile cards was also encouraging migration from the postpaid model to prepaid.

An analysis of the latest subscriber data suggests that the decline in the postpaid subscriber base is also evident from the fact that more and more new subscriber additions are in the prepaid segment.

Telecom operator Bharti Airtel has a prepaid customer base of 95.2 per cent as on quarter ended September 2009. The prepaid subscriber base for the company increased from 92.9 per cent in September 2008. At Reliance Communications, for the quarter ended September 2009 the prepaid subscriber base stood at 94.4 per cent. For that quarter the net subscriber additions in the prepaid was 99.2 per cent.

“In the past five years, the telecom subscriber pattern has witnessed a paradigm shift from postpaid to prepaid regime due to the competitive tariffs and innovative offers by operators, making universal rates for prepaid and postpaid,” director (telecom) of KPMG, Romal Shetty said. He added that the Indian telecom market, which started with a dominant postpaid subscriber base, is eventually witnessing the phenomenal growth of the prepaid category.

“Earlier prepaid call rates were higher compared with postpaid. However, as the market is maturing, the call rates have gone cheaper making it equivalent to post paid. There are three major reasons why the prepaid model is picking up in India-- quick availability, easy documentation and fast activation of service. At present, only a small per cent of the corporate employees are on the postpaid platform,” Shetty said.

©Financial Chronicle