Bharti has mandated banks to advise it on its planned acquisition of Zain’s African assets and raise funds to finance a potential deal.
TelecomFinance understands that Standard Chartered and Barclays, which advised Bharti on its failed merger talks with…
Bharti has mandated banks to advise it on its planned acquisition of Zain’s African assets and raise funds to finance a potential deal.
TelecomFinance understands that Standard Chartered and Barclays, which advised Bharti on its failed merger talks with MTN, are advising the Indian firm on the latest deal.
The same banks will be in charge of coordinating fundraising efforts for the transaction. According to India’s Economic Times Bharti is likely to fund the deal through foreign currency loans and is reportedly in talks with the State Bank of India, Goldman Sachs and Nomura on funding arrangements.
Bharti and Zain have set themselves until March 25 to settle a deal, which carries a US$150 penalty clause in case no agreement is reached.
A chunky price
If the deal goes through, Zain is set to get US$10.7bn in cash for the assets, which exclude its Morocco and Sudan operations, but still span 15 countries with combined debt of US$2bn.
This would offer a net return of up to US$5bn, Zain said in a statement on the Kuwaiti bourse.
The price represents 7.7x the assets’ 2008 EBITDA and as much as 9.2x their 2009 estimated EBITDA, due to disappointing performances in the bulk of the markets.
For Bharti, however, the price is relatively small considering the firm’s non-existent debt and strong balance sheet. Even if it funds the entire transaction through debt, Religare Hichens Harrison (RHH) estimates that its post-deal debt to EBITDA ratio, when including Zain Africa, would stand at 2.4x. “The IPO of Infratel/ Indus tower would further help deleverage Bharti’s balance sheet, mostly in FY11,” the investment bank adds.
Most of all, Bharti expects a deal to help it generate growth as its home market, where it has 120 millions users, is becoming increasingly competitive while ARPUs plummet.
A turnaround story
However, RHH warns that success will heavily rely on Bharti’s ability to turn around the Kuwaiti firm’s African assets.
The assets’ disappointing performance, along with a need for money, was a key reason why the Kharafi family has been so keenly pushing for a sale, with Zain mandating UBS last year to review the portfolio’s options.
Despite being number one in most of the African countries where it operates, Zain has failed to translate high market share into profitability. While the assets accounted for 58% of Zain’s total subscribers according to latest figures and for 56% of overall 2008 revenue, they are expected to account for 33% of its 2009 estimated EBITDA and to post a loss of US$112m for the same period – compared to a profit of US$122m last year (representing only 10% of group profit).
Changing this trend, therefore, “assumes critical importance for Bharti to make this acquisition accretive,” RHH argues.
RHH further warns that while Bharti has a track record of managing low-cost operations at home, the firm has no experience in managing cross-border operations. The same could be said about its M&A record: the deal would only be Bharti’s second international foray, hot on the heels of its recent Bangladesh purchase.
Nigerian thorn
Zain’s Nigeria situation could offer further complications to the deal. As reported last year, Zain has been embroiled in a dispute with South Africa’s Econet Wireless Group over its ownership of Zain Nigeria. Econet’s founder, Zimbabwean entrepreneur Strive Masiyiwa, has maintained that Zain Nigeria is not for sale.
