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| Bharti Airtel: Not a value call |
| Vishal Chhabria & Ram Prasad Sahu / Mumbai Jan 14, 2010, 02:26 IST |
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Although the deal to acquire Bangladesh’s Warid Telecom appears to be at a discount, replicating its India success story will not be easy for Bharti.
 While Bharti Airtel’s acquisition of Warid Telecom, Bangladesh’s fourth largest wireless service provider, gives its global expansion plans a small prod, it is hardly significant. Warid’s estimated revenues for CY09 are pegged at $80 million, and it has a subscriber base of 2.9 million giving the company a share of nearly six per cent in a competitive six-player market. On Tuesday, Bharti Airtel, which has a market cap of $26 billion and 116 million customers, announced that it will pay $300 million for a 70 per cent stake. This pegs the equity value of Warid at around $428 million, while reports estimate Warid’s debt at around $400 million. Considering the net debt of Warid (post cash infusion by Bharti), its enterprise value (EV) will be in the $625 million range, translating into an EV to subscriber ratio of $216.
While the deal appears to be at a discount to Bharti’s EV ratio of $250, the path ahead for Bharti will be tough considering Bangladesh’s market dynamics and Warid Telecom’s position. Though the Bangladesh wireless market has about 50 million subscribers with a penetration of 32 per cent (in a population of 160 million), considering that a little less than half the population lives below the poverty line, the total market is pegged at around 90 million. An HSBC report suggests that operators will find it tough to expand once the subscriber base touches 70 million. Average revenues per user (ARPUs), too, at around $3 per month are 40 per cent lower than Indian wireless equivalent. Moreover, the top three players in the market control 88 per cent share and have backing of world telecom majors NTT Docomo, Orascom and Telenor. This will make it tough for Warid to expand its presence in a market that is growing by about 15 per cent every year with sluggish net additions observed in the last four months. The sector could see more consolidation believes UBS, as the fifth largest player, Pacific Bangladesh Telecom with a market share of four per cent is 45 per cent owned by SingTel.
While Bharti has got a foothold in the Bangladesh market, profits at the operating level, says HSBC, are at least a year-and-a-half away and will require Bharti to triple Warid’s subscriber base to 9 million requiring sizeable investments in a tough competitive environment.
The deal, considering the challenges Bharti will face in expanding in Bangladesh and the price paid for it, has not been received well by the Street. The scrip has lost 3.1 per cent over two days as against the Sensex’s 0.1 per cent decline. With the deal hardly making much of a difference to Bharti’s financials, analysts have kept their earnings estimates for 2010-11 unchanged at around Rs 21-22 level, which gives it a P/E of 17 times. With a price target of around Rs 330 pegged by analysts, there is little room for an upside.
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