African high

Bharti: When Bharti Airtel announced an agreement to spend $10.7 billion buying the African assets of Kuwait’s Zain telecom, investors questioned how it would finance such a mammoth acquisition. India's largest telecom operator is now close to securing debt for the transaction, according to a person close to the deal. But that may not be the end of the matter.

The financing would move Bharti’s debt from just 0.4 times forecast 2010 Ebitda to just more than 2.5 times, according to Reuters estimates. That's slightly lower than Indian rival Reliance Communications. But the raised debt level brings new challenges. Unlike Reliance, Bharti needs to invest heavily in upgrading Zain’s networks in Africa. At home, it is battling a price war and bidding for 3G licences. The raised debt would threaten Bharti’s investment-grade credit rating, which Standard and Poor's has at BBB-, one notch from junk reflecting its emerging market status.

Few blame Bharti for eschewing other financing options until it formalises what is currently a preliminary agreement. Debt is the fastest way to finalise a transaction; the exclusivity period between the two sides expires on March 25.

If Bharti seals a deal, however, the traditionally conservative telco is likely to want to deleverage in coming months. If Bharti raised $1.7 billion of equity — the amount wiped off its market capitalisation since the potential deal was announced — that would reduce pro-forma leverage to a more two times Ebitda, a somewhat more comfortable level.

One option would be to launch an initial public offering of its telecoms infrastructure subsidiary Bharti Infratel, valued at over $10 billion in the sale of 9 percent to a consortium of investors in 2007. Or, Bharti Airtel could hold a rights issue, to which parent Bharti Enterprises, owner of 45 per cent, could subscribe. Singapore Telecom, which owns 32 per cent stake in Bharti Airtel, has also indicated its willingness to be part of the funding.

Bharti has no shortage options. If the Zain deal goes though, expect it to use them.