Bharti Airtel: Hurdles ahead

With the deal sealed, Bharti Airtel has its task cut out to make the $10.7-billion acquisition click

Bharti Airtel has finally signed the $10.7-billion deal to acquire the African assets of Kuwait’s Zain. The acquisition of Zain Africa will add 42 million subscribers in 15 countries to Bharti’s existing 137 million customers.

Bharti, which has already tied up loans to fund the buy, will add $1.7 billion debt. Of the remaining, it will pay $8.3 billion to Zain now, and the balance $700 million after a year. For Bharti, which has been struggling with falling tariffs and saturation in urban markets, the situation in India is likely to get worse due to stiff competition.

In this context, the entry into Africa could not have come at a better time. From the growth perspective, the 15 countries are an attractive market, with low penetration levels of 35 per cent and an average revenue per user ($8) that is 60 per cent higher than India’s. More importantly, 80 per cent of geographies have three or fewer competitors compared to 12 in India.

Though the deal takes Bharti into the big league, analysts are concerned about the impact of the high-cost acquisition on the company’s earnings and its ability to integrate operations. On the valuations front, analysts believe that Zain’s EV/Ebita of 10.7 (Zain made losses of $112 million for the first nine months of CY09) is way over Bharti’s own metric of 7.7.

This deal will take the company’s net debt to over $10 billion from the current $414 million, with debt-to-equity ratio rising to over 1 from 0.05. Analysts expect FY11 earnings to be affected negatively by about 20-25 per cent due to higher interest outgo. Further, it will be difficult for it to integrate operations in 15 African countries, which have their own regulators.

The telecom space has been a laggard and Bharti is no exception, dropping 36 per cent from its FY10 highs. The stock, at Rs 314, trades at 12 times FY10 estimated earnings of Rs 26, with few upsides in the near to medium term.

With contributions from Sunaina Vasudev & Ram Prasad Sahu