MTN-Bharti Airtel deal seen diluting EPS

Investors gave a lukewarm response to Bharti Airtel’s efforts to acquire a 49 per cent stake in South Africa’s MTN Group, as the arrangement for the merger includes issuance of new equity, which would dilute the earnings per share (EPS).

Besides, the absence of an open offer and the immediate concern over a $4.1-billion debt on Bharti’s books brought down the company’s shares by 5.1 per cent to Rs 814 a share on the Bombay Stock Exchange.

The company said there would not be any open offer despite MTN and its shareholders proposing to acquire a 36 per cent stake in Bharti, as the transaction is “pursuant to a scheme of arrangement.”

Under Section 391 to 394 of the Companies Act, a scheme of arrangement is similar to merger and demerger and the company concerned is exempted from the Takeover Code of the Securities and Exchange Board of India.

Under the Takeover Code, if a company or an individual acquires 15 per cent or more stake in a target company, then it has to make an open offer to other shareholders to buy 20 per cent more stake.

Analysts said the possibility of the dilution of about 10 per cent in the EPS pulled the stock price down. However, they said investors may get over their disappointment soon as, in the long run, the deal looked value-accretive for the company as it expands in new geographies.

“Bharti Airtel will benefit as it is expanding into the high growth areas of Africa. On the face of it, the deal seems reasonably priced at an EV/EBIDTA level of sub-6,” said Vivek Gupta, partner, mergers and acquisitions practice, BMR Advisors.

The EV/EBITDA is a yardstick that gauges the enterprise value paid against the operating profit of a company. Bharti Airtel is currently valued at about 10 times its EBITDA.

Last year in May, when Bharti was in talks with MTN, the Indian company’s average stock price for the month was Rs 850 a share. This year, the average price of the stock has been Rs 809, which represents a decline of 4.8 per cent.

However, MTN’s stock has declined by 32.4 per cent to an average of $13.7 this month — one of the main reasons for the lower valuation for MTN.