According to an ABN AMRO report, Bharti is expected to issue about 744 million fresh shares to MTN in lieu of 466.2 million fresh issued MTN shares. Bharti will swap 25% of its post-transaction equity base with 25% of MTNs current share base. In addition to the share swap, Bharti will acquire 36% additional stake in MTN from MTNs existing shareholders. Bharti will issue GDRs, each equivalent to one Bhartis equity share, and will be listed on the Johannesburg Stock Exchange in South Africa. The GDR issue will be at least 11% of its post fresh equity and GDR issue.
Bhartis equity capital will expand 57% to 3 billion shares from 1.9 billion shares at present. MTNs equity base will expand by 25% to 2.3 billion shares. The net cash outflow for Bharti would be around $4 billion, estimating the total transaction, valueing MTN at $34.5 billion, the report said. Further, the equity capital will expand 57% post the proposed fresh equity and GDR issue. This could dilute financial year (FY) 2010 consolidated earnings per share (with 49% of MTNs PAT) by 7% based on our current estimates for Bharti and Bloomberg estimates for MTN, adjusted for increased interest costs and loss of interest income, the report added. We estimate at least $3 billion of additional debt at 5.3% per annum, same as the current effective interest rate and loss of interest income of Rs1.3 billion for Bharti and $162 million for MTN (on its $3 billion December 2008 cash balance).
Another report by Ambit Capital expects the dilution of EPS to be 8% for the first year. We believe the potential upside will depend on the companys ability to implement its low-cost GSM-based business model in MTN operating companies. Increased geo-political risk, regulatory risk, and execution risk, however, will continue to pose downward pressure on stock performance, said the Ambit Capital report.
MTN is present across 21 countries in the Middle East and Africa, with Nigeria (26% of MTNs subscriber base), Iran (19%) and South Africa (18%) as major markets, contributing 67% to 2008 revenues and 71% to EBITDA. Importantly, its subscriber base grew at 47% year-on-year in its top-three markets in March 2009 and MTN has ready for 22.6 million net additions (23% to March 2009 base) by December 2009.
However, South Africa and Iran are well penetrated at 97% and 61% respectively, though Nigeria still offers potential growth at 36% penetration. Over 10% of MTNs subs base is in geo-politically sensitive countries such as Afghanistan, Sudan and Zambia.