In a knee-jerk reaction, the stock market has voted against Bharti Airtel?s plan to acquire the African operations of Zain Telecom, terming it an ?expensive? deal and battering down the stock by over 13% in flat two sessions. However, after a pep talk by Sunil Mittal, Bharti?s CMD on Tuesday, who pointed to the long-term value of the deal, the company?s shares have gained 2.44% on Wednesday in a rising market.
The market?s fear was that Bharti would have to raise debt for the deal, which would dilute its earnings per share. Since Bharti has extremely low levels of debt, the costly acquisition plan came as a dampener to shareholders. ?The debt is a sufficiently big number to add to Bharti?s balance sheet, on top of whatever it takes to finance the rest of the transaction. All that debt will likely reduce earnings per share for the next few quarters at least,? said Jagannadham Thunuguntla, chief strategist at SMC Capitals Ltd.
Currently, Bharti?s net debt stands slightly below Rs 2,000 crore.
However, a close look at the opportunity that lies ahead for the company tells the long-term story, which the market seems to have lost sight of. And this story goes on to prove that the premium that Bharti is ready to pay is justifiable.
True, Zain?s Africa operations are loss-making venture. However, Bharti is best poised to turn it around, and if that?s successful the joint entities? profitability would be huge?to the extent of $4 billion.
This is how it?s possible: In the first nine months of the current fiscal (April-December) Bharti?s net profit was at Rs 7,048 crore ($1.53 billion). By the time the year closes, its profit could cross $2 billion. However, the net profit and revenues slowed down for the company in the third quarter at 2% and 1%, respectively.
If Bharti turns around Zain?s Africa operations in two years, it can easily post similar levels of profits from the markets there, taking its overall profitability to around $4 billion, which would be difficult to achieve through its Indian operations alone.
Analysts agree that a turnaround would not be difficult for Bharti to manage.
It has pioneered the model of outsourcing IT infrastructure and network management. It runs the least cost operations in India and has grassroots level experience of operating in a market with low tariffs. In these areas even Vodafone, which is the world?s largest mobile company by revenue, cannot match Bharti?s record.
If Bharti can replicate its success in Zain Africa, the results would show up soon.
?Given all the possibilities, Zain is the best bet on Bharti?s table. Africa is pretty similar to the Indian market in certain ways. With penetration levels of less than 40% and average user per user of $8-$10, it is just ripe for an operator like Bharti to enter the market?, said Romal Shetty, telecom analyst at KPMG.
Zain would provide Bharti an instant footprint in 15 African markets. Since Zain has a ready network and around 40 million subscrirbers, Bharti would not have to wait for rolling out services. All it requires is financial and marketing brains, areas in which it has the best managerial talent globally.
