Bharti Airtel is looking at de-leveraging its books within 3-4 years after it acquires Zain?s African operations at an enterprise valuation of $10.7 billion. The road map for de-leveraging its combined balance sheet will have many components, including roping in global private equity investors at a later stage. Bharti?s time-tested foreign partner Singapore Telecom will also participate in this process.
According to a company executive familiar with the funding strategy, the idea is to reduce the $9-billion debt, which the company would effect by bringing in private equity investors at a subsequent stage. Sources said relying on debt at the current juncture makes sense, as debt is available at cheap rates with excess liquidity sloshing about in the international financing system. Bharti could also consider making an ADR or GDR issue as part of the de-leveraging process at a later stage. Further, debt reduction could also happen with Bharti Airtel listing its tower arms?Infratel and Indus.
Analysts said Bharti would not have any problems either raising debt to fund its acquisition or roping in private equity investors later as such investors have always made money with promoter Sunil Bharti Mittal. For instance, US-based Warburg Pincus exited Bharti Airtel in 2005, making a return of over $1 billion?five times the amount it had invested in the company in 2000-2001 for around 19% stake. Private equity investors will get attracted if they are convinced that the combined entity would deliver a bottom line growth of at least 20% a year after Bharti transplants its low-cost model in Zain. Bharti?s past record in doing so would give potential equity investors the required confidence, analysts say.
A company official said Singapore?s SingTel, which has 32% stake in Bharti, may play a critical role in bringing down the debt component within the next 3-4 year after the company acquires Zain. SingTel would also help Bharti in raising funds for acquiring Zain at most competitive rates?under 6%.
Once Bharti closes the deal with Zain, its debt-equity ratio would jump to 1 against the current 0.05. The Ebidta-to-debt ratio of the combined entity is likely to touch 2.4 which is a comfortable level below the desired 2.5. Analysts say the Ebidta-to-debt ratio is more relevant for a fast-growing telecom company, rather than the debt-equity ratio.
The Bhart-Zain combined entity would have total revenues in excess to $12 billion and once Bharti is successful in turning around Zain?s operations, the combined entity?s net profit would also double to $4 billion.
?In that event, Bharti would be in a position to retire the debt totally through its earnings but then it?s better to rope in private equity investors since funds would be required for reinvestment in operations also,? an analyst said.When contacted a Bharti spokesperson said, ?We have no comments to offer beyond our two statements (on the proposed deal).?
Bharti?s strategy assumes significance as the company?s scrips have taken a beating since the announcement regarding acquiring Zain mainly on concerns that it is overly priced, and would significantly leverage Bharti?s books in the short run. A large number of brokerage firms have considerably reduced the ratings of the company?s stock. In the first two days of the announcement, Bharti?s scrips lost close to 13%, leading Mittal to state that once he reveals the larger plans the company has for Zain the markets would see the long-term potential.
Bharti has said its total payout on Zain would be $9 billion after deducting the latter?s net debt of $1.7 billion. Of the $9 billion, it would pay $700 million a year after the closing of the deal.
Zain, a Kuwati-based telecom operator with presence in 15 African markets, recorded a loss of close to $112 million in its African operations for the nine months of the current fiscal. Its revenues have fallen 11% and Ebidta by 16%. However Bharti has valued it at 9.2 times the enterprise value over Ebidta at $10.7 billion.
This valuation is believed to be at a premium of almost 40% when compared to its closest rival MTN. MTN is valued at 5-6 times its enterprise value over Ebidta.