Bharti Airtel (Bharti), post acquisition of Zain Africa (Zain), would compete with MTN/Vodafone, its largest rival in eight of the 15 sub-Saharan African geographies that it intends to acquire. For 9MCY09, these eight geographies contributed 79%, 74%, and 68% of Zain’s subscriber base, revenues, and EBITDA respectively.
MTN – formerly one of Bharti’s potential partners – would now be one of its largest competitors in the fray for five of Zain’s 15 markets in Africa. At present, Zain Africa derives 54% of its revenues and 52% of its EBITDA from these five geographies. Additionally, Bharti would be competing with Vodacom, a Vodafone-controlled entity, in Tanzania, and the Democratic Republic of Congo and Safaricom in Kenya.
The Nigerian market contributes 36% of Zain Telecom Africa’s revenues and 38% of its EBITDA. Despite being second to MTN in Nigeria, Zain trails the African telecom behemoth in terms of its subscriber base (by 46%), revenues (by 65%), and EBITDA (by 80%). For H1CY09, Zain posted an EBITDA margin of 35% in Nigeria as against 61% for MTN.
Although Zain has maintained its leadership in Congo and Zambia so far, it continues to lose market share to MTN in these markets too. Zain has also lagged Safaricom, the market leader in Kenya, in terms of both – subscribers (by 85%) and revenues (by 91%). Bridging the gap between itself and MTN, especially in Nigeria, would be the key deliverable for Bharti to ensure that the acquisition of Zain turns value accretive. Zain, on likely to be a leveraged buy-out for Bharti, has the potential to significantly enhance the latter’s earnings and return ratios on turn-around.
Bharti has successfully established its foothold in India on account of its strong management, execution capabilities, and its low-cost minute’s factory and outsourcing model. The possibility of replicating this success in the African market cannot be ruled out. Further, Zain’s poor operating performance vis-à -vis competition provides scope for Bharti to improve upon this parameter.
Bharti’s acquisition of Zain at an enterprise value of $10.7bn appears expensive, prima facie, at 9.2x (full EBITDA of Zain Africa) and 11.6x (Bharti’s proportionate share adjusted for minority interest) its EV/EBITDA for CY09E. However, the valuation remains distorted due to the sharp depreciation of African currencies on dwindling oil revenues (average 20%) against the US$ in CY09 vis-à -vis CY08.
On the constant currency base of CY08, the deal valuation would scale down to 7.8x (full value) and 10x (proportionate share) respectively. This, we believe, is reasonable taking into consideration the premium for acquiring a controlling stake in Zain as well as the growth opportunities that the African market offers.
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