Bharti – Zain deal

The Bharti’s share nosedived nearly 10% on Monday as market gave thumbs down to Bharti’s deal with Kuwaiti telecom Zain for its African cellular assets. Mobile phone penetration in most of the African countries is below 40 percent and a dozen countries have penetration below 30 percent. Therefore Zain, with its African and Middle East operations, remain a natural target for Bharti which has succeeded in Indian market with low incomes and tariffs and a heavily rural population - characteristics shared by Africa continent. This deal also provides strategic direction to Bharti as India is becoming more and more saturated in the coming years and Africa with lesser competition is the place where the next round of growth will take place.

However, the deal appears expensive considering the fact that Bharti’s offer of $10.7 billion values Zain assets at close to Rs 11750 per subscriber. Moreover Zain has net debt of about $5 billion which could considerably stress Bharti’s balance sheet in the short run. The valuation is close to Bharti’s current valuation per subscriber. The rather costly acquisition is being justified by the management in terms of much higher expected growth and margins in the African Continent compared to India. But all these benefits are strategic in nature and will accrue only in the long run. In the immediate future the company’s balance sheet will be stretched as it is an all cash deal and the acquired company has a lot of debt in its balance sheet and very marginal profit from operations.

The stock is likely to remain under pressure for sometime and will be an underperformer if the market sentiment improves in the next couple of months. Nevertheless, given the creditable track record of the company’s management we advise long term investors to buy the stock at current levels and use all declines to add more.