M&A Definition A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
Global M&A Market Overview 3 Global M&A Volume Global M&A by Region Source: Thomson Financial Securities Data. Year-to-date as of 31-August
Top 5 Deals in 2011
M&A in Telecom Sector
Why Africa Huge Consumer base Untapped Market High Profit Margin Lesser Competition Higher Brand Value
Merger of Equals Ultimate recipe for disaster According to AOL-Time Warner and Citibank-Travellers, most mergers end up destroying shareholder value. One side typically pays a premium to the other, less than non-MOEs, but still a premium. Recipe Step 1 The two firms often aren't equals in an economic sense. Out of top 110 M&A deals, half of the deals show material disparities in size, market position, and/or financial health Recipe Step 2 It creates an indecisive command and control structure. Recipe Step 3
Bharti and MTN First Encounter
Bharti and partner SingTel (Singapore Telecom) wanted to acquire 51% in MTN in 2008
MTN board met and proposed a different transaction, in which Bharti Airtel would become a subsidiary of MTN
Bharti’s vision of transforming itself from a homegrown Indian company to a true Indian multinational telecom giant, symbolizing the pride of India, would have been severely compromised.
Bharti and MTN will have $20 billion in revenues and over 200 million customers, making them the third biggest telecom company in the world. Sunil Bharti Mittal to be Executive Chairman of the merged entity New entity to have two CEOs – ManojKohli (CEO and Joint MD of Bharti Airtel) and PuthumaNtleko (CEO, MTN) Bharti-MTN Merger Details
Under the proposed deal, Bharti will buy 49 per cent of MTN through a cash-cum-shares offer totaling about $13.1 billion; MTN will buy 36 per cent of Bharti, with a similar cash-cum-shares offer of around $10.5 billion At current share and exchange rates, this means Bharti would pay around $7.4 billion in cash, and MTN around $2.9 billion — leaving around $4.5 billion to be financed through loans. Bharti-MTN Merger Details
Deal Structure Step 1 Bharti will acquire 36% of the current share capital of MTN from MTN shareholders. ZAR 86 in cash and 0.5 newly-issued Bharti shares in the form of Global Depository Receipts (GDRs) for every MTN share acquired. 1 Step 2 Bharti will also receive further MTN shares equal to around 25% of the current share capital of MTN in part settlement of the latter's acquisition of around 36% post-transaction economic interest in Bharti Airtel (25% by MTN, 11% by MTN shareholders). 2
Bharti + MTN Financial Implications EPS will have 21% dilution in FY2010 and a considerably lesser 6% dilution in FY2011 Revenues: US$13bn in FY2010 and US $19.4bn in FY2011 5% interest rate on debt > Rs1,000cr of interest expenses to be paid EBITDA will cross US $5bn in FY2010 and US $7.7bn in FY2011 Bharti will take debt of US $4bn to fund the acquisition Net Profit: US 2.7bn in FY2010 and US $3.7bn in FY2011
Mergers fail largely because expected synergies take a longer time to deliver, or the price is too high, or there is no one completely in charge. In the Bharti-MTN case, all three apply 49 per cent will not give Bharti unhindered control Paying $4-5 billion in cash means it will take several years to amortize the cost Synergies will not come till the people, culture and branding issues are addressed, and that will take some doing Why did Bharti-MTN deal not work? 3 cases
Brief Snapshot for Bharti Zain Deal
Structure of the Acquisition (Leveraged Buy Out) BHARTI AIRTEL INDIA SINGAPORE SPV SINGAPORE ZAIN AFRICA INTERNATIONAL BV 100% BHARTI AIRTEL NETHERLANDS BV NETHERLANDS ZAIN Africa – Operation in 15 Countries
Why LBO? The purpose of SPVs (100% subsidiary of acquiring comp) is to allow companies to make large acquisitions without having to commit a lot of capital and they can use their minimum equity capital to gear up significantly larger debt to buyout the target company. In a LBO, there is usually a ratio of 70% debt to 30% equity. LBO will not impact Bharti Airtel’s balance sheet in the near term and its financials will remain intact. Since Bharti Airtel’s debt-equity ratio could have grown from 0.4 to 1.2 if the debt was taken on its books and that could have seriously limited its ability to raise funds for future expansion into 3G technology.
Repatriation of Profits The structure adopted by Bharti Airtel for acquisition of Zain Africa is conducive from a tax perspective specifically w.r.t repatriation of profits from Zain Africa to Bharti Airtel. Under the domestic tax laws of Netherlands, no taxes are levied on dividends distributed between two Netherlands resident companies, subject to compliance with applicable participation exemptions. Further under the Netherlands-Singapore tax treaty, dividends paid by Bharti Airtel Netherlands BV to Singapore SPV would not be subject to any taxes in Netherlands since the Singapore SPV holds at least 25% of the share capital of the company declaring the dividends.
Repatriation of Profits(contd.) Under the domestic tax laws of Singapore, foreign sourced dividends are exempt from Singapore corporate taxes, provided the foreign sourced dividends have been subjected to tax in the foreign jurisdiction and the headline tax rate of the foreign jurisdiction is at least 15%. The headline tax rate in Netherlands is at the rate of 25.5%. It should be noted that Singapore does not levy any withholding taxes on distribution of dividends; therefore dividends distributed by Singapore SPV to Bharti Airtel would only be taxable in India (when distributed) at the rate of 33.22% as per the provisions of the Income Tax Act, 1961.
Investors Reaction to the Deal Since the announcement of deal, 8.2 million shares had changed hands till 25th march 2010. The share price had fallen to 16 month low of Rs. 272.45,because investors were apprehensive of the deal being largely debt funded. Credit rating Agency S&P lowered its long term corporate credit rating to BB+ from BBB- Junk bond status
Commercial Considerations BhartiAirtel paid Zain an enterprise value of USD 10.7 billion which is 10 times the enterprise value (“EV”) to EBIDTA multiple for Zain. This valuation is high given that BhartiAirtel itself is available at 7.2 times EV to EBITDA. Even if significant EBITDA growth of 20-22% for the next two years is factored in, the deal would still be upwards of 6 times to 6.5 times on EV/EBITDA multiples. This would make it amongst the most expensive emerging market telecom players on figures after two years. To acquire a financially sinking company, BhartiAirtel has incurred exceedingly expensive loan worth USD 8.3 billion at an interest rate of 195 basis points over LIBOR. Bharti is paying around 80 basis points, or 0.8%, for the dollar funding of $7.5 billion, which will generate $60 million for banks. The loan would be a drag on Airtel's earnings with no immediate returns expected from the loss-making target.
Losses in Africa – $112 Million before acquisition The turnaround would be tougher in loss-making regions. Adding to BhartiAirtel’s woes is the risk on foreign exchange exposure. The extremely high cost of acquisition, interest payable on loans availed and meager revenues for next few years make this deal a very costly investment for BhartiAirtel. Each Consumer valued at: With Zain – 252$ - Total Customer Base was approx 42 Million With MTN – 349$ - Total Customer Base was of approx 116 Million EV/EBIDTA for MTN 1st Deal – 7.8 Times EV/EBIDTA for MTN 2nd Deal – 5.5 Times
D/E Bharti’s D/E ratio shot up in Q1, FY 2011 post Zain deal indicating that The acquisition was funded heavily by debt.
EPS Post Deal All figures in INR millions The above graph shows that the percentage change in earnings is greater than the % change in earnings in June 2010 implying EPS has increased after the debt financing deal. The drop in earnings in June 2010 can be attributed to increased interest expenses in June 2010 on the new debt it acquired and reduced income from financial activities (inr 4992 million to 2510 million). Hence in this case we cannot say that debt financing has produced higher EPS as the total earnings have declined although the rate of decline of earnings is larger than rate of decline of EPS which shows that EPS has increased.
Airtel After 1 year of Zain Deal The African operation has grown from 42 million subscribers in the quarter ended June 2010, when Bharti acquired Zain Africa BV, to 50 million subscribers in the quarter ended June 2011. Bharti continues to hurt in the region with a net loss of $2 million on total revenues of $979 million. That’s an improvement over the $15-million net loss Zain incurred in June 2010.