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  • After bankers from both sides agreed in principle to a Bharti-controlled structure on May 16.
  • Step1 -Each GDR would be equivalent to one share in Bharti and would be listed on the Johannesburg Stock Exchange.Step2 - This will be a fresh issue of shares for MTN (around 467.3mn shares) and will take Bharti's stake in MTN to around 49% (48.8%) post the fresh issue. The balance consideration will be paid out in cash of US$2.9bn. Thus, Bharti will issue an additional 731.3mn shares over and above the shares issued through the GDR, which will result in MTN Group and its shareholders getting a 36% stake in Bharti Airtel.

Bharti ma last updated Bharti ma last updated Presentation Transcript

  • Bharti’s African Safari
    Presented by:
    Abhinav Kumar Nitin Bhardwaj
    Raj Shekhar Shailesh Jain
    Vivek Kumar
  • 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
    Comparative Analysis
    Source: Respective companies, COAI, Angel Research;
  • 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.
  • Bharti-MTN
    THANK YOU