Vivendi’s USD 12B rumored proposal to acquire Zain’s African operations has stolen headlines for the past few weeks, sparked large volumes, and resulted in a huge spike in Zain’s stock price. Vivendi SA, which owns SFR and Moroc Telecom, has never hidden its interest in untapped high-growth markets.
In 2005, Zain Group purchased Celtel International for USD 3.4B. The acquisition gave it access to 13 African countries and 40M subscribers. In CY’08, the African operations comprised nearly half of the group’s sales.
*Equity is the target market cap
In order to understand the dynamics of the deal and how it really affects the valuation, first, we have to separate Zain’s African operations from the rest of Zain Group. In CY’08 Zain Group recorded an EBITDA of KD871mn; the African operation making up 46% (KD401M). Vivendi’s USD12B (KD3,428mn) offer is relatively expensive as it values the African operations at an EV/EBITDA multiple of 8.5x against an industry average of 5x (this explains the surge in stock price).
Now that we have the EV of the African operations (KD3,428mn), all we need is the EV of the rest of the group. Using the industry average EV/EBITDA of 5x, we apply it to the group’s EBITDA ex Africa of KD 469mn and get KD 2,346mn. We add the two EVs to get the Total EV, then we subtract the debt, and add the cash and minority interest to get an equity value of KD 4,289mn. When we divided this by the shares outstanding, we get a fair value of KD 1.115/share.
Most of you already know either by experience or education that valuation is very much subjective and many inputs that affect results are based on assumptions that are either too optimistic or too pessimistic. According to Santander analysts, “Aside from the difficulties involved in raising a significant amount of debt in the current climate, we do not see how it would be possible for Vivendi to take full control of Zain’s African operations without endangering its rating.” Personally, I believe a USD 12B deal is unrealistic. I would be a seller of Zain at the current price level because it had an impressive run and its current price fully discounts the most optimistic outcome ($12B deal).
Below are charts showing Zain’s stock price movement and capital structure:
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Loading ...Tags: maroc telecom, MTC, nbk, Vivendi, Zain, Zain Africa Vivendi Buyout 12B
This deal just doesn’t make sense. Zain wants to be one of the top 10 Telecom companies in the world by 2011. If they sell Zain Africa, this strategic goal is GONE. Even if they wanted to sell, they can’t fetch $12B even from the US Treasury Dept (they’ve been printing a lot of money
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I don’t know why Zain is maintaining its current high price level. I know this: Zain needs cash to address its funding needs. I only feel that if I was the CEO of Zain I would place a sell order for all those 425M Treasury shares bought at the end of last year using half of the $4.5B rights issue.
Although Zain would realize heavy losses on the sale of the Treasury shares, I believe desperate times call for desperate measures and between selling the African operations or the Treasury stock; I would vote for selling the Treasury stocks.
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The question that you bring up about the purchase price being not reasonable can perhaps be answered by a statement I found in the Financials Times:
“Vivendi has little choice but to persevere. It is facing pressure on revenue and margins in its mature markets and needs to find higher growth quickly, even if the price includes failed attempts and high banker advisory fees.”
So in summation, they are DESPERATE for growth sources.
As for the point about going against Zain’s startegy, Vivendi is attempting to acquire a majority stake (between 51% and 65%) not the whole stake, so this gives Zain an exposure to the Aftrican market. Plus you have a French company running the show, which in my opinion has a better chance of succeeding than Zain due to the abundance of French culture in West African countries (ex-French colonies).
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now 3 companies are bidding for the african operations, and i think Vodafone is one of them
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Naser:
Its not that I think the deal wouldn’t happen, but if I was Zain I wouldn’t do it (unless it was extremely lucrative).
I think you raise a couple of fundamental points: Vivendi is desperate for growth and they know the African continent more than Zain.
In its confirmation of talks with Zain, Vivendi highlighted two points:
1. Commitment to its BBB rating
2. Delivering dividends of at least 50% of adjusted Net Income
To uphold its promises, Vivendi can’t acquire all of Zain Africa without severe dilution to shareholders or a downgrade to its credit. Thus, a total take-over is out of question.
Assuming a majority takeover (51%), Vivendi would have to raise 1.4B Euros of capital which would cause a 7% dilution. Although a 7% dilution doesn’t seem significant, please note that Vivendi’s shares have already underperformed the CAC 40 Index (France) by more than 20% YTD.
On the other hand, Vivendi can acquire 51% hassle-free through under-leveraged Maroc Telecom (owns 53% of it). The only issue here is that such a deal would require the approval of the Moroccan government. According to a Citigroup analyst, “the strategic logic of a transaction, even with Maroc Telecom, is non-existent because many of Zain’s assets are number two in their respective markets.”
I think a deal is possible, but a $12B full take-over deal is impossible.
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Good job Oik, well delivered. Buy the rumor and sell the fact. I never knew Africa’s operations contributed that much to Zain!
However, shouldn’t the share price be 1.050/ share on an equity of 3925? I subtracted MI in my valuation.
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Thank you Sal, I agree with you on sell on the fact but the stock has a great support and keeps beating analyst expectations so I wouldn’t be surprised if it continues to increase even more. As for the equity, Zain’s equity net of minority interest as of Q1 09 is 2,131mn. But what I meant was the target market cap of 4.2 b. I would be glad to answer any inquery u have regarding zain
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[...] the sale of part of the company? Even with Vivend’s deal the stock isn’t worth KD 1.500 (click here for details). I lost track of all the rumored deal, but it seems the latest one is Indian Reliance which is [...]
[...] the sale of part of the company? Even with Vivend’s deal the stock isn’t worth KD 1.500 (click here for details). I lost track of all the rumored deal, but it seems the latest one is Indian Reliance which is [...]
[...] the stock price to above KD 1.000. Alpha Dinar posted an article declaring the Vivendi deal as a mission impossible. A week later, Zain presumably rejected Vivendi’s offer. We doubted Zain rejected Vivendi, [...]
[...] CNBC Arabia announced today that Zain Group’s board of directors has approved to sell their African operations to Bharti Airtel for USD10.7 billion (KD3,082 million). Bhari has been interested in the African operation for a while and there were previous negotiations last year for purchasing a stake in Zain Group. Vivendi SA, who came in July and offered USD12 billion for the African operations were the first to start off the Zain’s deal dilemma, but talks didn’t last for long (click here). [...]
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