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 Zain’s deal dilemma, but talks didn’t last for long (click here).
Bharti is Paying a 65% Premium
Based on Zain Africa 9M ‘09 financials, it shows that they have an EBITDA of USD870 million, which constitutes about 34% of the group’s EBITDA. Telecoms are trading at a mean EV/EBITDA multiple of 5.6x; if we imply that multiple to Zain Africa FY09E EBITDA (USD 1,156 million) it will result in a value of USD6,492 million. This means that Bharti are willing to pay approximately a 65% premium.
In Need for Cash
Obviously this is a good deal for Zain as they didn’t keep their willingness to liquidate some assets a secret. Although this forgoes their strategy of expanding outside the Middle East and capture growth opportunities, however they could use this excess cash to payback some debts or to finance other struggling operations, such as Zain Saudi. Personally I think that this cash will be given out as special dividends.
18% Upside Potential
Zain was suspended from trading today, but the whole market rallied on the back of this positive news. The sale will have a positive impact on Zain’s value. Looking at the table below, Zain African operations is valued at an EV/EBITDA multiple of 9.3x. If we value Zain ex-Africa by multiplying the average EV/EBITDA (5.6x) multiple to FY09E EBITDA (KD646 million) we will get an enterprise value of KD3,618 million; it will result in an EV of KD6,700 million for Zain Group (3,618+3,082). Doing the math (6,700-2121+330) we will reach a target market cap of KD4,909 and fair value per share of KD1.27, 18% upside from current prices.
(No Ratings Yet)
Loading ...Tags: Bharti Airtel, Kuwait, Zain, Zain Africa, Zain Kuwait, Zain sale
Its a good deal, but one that will transform the company from a growth to more of a value stock. This means it will deserve a lower valuation multiple and will not have an exponential profitability growth pattern.
Having said that, it will help revive the Kuwaiti economy in general as it will splurge companies and high net-worth families with much needed cash. Bank provisions will dramatically decrease causing increased profitability and less caution in giving loans, thus, providing much-needed liquidity
Simplistically speaking, a KD 1 billion profit dividend by approx. 4 billion shares outstanding translates into a profit of 250 fils per share.
[Reply]
many families own zain, not just the wealthy ones. that’s important because the impact may be felt quite widely. also, the natives aren’t particularly well-known for saving so the trickle down effect may be noticeable albeit it short-lived especially if planned economic stimuli aren’t pushed through. crank it or stay cranky
[Reply]
few questions:
1) what % of group’s profits does the African part make up?
2) are the Sudan & Morroco operations consolidated under the africa operations? (they are not part of the deal)- so this may lower the ebitda and hence enrich the multiple
2) better comparison is made if we look at ebtida mutliple of other african listed wireless companies
I won’t take the averages game cuz it can be misleading, however 10x or 9x EBITDA is way too rich. we are not in 2007 anymore!
The management of the indian co will have to fight hard to make it pass
personally, I dont think it can happen at this price. but again, who knows.
maybe a nother pump and dumb. I have zero trust in the owners
[Reply]
Ra'ad Reply:
February 16th, 2010 at 2:39 pm
I agree with you, its a case of “Pump and Dumb” and zero trust in the owners!
[Reply]
Saud Reply:
February 16th, 2010 at 5:37 pm
Bo6air,
Thank you for pointing out these issues
1) the african operations make up 42% of the revenue, 33% of the EBITDA and a loss on Net Income. The sale of the african operations will decrease revenues BUT will increase margins and probability ratios; the investor is better off.
2) In my african operation EBITDA calculation, Sudan and Morocco were omitted.
The Kuwaiti economy needs this deal to go through
[Reply]
The “problem” with mobile companies in emerging markets is that they are indeed fast growth – but that growth eats cash. Thus profits may be good but whatever inward cash flow that means is more than eaten up by the need for network build-out. This is a game that needs deep pockets – something that the controlling shareholders in Zain do not have right now. Good deal for them but a pity from the wider perspective of trying to develop Kuwait-based global players in any industry.
[Reply]
Keynesian Reply:
February 16th, 2010 at 6:02 pm
Excellent points. I concur.
[Reply]
Bharti Drops on Concern Zain Offer May Face Hurdles
By Nicky Smith and Mehul Srivastava
Feb. 16 (Bloomberg) — Bharti Airtel Ltd., South Asia’s biggest phone company, fell to a three-month low on concern its $10.7 billion bid for the African assets of Kuwait’s Zain may face hurdles from the seller’s biggest unit in the continent.
New Delhi-based Bharti can’t include Zain’s Celtel Nigeria B.V. unit until an ownership dispute with Econet Wireless Holdings Ltd. on that business is resolved, Econet Chief Executive Officer Strive Masiyiwa said in an interview in Johannesburg yesterday.
Bharti fell as much as 3.5 percent to 275.6 rupees, set for its lowest close since Nov. 23, after plunging 9 percent yesterday. Nigeria, Africa’s most-populous nation and the continent’s fastest-growing telecommunications market, is part of the 15 countries where Bharti is seeking to take over Zain’s operations. Zain and Bharti said that they will hold exclusive talks until March 25 on the assets.
“Without Nigeria, the transaction would probably be a lot less attractive,” said Lindsey Mc Donald, an analyst with consultant Frost & Sullivan in Dubai. “It would leave a bad taste in the mouth, but there is still a lot of investment needed in Nigeria and the average revenue per user has been falling. If it’s excluded, it may be a blessing in disguise.”
Econet, based in a suburb of Johannesburg, is seeking to overturn a 2006 deal in which Celtel bought a 65 percent stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria. Econet, with 5 percent of Zain Nigeria, says it should have had the right of first refusal on those shares.
Mittal’s Ambitions
Econet’s Masiyiwa said yesterday that the case is still in arbitration and that until that process has been completed, “Nigeria cannot be sold, it is not for sale, there can be no due diligence by Bharti or any other party.”
Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria.
Senjam Raj Sekhar, vice-president of corporate communications at Bharti, did not reply to an e-mail or a text message seeking a comment on the Nigerian situation. Zain spokesman Ibrahim Adel couldn’t immediately be reached for comment on the matter.
Bharti’s third attempt to enter Africa highlights billionaire Chairman Sunil Mittal’s ambitions to expand overseas as competition intensifies at home, where call rates have fallen to less than a penny a minute.
Mittal has tried to gain access to other fast-growing markets, including a second failed attempt last year to buy South Africa’s MTN Group Ltd. for about $23 billion.
Key Unit
Bharti is seeking Zain’s African business for access to an estimated 42 million customers across 15 African countries from Nigeria to Uganda.
The Nigerian unit is a key asset for Zain. In 2008, Zain generated about 21 percent of its total earnings before interest, tax, depreciation and amortization in Nigeria and about 22 percent of its total sales.
In Nigeria, Africa’s second-largest economy with a population of 155 million, the number of fixed-line and mobile- phone customers increased to 67.9 million in June from 65.5 million in January, according to the Abuja-based Nigerian Communications Commission.
Mobile-phone subscribers accounted for 98 percent of the total. Phone connections in Nigeria soared from 867,000 in 2001 when mobile-phone licenses were auctioned for $285 million each. Nigeria has overtaken South Africa as the African country with the most phone users, with many people carrying multiple handsets because of unreliable services.
[Reply]
Keynesian Reply:
February 16th, 2010 at 6:07 pm
A crucial point to keep in mind is that this is a “bid” and not a “finished deal”. It has to go thru several hurdles. Bharti failed on 2 previous takeover attempts. A third failure isn’t out of the question. Also, note the wording in the Zain disclosure to the Kuwait SE: The $10 billion will be paid on the deal closure date. “Closure” date is a significant word.
[Reply]
Laocowboy2 Reply:
February 17th, 2010 at 8:21 am
Bharti needs this deal almost as much as Kharafi needs the cash. The mobile business in India is so competitive that ARPUs are dropping fast. Subscriber growth is now mainly coming from rural areas – not places where you are going to sell ring tones or value added services. Bharti therefore needs to break out into higher growth markets where margins are (a) better and (b) likely to remain so.
[Reply]
Sal Reply:
February 17th, 2010 at 8:45 am
True, but again remember that Bharti’s recent failed attempt to enter Africa was a result of intentional regulatory hurdles set by the South African government. There is no assurance that the deal will go through.
[Reply]
So it’s not a “finished deal”….. again.
The Khorafis and NBK must be dying for this to finally go through.
“Having said that, it will help revive the Kuwaiti economy in general as it will splurge companies and high net-worth families with much needed cash. Bank provisions will dramatically decrease causing increased profitability and less caution in giving loans, thus, providing much-needed liquidity”
could not agree more with Keynesia’s initial comment.
[Reply]
Kuwait’s economy is 95% oil. this deal does not add one bit to the economy. Khorafi & NBK just happen to own a larger % of the wealth this country has….. But thank God, they are not the source of it
Besides, I think such untrustworthy owners along with their toy bank do need harsh reality lesson….even with the short term implications may be on Stock Market.. look at it as part of a cleansing process
[Reply]