Bharti Airtel may dilute equity to fund Zain buy

Bharti Airtel said it might look at diluting some of its equity either at Bharti Airtel or at its tower subsidiary as one of the options to fund the $10.7-billion acquisition of African assets of Zain Telecom.

Bharti also stated that it might opt for an all-debt funding, in which case it would have to take around $9 billion on its books.

Chairman Sunil Bharti Mittal and MD Akhil Gupta, who participated in an analysts conference call, said that they expect 'fair and decent' returns to shareholders.

The company maintained that the valuation was not excessive, and that lower tax rates in Africa justified some of the premium paid for the assets. A Bharti Airtel spokesperson, when contacted on the details of the concall with analysts, declined to comment on the issue.

The company told analysts that the attractiveness of Zain Africa lies in large aggregate population of 470 million, low mobile penetration which is at 36 percent and over seven per cent GDP growth in the region.

African markets also have low competition, and Zain Africa is the top telecom player in 10 of the 15 markets. The tariffs are also higher, which is reflected in average revenue per minute of $0.07, and low minutes of usage which is lower than Rs 100 per month.

Bharti Airtel's stock fell around nine per cent on the day the deal was announced, and has been volatile ever since. "While specific details on Zain's turnaround potential were not shared, the management's overall commentary has made us slightly less negative on the deal than before.

In any case, we believe the $3.2-billion decline in Bharti's market cap since February 11, adequately reflects the risk of value erosion from Zain. We, however, maintain 'sell rating', given the lack of catalysts in the near term," said Sanjay Chawla, analyst, Anand Rathi Securities.

Bharti Airtel said that it would extend its 'minute factory model' to Zain Africa and saw significant opportunities for rationalisation in terms of capital expenditure and operational expenditure efficiencies.

The company said that it would also look at more outsourcing in terms of information technology and call centre operations. Moreover, the management ruled out any further large acquisitions over the next one to two years, post Zain deal.

Analysts admitted that there were certain advantages to the Zain deal, but warned that one should not ignore macro and political risks in Africa. "It remains to be seen as to how Bharti, in the event of the deal going through, is able to get the required management bandwidth to run a 15-country operation, with different regulators to manage.

Bharti would also have to put in additional investments into Africa to expand its business, in addition to funding requirements for the upcoming 3G auction," said Harit Shah, Research Analyst, Karvy Stock Broking.