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Bharti plans stake sale to repay loans for Zain deal

Bharti Airtel on Thursday held out the possibility of issuing fresh shares or divesting its holding in telecom infrastructurecompanies to lighten the burden of debt it must assume to fund its planned acquisition of most of the African operations of Kuwait’s Zain Telecom.
Top executives at India’s largest mobile phone firm told analysts in a conference call that the purchase would be funded by medium-term debt — loans with maturity period between 1 and 10 years — which will then be repaid with money generated from operations as well as a likely equity issuance. A final deal is expected to be clinched by end-April or mid-May.

“If we close the deal with full debt, it will still be at a sensible level. But we are debt-averse and will use a combination of free cash flow and equity to repay debt. There is a possibility to raise more equity at Airtel or (Bharti) Infratel level, but we have not taken any decision at this point,” said Akhil Gupta, group deputy CEO and MD of Bharti Enterprises of which Bharti Airtel is a part.

“There will be impact on earnings in the short-to-medium term when you look for growth stories like this. Earnings per share should take a backseat for some time,” he added.

The Airtel-Zain combine will have annual revenues of $13 billion and earnings before interest, depreciation and amortisation of $5 billion a year after the transaction is completed. “Within a year or so of the takeover, we should be able to improve both revenue market share and EBITDA margins,” said Airtel joint MD Manoj Kohli. Bharti is in exclusive talks until March 25 to buy Zain’s African operations for about $10.7 billion, including debt. It will need about $9 billion in cash to finance the acquisition.

Investors and analysts have been largely unimpressed by Bharti’s announcement that it intends to buy Zain in Africa to transform itself into an emerging-market MNC. Ratings agencies S&P and Fitch have put Bharti Airtel’s long-term credit rating on watch with negative implications, citing a likely heavy debt burden.

Bharti group CEO Sunil Mittal attempted to convince the sceptics and sought support from stakeholders for an acquisition that would make Bharti the world’s seventh-largest mobile phone operator by subscribers.

“We are very clear that if we cannot use cash in a manner that can give better returns to shareholders, then we will return cash to shareholders. This move needs support from investors and shareholders because this acquisition is a result of a clear and well-deliberated strategy,” he said.

Mr Mittal also tried to address concerns that Bharti may be overpaying for Zain, observing Airtel “has picked up something under distress. Valuation is reasonable for both sides in view of the strategy we have lined up. Zain has over 40 million customers and is a well-run company with networks on ground and that’s what makes it good”.

At the end of December, Bharti’s net debt was just 0.1 times its equity and it had cash reserves of about Rs 7,600 crore. Besides the likely acquisition of Zain in Africa, the company needs money to acquire a 3G licence and operate the service.
The Indian promoters own a 45.44% stake in Airtel through Bharti Telecom. Bharti Airtel owns and manages passive infrastructure for telecom
operations under its subsidiary Bharti Infratel, which has 29,806 mobile phone towers and has reported revenues of Rs 2,600 crore in the nine months to December 2009. In addition, Bharti owns a 42% stake in Indus Tower, which has 102,696 towers, through Bharti Infratel.

The pioneer of the low-cost, outsourced model of operations, Bharti will try and replicate its success in Africa, where market conditions are similar.

“We will look at inculcation of Bharti’s DNA in Africa. We also see some significant possibilities in future — forming a tower company on the lines of Bharti Infratel and Indus Towers and getting into related business like international gateways, 3G and call home plans for NRIs in these countries,” he added.

Airtel will be a bystander and not a participant when the anticipated consolidation in India’s ultra-competitive and over-crowded mobile phone market happens, Mr Gupta said.

“We would always prefer a new country and a new continent over India, as we are already meaningfully present across India,” he said.

Source: Economic Times

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