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In an official statement issued on Tuesday evening, Bharti said it has not made any offer to acquire whole or part of MTN. Speculation around the MTN bid is incorrect and misleading, it said. "Details will be released as and when agreement is reached."
Earlier in the day Sandeep Gurumurthi & Sunita Nagpal of CNBC-TV18
According to a Financial Times report, Bharti Airtel has bid for 51% in MTN. It's bid for controlling stake stands at USD 21.8 a share, but MTN is looking for USD 23.8 a share. Bharti has secured USD 12 billion of financing from Goldman Sachs and Standard Chartered, the report states. The remaining funding will be through issue of equity to MTN shareholders, it added.
Yesterday, MTN has confirmed that it is engaged in discussions with Bharti Airtel. MTN is the largest operator in sub-Saharan Africa and operates in 21 countries. It has a subscriber base of 68.2 million and market capitalization of USD 36 billion. Its enterprise value is pegged at USD 42 billion.
Alpine Trust is the single largest shareholder with 23% stake. It is a consortium of MTN management and staff, and a private family. Merrill Lynch and Deutsche Bank are financial advisors to MTN, while South Africa Government Pension Fund holds 13.5%.
According to Eleni Giokos of CNBC-Africa, MTN is still refusing to speak to anyone at the moment. “Analysts are quite optimistic about their offer. But there is no confirmation as yet. At the moment, everyone wants to know what the price would be for MTNs shareholders to sell.”
“Now, as per the Financial Times report, Bharti is eyeing 51% stake in MTN at USD 21 a share, which is about 165 rand. Now, MT Ns share price is slowly reaching that point today. A manager with considerable amount of shares in MTN said in order for Bharti to achieve its 51% stake, will have to go to Old Mutual, Allan Gray, and Coronation which are all major shareholders. We have also heard reports of Alpine, which has a 23% stake in MTN. That would be a viable option for Bharti. Now, the company will have to take a material stake in all of these shareholders’ piece of the pie.”
Giokos said many analysts are asking whether USD 21 is a fair amount. “Reports suggest that MTN has rejected this.”
On MTN asking for a knockout premium, she said, “Yesterday, MTNs share price kept climbing. It has now reached an all-time high and 10% is above the normal price. Some analysts said the price could rise as much as 20-25% by the end of the week, which is a considerable amount. This news of Bharti Airtel’s stake buy is boding very well for the company. Analysts say investors could be buying purely on speculation and that good news could be built around speculation. If the discussions fall through, this could be a major risk for buyers of this share.”
On risks to Bharti if the deal goes through, Giokos said, “Bharti’s share price went down dramatically yesterday on fears of overpayment and dilution, before looking at synergies and extended growth opportunities. We mentioned that Bharti Airtel could have exposure to 21 countries that MTN operates in. But if something goes wrong in one of the countries, and unfortunately Africa is known to be politically unstable, it could be quite a risky buy. But still Bharti Airtel could be buying into a premium growth story in Africa.”
But how does the deal stand in terms of valuations and premium?
The current market price of MTN is 150 rand per share, or USD 19.80. Bharti has indicated that it will bid at USD 21.8 per share, a 10% premium to the current market price. However, MTN wants USD 23.8 per share, which is a 20% premium to the current market price.
As per Bharti's valuation, the bid works out to USD 39.6 billion. A 51% stake will cost it USD 20 billion. MTN's enterprise value is seen around USD 41 billion.
However, Bharti's stock is down on concerns about equity dilution and balance sheet leveraging. However, if other competitors also think that MTN is an attractive buy and are willing to pay higher premium, then Bharti might have to pay a higher price. So, these are concerns which is keeping the stock down right now.
How is Bharti placed financially for an acquisition of this size?
In the past whenever one company tries to acquire a similar-sized entity, the stock initially comes under pressure. The same was witnessed in the case of Tata-Corus when the deal was announced. At that time, the Tata Steel stock came under a lot of pressure. A similar story is playing out in Bharti’s case. There is no clarity on how this deal will be structured, so that is also adding to the confusion.
Bharti has a very low debt right now. The telecom major’s net debt to total equity stands at about 40-42%, which gives them a lot of leverage. If Bharti is able to acquire 51% stake in MTN, then the combined EBITDA will stand at about USD 9 billion. This will give them a lot of leverage to go and borrow further.
If done aggressively at 2.5 times net debt to EBITDA, Bharti can raise about USD 22 billion. However, investors need to see watch out for how much equity dilution the telecom major will have to go for, if they partly pay equity.
Also, analysts wonder whether SingTel will partner Bharti in the bid. If they also contribute in the equity part, then Bharti’s equity contribution might be much lower. Also, pricing is also an important factor.
Lastly, what do top brokerages think about this deal?
UBS thinks Bharti's share price may come under pressure in the short-term. It feels the Bharti- MTN deal makes strategic sense, as the combined entity is likely to have significant leverage with equipment vendors. Bharti could transport its low cost business model to African countries, it added.
However, Citi feels the deal structure, value for price, and funding are key to immediate stock reaction. The market, it added, tends to worry about overpayment and dilution before looking at synergies.
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