Bharti's entry into Africa, which has a huge untapped market, via Zain's African assets (ZAF) seems positive from a long-term perspective. It also reduces the risk that may have arisen because of the intense competition in the Telecom sector in India.Bharti Airtel (BAL) has bid for ZAF (excluding Sudan and Morocco) at US$ 10.7 bn. The acquisition will give BAL control over ZAF and while valuations are at a premium, the strategy will pay rich dividends in the long term.
ZAF’s assets have been impacted in terms of growth and profitability by the currency devaluation and poor economic conditions. ZAF’s revenues declined 12% through 9MFY09 (annualised), but grew 5% based on constant currency. The ZAF acquisition is likely to lead to mild EPS dilution in the second year of acquisition and is expected to be EPS-accretive from 2013. The current fall in BAL’s stock price (11% post announcement) is a chance to accumulate since the performance will likely improve post more clarity on the deal structure and business fundamentals.
Though the current market situation and scope for profitability growth in Africa may look glum but post the credit crisis in ’08, African currencies significantly devalued 3-39%, with African nations highly dependent on natural resources (crude) and remittances. With current mobile penetration at 36% in ZAF’s markets of presence, Africa presents an opportunity similar to that in India in ’08 and will likely witness the maximum interest by global telcos in this decade.
