May be it’s only me, but looks like Bharti Airtel is hell bent on chasing Fool’s Gold. Bharti has been chasing inorganic growth at a maddening pace primarily to expand globally. One of the top most telecom operators in India, Airtel enjoys a huge subscriber base in India and wants to penetrate the international markets in a bid to replicate its success in India.
The first indications came from the dicey Bharti-MTN deal which eventually never materialized after multiple rounds of discussion. The deal buzz went on for quite sometime but the S.African government seemingly did not like the terms of the deal. Given the interest shown by Bharti Airtel, the indications were clear that Bharti wants a piece of one of the most developed telecom networks of the world –S.Africa.
However, that was a short term loss for an acquisition hungry and the hunt was on. Recently, Bharti did manage to pick up stake in Warid Telecom for around $300 million.This deal will pave way for Bharti’s entry into India’s neighbouring country-Bangladesh.With a potentially growing telecom market in Bangladesh and a 70% majority stake, the deal value looks fair to say the least.
However, Bharti Airtel seems to have overdone its acquisition strategy big time too soon. It had not even been a few months for the Warid Deal and Bharti went ahead and announced its plans to acquire Zain’s (A Telecom Company From Kuwait) African assets for a whopping $10.7 billion.
Zain evidently has a substantial presence, with over 70 million subscribers in the African Markets and Bharti was eager to enter S.Africa in one way or the another. However, a little storm seems to be brewing up as far as the Stock Market performance of Bharti Airtel is concerned. Ever since, Zain issued a press statement showing its interest in accepting Bharti’s offer , the shares of Bharti have tumbled like nine pins in today’s trading session. Bharti Airtel shares have fallen 9% in today’s trade. The markets did end flat but Bharti was in RED from the word go. From an almost 4-5% in the very first 2 hours of the trade, the traders seem to be offloading Bharti shares like there is no tomorrow.
Now, given that the telecom market in India has become highly competitive and price wars and Mobile Number Portability are definitely hurting the operators, but does that mean losing the focus on the home turf and eyeing new geographies. Expansion is generally a good de-risking ploy but i am just a little sceptical given that Bharti is trying to do too many things in too small a duration.
Moreover, BOA-Merrill Lynch have listed their reasons for downgrading the Bharti Stock from Buy to Underperform on two reasons primarily,
- Rich valuation of the potential deal
- Unexciting growth outlook for Zain’s African portfolio
Even if the current deal might be of critical long term value , it is difficult to get the point across the investors when Bharti keeps on making acquisition news every now and then.For investors, it only comes across as a serious strain on Bharti’s Balance Sheet. More so, when the market confidence is not really positive, moves like these can backfire and it sure have backfired in Bharti’s case today.
As an investor I would rather see Bharti concentrating on the Indian Markets and going all out for the booming VAS market. At least, Bharti could announce these acquisition details after sufficient gaps otherwise all the markets are going to hear is money going out of Bharti Airtel’s coffers with feeble indications of a possible return on the investment.
What do you think of the recent acquisition spree of Bharti Airtel? Would you as a Bharti Airtel investor consider the long term potential of these deals and stay invested.
Liked the article very much…!!! Gud Going ankit, nice post…!!
N yes, Comments from Arun, viral n you were quite good, provided a nice holistic view of the situation, gr8 discussion. :-)
Hello Ankit,
Apologies for being a bit harsh which I unintentionally was while writing my comment. I didn’t mean to say your perspective is wrong or anything. I just wanted to put light on the other side of theory as well.
In fact, I would like to admit over here that the broader view from what I speak to other people almost mirror the one as pointed out by you. So, it is like a debate which simply goes on & only time has the correct answer for it.
Vishal, no apologies needed.You were not at all harsh, and infact as i mentioned before my focus to write is to present my views and encourage readers to out theirs.Helps me and the readers to see the complete picture.
Well yes, only time will tell the answer
Dear Arun Prabhudesai,
I would further like to add that, the fact remains that stock markets values companies based on future earnings and prospsects of the companies. So, if by my argument Bharti prospects are good, why is markets punishing the stock price?
Answer: Stock market does value a company based on future earnings & prospects but that is related to near future of 1 or 2 years down the line. Markets usually dont like to see much farthe. And the near future, of say, 1 or 2 years certainly looks stressful on books. But, the real value of the deal my start coming from, say, year 3 or year 4 with such a huge scale of acquisition. Probably market will take time to digest and justify this acquisition.
Take, for example, markets have now digested Hindalco acquisition of Novelis. But, once can say markets have still not fully digested acuisition theory of Tata Steel and Chorus. However, current market valuation of Tata Steel shows that markets have partially digested the Chorus acquisiton after 2 years now that recovery has slowly started in world markets.
So, markets may show its nod to Bharti’s acuisition of Zain; but say after 1 or 2 yrs as the results and signs of stability start oozing over a period of time. Its like healing of the wound with more passage of time.
Viral, you have almost added a new post with your comments.This is the kind of participation that makes blogging all the more worth it for me.
Now, i am not going to say that you are wrong or anything because all the points suggested by you are spot on and perfect when we talk bout a fundamental approach.
However, i will just clarifiy on a few aspects to support my POV
1) The future earnings insights given by you are perfectly bang on.It takes certain amount of time for these acquisitions to be digested by the marketplace.But, given the market has been for the past year and half, there is more pain.The long term investment horizon is not very much in place.So, back to back acquisitions have hurt Bharti in short term and will probably hurt in medium term too.The timing can be a little tricky since other players are making inroads and Bharti would not want a battered stock among other things.
2) The Warid deal value might be insignificant compratively, but then it is $300 million alright.More that that, back to back acquisitions send a possibly money draining Balance Sheet even if the amounts of both are not significant.
However, i do accept the fact that i took a short to medium term view on the whole thing.May be my personal instincts got the better of me.But, then thats learning and i am gonna try present a broader picture from next time.
Thanks again for adding so much value to the post!!
Well many of the points have already been made by great minds here. What I would think is,
1. For every dollar spent on the acquisition, can Bharti create an asset (or earnings) of a dollar or more?
2. Buffet says that companies that do too many acquisitions could be hiding something. He would rather give the extra cash back to share holders in terms of dividends. So, though a few acquisitions may make long term sense, the same needs to be presented to the shareholders (not just the board) and approved by them.
3. The management has to be rational on the usage of funds and equity vs. debt options to fund acquisitions and long term implication on margins and share holder value should be thought through.
I like aggressive companies… but aggression might not always be the answer.
Madhav, finally i have someone who has a little support for my POV :-)
This was exactly my opinion.Acquisitions are fine as long as the company is cool enough to show a roadmap of generating cash out of it.Glad to c me and Buffet think alike :P
Yes, the management will have to be cautious on how they raise capital for funding acqusitions.As in last two days, Bharti is down more than 13% , that creates a big hole in the market cap for a company even for a short term basis.
But, Viral did make some very thoughtful observations in citing that it might be a matter of time before the market digests the acquistion effect on the Balance Sheets.
Dear Ankit,
Speaking about your point of back to back deal of Warid Telecom and Zain, it is quite unrelated topic with Warid deal hardly worth $300 million which is too small when compared with a $10 billion deal. The point would have been debatable if Warid would have been $3-5 billion & Zain $10 billion would have accumulated a stress of $13–15 billion on Bharti books.
But, with Warid deal being hardly $300 million it should not be mixed with a multi-billion deal.
Hello Ankit,
I tend to share opinion with likes of Arun Prabhudesai. Not for just his set of reasoning but many more as follows: I feel what Bharti is doing is taking priority step in what other bigger companies would have to follow in future as Indian market is getting saturated. Today Bharti is doing things against headwinds but tomorrow other ‘Bigger’ players might definitely follow this route of inorganic growth.
Inorganic growth is must for a sector in which Bharti operates. Say, for example, we have seen companies from Power Generation business diversifying into Power Distribution or Power Equipments business. But, companies from Telecom sector have little jostling space except for areas like DTH, VAS, IPTV, 3G, Broadband, etc. This is maximum that Telecom companies can diversify into with little out-of-box perspective.
Now, these Telecom companies have a scope of expanding organically through fresh entry into other emerging markets. But, fresh start would mean big investments starting with towers, new client acquisitions, setting infrastructure, etc. Also, starting afresh in competition with already established players of the target destination would mean a long time (running into many years) before getting even an average sort fo foothold into the over-all market share of the area.
Any which way, organic or inorganic, is going to cost dear for these companies. So, why not go for inorganic route which comes with readymade infrastructure even if it costs a substantial Premium. Also, in this fast paced sector of Telecom, the organic route holds risk of infrastructure getting outdated and obsolete until it is optimally utilised. So, inorganic growth again scores its bit with this perspective.
Again coming back to Bharti…. going for international acquisition does not call for non-commitment on behalf of Bharti towards domectic market and it’s various segments of operations. Bharti is well aware of the view that even with Indian market being saturated, the global players are still vying for this market which still has tremendous scope of business opportunity in space of Telecom and other related businesses like 3G, Broadband & DTH to name a few.
Bharti continues to have prime presence in these domestic businesses but at the same time it is also taking a step forward looking at long term prospects in other emerging markets. Taking this step very now gains significance rather than following suit when others have already established foothold in such growing markets. This bold step has to be taken by the company against the wishes of market or some group of shareholders who may not real long-term investors but traders taking advantage of hammering the stock at the expense of short-term stress on the company’s Balance sheet.
We must not forget that even Reliance communication was vying for MTN deal which got fractured after first attempt of discussion by Bharti with MTN. This point also underscores the significance for bigger companies to think big if they want their long term shareholders to benefit from other emerging growth stories and not remain limited to gradually saturating Indian markets.
That apart, We keep talking of Indian markets saturating. But, we should also understand that Telecom story is not all about Adding New clients and High ARPUs. Telecom is the story which keeps ringing even from existing customers. Existing clients won’t stop making calls. More automated processes have arrive like internet calls but calls from mobiles are inevitable. When a person is on walk or travelling, he will certainly need to call from mobile rather than logging-in from the internet. So, even after saturation of the sector, what we call as ‘Repeat Orders’ in other business won’t stop for Telecom sector.
The Premium that a company pays to acquire a company inorganically is the price paid for readymade business, clients & infrastructure related to that business. Some times premium could be high but the cost of establishing business from the word start could back-fire even harder if the product is left obsolete untill fully launched and utilized.
Viral, Excellent comment and reasons very well given to make your point – I second most of it…
The thing with telecom market is – its never saturated. You had 2G and now 3G and possibly 4G+ in near future. Telecom has become such an important business that it will never be saturated, even if everybody on the planet has a phone with data plan.
About price – I think Bharti has definitely negotiated under the hood before coming up with term sheets. There are many tangible benefits that are offered by African market, along with lot of not so tangible one.
Market in Indian subcontinent is already there for Bharti, what it needs to do is – a. Get hold of technology for future. b. get hold of markets for future.
I dont think just because market dived today on Bharti means its not a company of future, stockholders and analyst are generally 90% in-accurate anyways. I bought a lot of Bharti today btw :)
Looks like it is a highly debatable topic :-) Ajit, the telecom market is growing indeed, but again past few years have seen a flurry of new players.Now, that does create issues for the existing players right.
Now, i completely agree with the future insights.But again, IMO the timeframe of this future is a little tricky to predict, hence my opinions :P
I hope you make lots of money with Bharti :) BTW out of curiousity is there a time frame u r considering before booking profits or you have a real (3-4 yrs) horizon
Hello Ankit,
Strangely, I was writing an article but with a completely different point of view – one which says Bharti is chartering new grounds and it might just pay off making them global leaders instead of being just within Indian Subcontinent.
Think 70 millions subscribers in Africa that ZAin has today will be Bharti’s – the experience they have here in India to sustain as such low ARPU’s will surely help them in bringing down costs of Zain’s Business, thereby increasing Airtel’s bottom line.
You know we should wait and watch on how things pan out over next couple of years – it could go both ways !
Agree Arun, but frankly i have been reading a lot bout S.Africa and take it from me, the place lacks the press or else the telecom market there is already saturated.Moreover, it is overtly difficult for foreigners to establish biz there as was highlighted in the Bharti-MTN deal.
Again, from a long term perspective the in-organic growth might work well since volumes might compensate for lower ARPU’s.However, i seem to of the view that Airtel has a lot to do in the Indian subcontinent itself.It wont make sense to give the lead to the likes of Docomo etc and go global.
Moreover,from a shareholders POV how does one explain an unending acqusition spree. Close to half a million dollars and then a $10 Bn deal.As an investor i would shit my pants :P The stock markets seem to take in account the real long term values, if i cant see it aint there is the mantra now.
But as you mentioned, only time will tell!! It might as well work in Airtel’s way too :P
And as for ur completely diff take, this is exactly why i like blogging :-) completely diff perspectives.
Well , i agree with you because S.Africa is one of the most technologically advanced telecom market in the world.The African economy is seeing tremendous interest from the outside world and who would not want to be part of the game.
But, from a business value, too many acquisitions make it a little tricky.I am no expert at valuations, but BOA sees the valuations over priced, moreover Zain seemed to have agreed at the first price offered.Not that it is indicative of anything but then it could mean that Zain is kinda happy with the valuation.
I wanted to delve from a stock holders perspective citing that with a huge outflows and no clear indications of the return, how does Bharti expect to hold the investor confidence
I dont agree. I think bharati decided to enter SA to acquire technology and use that technology to keep its edge above competition. One of the reasons for acquisitions into African markets is, it is predicated that this decade will finally see tremendous and tremendous amount of growth in infrastructure sector in africa