As a result of the equity issuance, SingTel’s effective stake in Bharti would decline from the current 30.7% to only 19.6% of the enlarged, merged business. Bharti is already equity accounted anyway, so no deconsolidation is required. Furthermore, at the “entry price” being paid by Bharti on the current terms (14x P/E and 5.4x EV/EBITDA) the dilution to Bharti’s EPS would be limited to only 2.3%. SingTel’s management has not yet been able to inform us of the impact on SingTel’s shareholder rights (and veto powers) following the transaction (and the resulting stake dilution).
Thus, the prima face impact on SingTel will simply be felt through the valuation impact of the transaction on Bharti. Given the share-for- share exchange, the valuation impact on Bharti is complicated. But taking the closing prices of the two shares on Friday 22 May, it appears US$3.8 bn in value would be transferred from Bharti shareholders to MTN shareholders as a result of the deal. This can be thought of as a control premium (equivalent to a 14.3% premium to MTN’s closing price).
SingTel’s share of US$3.8bn in “value destruction” in Bharti would equate to S$0.11/share in value destruction at SingTel, or 3.3% of our current target price of S$3.34/share.
On the other hand, the US$3.8 bn in assumed value destruction is based on the deal terms at the closing market prices on Friday. It takes no account of potential synergies (either on procurement of operating/’back office’ costs), although we are not a big believer in either cost/revenue synergies from international acquisitions. What will probably be of far greater importance in the medium-to-long term will be MTN’s operational performance and the currencies/macro environment in Africa and the Middle East. On 4 March, our MTN analyst cut his MTN target price 38.7%, from ZAR150 to ZAR92 on currency and macro weakness. Should this prove short-lived, Bharti might destroy less than US$3.8 bn in value.
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