Monday 15 February 2010

Bye Bye Africa



CNBC Arabia announced today that Zain Group’s board of directors has approved to sell their African operations to Bharti Airtel for USD10.7 billion (KD3,082 million). Bhari has been interested in the African operation for a while and there were previous negotiations last year for purchasing a stake in Zain Group. Vivendi SA, who came in July and offered USD12 billion for the African operations were the first to start off the Zain’s deal dilemma, but talks didn’t last for long (click here).

Bharti is Paying 65% Premium

Based on Zain Africa 9M09 financials, it shows that they have an EBITDA of USD870 million, which constitutes about 34% of the group’s EBITDA. Telecoms are trading at a mean EV/EBITDA multiple of 5.6x; if we imply that multiple to Zain Africa FY09E EBITDA (USD 1,156 million) it will result in a value of USD6,492 million. This means that Bharti are willing to pay approximately 65% premium.








In Need for Cash
Obviously this is a good deal for Zain as they didn’t keep their willingness to liquidate some assets secret. Although this forgoes their strategy of expanding outside the Middle East and capture growth opportunities, however they could use this excess cash to payback some debts or to finance other struggling operations, such as Zain Saudi. Personally I think that this cash will be given out as special dividends.
18% Upside Potential
Zain was suspended from trading today, but the whole market rallied on the back of this positive news. The sale will have a positive impact on Zain’s value. Looking at the table below, Zain African operations is valued at an EV/EBITDA multiple of 9.3x. If we value Zain ex-Africa by multiplying the average EV/EBITDA (5.6x) multiple to FY09E EBITDA (KD646 million) we will get an enterprise value of KD3,618 million; it will result in an EV of KD6,700 million for Zain Group (3,618+3,082). Doing the math (6,700-2121+330) we will reach a target market cap of KD4,909 and fair value per share of KD1.27, 18% upside from current prices.




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