On February 13, Zain’s board accepted a $10.7bn offer for its African assets from India’s leading carrier Bharti, including $1.7bn in debt. The deal is expected to close within a month, the time for Bharti to close out the financing of the transaction; at first blush, this appears to be that rare transaction that works for all parties, though perhaps not as well for Bharti’s shareholders. (Please click title – Full Analysis in PDF available at www.africanext.com)

The price: the price point is at the higher end of the $7-$9bn equity valuation we had estimated for Zain’s African assets (see “How Much is Zain Africa Worth?” an AfricaNext Research Investor Note – September 2009). It values the equity of Zain’s African operations at about 7.5x projected 2009 EBITDA, a relatively rich valuation in the current African context (public pan-African carriers currently trade at 3.5x-4.5x forward EBITDA), but hardly excessive within the historical context of similar transactions.

For Zain, it’s a good sale price for a set of operations in which the Kuwaiti company had sunk around $6-$7bn over the past five years, with a nearly non-existent dividend stream. It’s a price that allows Zain to realize a profit through capital gains that would have been hard to come through dividend upstreaming alone, on a business that was dragging down its earnings. Zain will be able to pay down debt and focus capital expenditure on more profitable Middle Eastern markets. Removing Sudan from the equation was the icing on the cake, making the deal the ultimate no-brainer.   

By our estimates, Zain realized a non-weighted return of at least 30%-40% on its African investments, potentially more depending on the structure of individual capital transactions and depending on assumptions for management fees and equity contributions to CapEx.

What is Bharti getting for its money? Our analysis in a June 2009 Investor Note is still relevant:

 “The fact that Zain would even consider selling its Africa business points to heightened concerns about the deterioration of fundamentals in African mobile markets. Competition has intensified, taxation levels have risen as tax holidays have expired, the markets are as capital-intensive as ever (at a time Zain is seeking to cut CapEx levels by half) and African currencies have plunged against the dollar. […] Excluding Sudan, Zain’s African operations accounted for about 65% of the group’s subscriber base, 56% of its revenue and 50% of its EBITDA in 2008. Perhaps more significantly, they take up more than 75% of capital expenditures, yet only account for 15% of the group’s net income. Zain’s net income rose 6% in 2008; excluding Africa, net income rose 34%. For all the lofty subscriber numbers, African operations are arguably a drag on the entire group, at least for now. “

 Please download full analysis in PDF format at www.africanext.com.