Bharti Airtel-: what exactly did Bharti buy in Africa? Daiwa

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Bharti Airtel (BHARTI IN) Rating:4
Goodwill hunting: what exactly did Bharti buy in Africa?



What has changed?
 We have examined the previous financial quarterly statements for Bharti Airtel
(Bharti) and Zain (Not rated) for insights into their recently-concluded transaction.




Impact
 Magnitude of goodwill recognised is a negative surprise: Bharti recognised
provisional goodwill of Rs345bn (US$7.6bn), as per the footnotes to its 1Q
FY11 financial report. While we are cognisant that this is a preliminary
assessment that is likely to be finalised by June 2011, the quantum of goodwill
recognised, which constitutes 82% of the US$9bn total purchase consideration,
has caught us by surprise. The goodwill provision equates to Rs91 per share.
 We think Zain’s reports point to an interesting mismatch: based on Zain’s
March 2010 reports, we derive a large, but a much more palatable, goodwill
estimate of Rs188bn (US$4.1bn) for the transaction. The mismatch between our
estimate for goodwill based on Zain’s reports and that recognised by Bharti
points to a probable re-valuation of the deal assets. It appears to us that the fair
value of the fixed assets and intangibles acquired by Bharti is about 40% lower
than the value of the assets disposed of by Zain.
 Key question for investors: we think the key question for investors is whether
Bharti’s initial measurement of goodwill suggests conservatism or is a
reflection of the true fair value of the assets acquired. While it is too early to be
sure, we are concerned that Bharti’s current valuation for the assets acquired
could point to an increase in reinvestment risks for the Africa operations.
Valuation
 We maintain our 4 (Underperform) rating and sum-of-the-parts-based sixmonth
target price of Rs265.
Catalysts and action
 We believe it is too early to be optimistic about any turnaround potential in
Bharti’s Africa operations.