S&P downgrades Bharti on Zain bid

Standard & Poor's Ratings Services today said that it had placed its 'BBB-' long-term corporate credit rating on India-based telecommunications service provider Bharti Airtel Ltd. on CreditWatch with negative implications following the company's proposed bid for Zain Africa BV.

"The CreditWatch reflects our expectation of a significant deterioration in Bharti's cash flow protection measures and a weakening of the company's business risk profile if it acquires Zain Africa," said Standard & Poor's credit analyst Yasmin Wirjawan.

A potential debt-funded acquisition and the near-term 3G license auction in India could increase the company's pro forma consolidated debt to EBITDA to about 3.0x for the fiscal year ending 31 March 2011, from 1.4x for the 12 months ended 31 December  2009.

"Bharti's business risk profile could weaken because of the macroeconomic and political risks associated with, and the lower profitability of Zain Africa's operations," said Wirjawan.

Zain Africa's EBITDA margins were about 33 per cent for the nine months ended 30 September 2009, compared with Bharti's 45 per cent for the 12 months ended 31 December 2009.

In our opinion, the proposed transaction would provide Bharti with meaningful growth opportunities in Africa, which has a relatively low mobile penetration. Zain Africa has close to 42 million subscribers in the continent. We expect the combined entity to benefit from economies of scale as it would have a leading position in many of the African markets as well as India.