Investors hammered shares of Bharti Airtel on Monday, pushing it down by 9.25 per cent, after the company said it would enter talks to acquire African operations of Kuwait-based Zain Telecom.
Market players raised concerns over the valuations of the company and whether it would be able to make gains from the $10.7 billion (Rs 50,000 crore) buyout that comes in the backdrop of cut-throat competition that has eroded profits at home.
While Bharti Airtel’s shares lost Rs 29 to close at Rs 285, Zain’s share price rose 3.9 per cent on Monday after the announcement came in.
Market experts feel that Bharti’s valuation is stretched and in an uncertain environment for the domestic telecom sector, which has grown very competitive, the company’s big ticket acquisition will stretch its balance sheet.
“The telecom companies in India are already under pressure to maintain their revenues at lower rates and this deal will add debt to its balance sheet and exhaust its cash reserve,” said Divyesh Shah, chief executive officer, Indiabulls Securities.
Over the past year the industry has been under pressure and the call rates have been going down with the entry of new players. The latest missile to hit entrenched players such as Bharti is the pay-per-second billing by new rivals such as MTS.
“The valuation is a concern and the time the deal will take to become revenue generating for the company is a question,” said Aseem Dhru, CEO, HDFC Securities.
“Zain’s financials for the calendar year 2009 deteriorated and hence the valuations for the deal looks stretched,” said Himanshu Shah, telecom analyst at Religare Capital Markets.
The industry is also cautious in view of the history of foreign acquisitions by Indian firms.
“In most cases, the acquisitions have put the mother company under stress,” said Dhru.