MERGER ANALYSIS BETWEEN

BHARTI AIRTEL

&

WIRELESS BUSINESS SERVICES PRIVATE LIMITED

Submitted To :

Dr. Kulbir Singh

Submitted By : Sirsa Majumder (2013282)

Sneha Malhotra (2013284)Soumitra Kansabanik (2013287) Souvik Chakravarty (2013289) Vijaya Srivastava (2013322)

BHARTI AIRTEL

QUALCOMM INC.’S WBSPLWIRELESS BUSINESS SERVICES PRIVATE

LIMITED

2 ACQUISITION OF WBSPL BY BHARTI AIRTEL

INDEX

Acknowledgment 4

1 Introduction 52 Expectations of Shareholders 53 Motive of the Merger 5

4 Type Of Merger 6

5 Projected Post-Merger Cash flows for target firm 6

Balance Sheet of WBSPL March 31, 2013 7

Profit and Loss Statement of WBSPL March31, 2013 8

Cash Flow Statement of WBSPL March 31, 2013 9

6 Calculation of WACC 10

7 Calculation of Unlevered Cost of Equity 11

8 Economic Gains and cost of M&A 11

9 Forecast of Statements 12

10 Economic and Business Assumptions 1311 Operating Expenses Forecast 1412 Bibliography 15

3 ACQUISITION OF WBSPL BY BHARTI AIRTEL

ACKNOWLEDGEMENT

I express my deepest and most sincere thanks to my project guide Dr.. Kulbir Singh, Professor, IMT Nagpur. The project could not be completed without his able support, knowledge sharing and guidance, for helping me and providing me with useful information.

I take this opportunity to thank all of my colleagues, without their cooperation it was not possible to complete this project.

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1. INTRODUCTION:

In October, 2013, Bharti Airtel merged with its own wholly subsidiary. It was executed by

acquiring a 100 per cent stake in Wireless Business Services (WBSPL). WBSPL was a company

founded by US chipmaker Qualcomm. After the acquisition, the company was renamed Airtel

Broadband Services.

2. EXPECTATIONS OF SHAREHOLDERS:

The pattern of shareholding in each of the WBSPL entities remains unchanged even after the

merger. This step was taken to ensure that the shareholders’ interest was taken into

consideration. It also helped in not curbing the competition concern.

3. MOTIVE OF THE MERGER:

Initially Airtel had 49% stake in WBSPL. With the passage of time, it increased to 51%.

Additional acquisition estimated to about USD 165 million. The main reason for this acquisition

was to expand the services and regions in which Airtel could serve and cater to the demands of

the customers. Moreover, it was a step taken to increase the market share of Airtel. WBSPL had

spectrum that could be used for high speed 4G services in New Delhi, Mumbai, Haryana and

Kerala. Airtel had spectrum in the similar lines in Punjab, Kolkata, Maharashtra and Karnataka.

This would have directly favored in providing good services to the customers, So, the merger

was given a green signal.

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4. TYPE OF MERGER:

It was a complete 100% merger which involved both, asset and share purchases of WBSPL.

5. PROJECTED POST-MEREGR CASHFLOWS FOR TARGET LTD.

Sl No. Prticulars 2013 2014 2015 2016 2017

1 Net Sales 25.35 27.885 30.673533.7408

5 37.11494

2 Cost Of Goods Sold 27.65 29.032530.4841

332.0083

3 33.608753 Selling & Administrative Expenses 0 0 0 0 04 Depreciation 0 0 0 0 0

5 EBIT -2.3 -1.14750.18937

51.73251

9 3.506187

6 Taxes -0.805 -0.401620.06628

10.60638

2 1.227166

7 PAT -3.105 -0.745870.12309

41.12613

7 2.2790228 Plus : Depreciation 0 0 0 0 0

9 Operating cash Flow -3.105 -0.745870.12309

41.12613

7 2.279022

10Less: Gross Invest. In Operating Capital -89.1 -98.01 -107.811 -118.592 -130.451

11 Free Cash Flow 85.99597.2641

3107.934

1119.718

2 132.730312 Interest 96.5 96.5 96.5 96.5 96.513 Interest Tax Shield 33.775 33.775 33.775 33.775 33.77514 Horizon Value 14600.34

15 Final Cash Flows 119.77131.039

1141.709

1153.493

2 14766.84

16 Net Income107.900

9106.354

3103.616

5101.110

7 8763.402 Total Value of the firm after 5 years 9182.384299

6 ACQUISITION OF WBSPL BY BHARTI AIRTEL

7 ACQUISITION OF WBSPL BY BHARTI AIRTEL

8 ACQUISITION OF WBSPL BY BHARTI AIRTEL

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6. Calculation of WACC

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where:Re = cost of equityRd = cost of debtE = market value of the firm's equityD = market value of the firm's debtV = E + DE/V = percentage of financing that is equityD/V = percentage of financing that is debtTc = corporate tax rate

As per the data obtained, D = 5,80,84,500 E = 66,55,601 Tc = 35% (FY 2012-2013)

D = 2,70,38,308 E = 11,95,861 Tc = 35% (FY 2011-2012)

FY 2012-2013

D/V 5,80,84,500 / (5,80,84,500+66,55,601) = 0.897

E/V 66,55,601/ (5,80,84,500+66,55,601) = 0.103

Rd 0.0675

Re (Risk-free Return+ Beta * Market Risk Premium) = 0.046 + 1.00 * 0.05 = 0.096

FY 2011-2012

D/V 2,70,38,308 / (2,70,38,308+11,95,861) = 0.958

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E/V 11,95,861/ (2,70,38,308+11,95,861) = 0.042

Rd 0.0664

Re (Risk-free Return + Beta * Market Risk Premium) = 0.044 + 0.9 * 0.052 = 0.0908

From the above calculation, we get the WACC for Wireless Business Services Pvt. Ltd. as:

WACC (FY 2012-2013) = 0.103 * 0.096 + 0.897 * 0.0675 * (1-0.35) = 0.0492 (4.92%)

WACC (FY 2011-2012) = 0.042 * 0.0908 + 0.958 * 0.0664 * (1-0.35) = 0.0452 (4.52%)

7. Calculation of Unlevered Cost of Equity

Unlevered Beta for Wireless Business Services Pvt. Ltd. = 1.28 (FY 2012-2013)

= 1.16 (FY 2011-2012)

(Risk-free Return + Beta * Market Risk Premium) = 0.046 + 1.28 * 0.05 = 0.11(FY 2012-2013)

= 0.044 + 1.16 * 0.052 = 0.1043(FY 2011-2012)

Unlevered Cost of Equity = 11.00 %(FY 2012-2013)

= 10.43 %(FY 2011-2012)

8. Economic Gains and cost of M&A

Cost at which Bharti Airtel bought WBSPL = $165 million = Rs. 1008.1 crore

Premium = Value of the firm – Cost

= Rs. (9182.38-1008.1) = Rs. 8174.28

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9. Forecast of Statements:

Sl No. Particulars 2013 2014 2015 2016 2017

1 Net Sales 25.35 27.885 30.673533.7408

5 37.11494

2 Cost Of Goods Sold 27.65 29.032530.4841

332.0083

3 33.608753 Selling & Administrative Expenses 0 0 0 0 04 Depreciation 0 0 0 0 05 EBIT -2.3 -1.15 0.19 1.73 3.516 Interest 96.5 96.5 96.5 96.5 96.5

7 Taxes -0.805 -0.401620.06628

10.60638

2 1.227166

8 PAT -97.995 -97.2459 -96.37691.12613

7 2.279022

The net sales have been assumed to grow at 10% per annum. The cost of goods sold has been assumed to grow at 5% per annum in tandem with the inflation rate. The interest on debt has been kept constant. Since it’s a telecom company with negligible fixed assets, the depreciation is nil. Corporate tax rate is 35% per annum.

All these taken together the merger is benefited by a positive PAT after 2015.

It is very difficult to arrive at a forecasted cash flow based on economically sound assumptions that are acceptable to business buyers and sellers. The diversity of industries, company forms, ownership configuration, capital structures and market conditions make general set of forecasting rules and formats subject to modification. Some of the steps involved in forecasting the financial data are-

Evaluating a series of economic and business assumptions Preparing a sales forecast based on such assumptions Establish a cost structure functional relationship from historical accounting records Forecast man-power requirements

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Project cost of fixed asset/ depreciation Develop a budget for R&D and new product line introduction Preparation of pro-forma balance sheet and income statements Preparation of cash flow formats

If we take into account Bharti Airtel and WBSPL, these companies deal with providing telecommunication services. These companies are susceptible to both economic and industry cycles and sales volume fluctuates for about 10% every year. New tariff development is the mode by which such companies stay afloat. The market value per share of Bharti Airtel on the day the announcement was made jumped to Rs. 352.35, up by 1.25 percent.

10.Economic and business assumptions:

The direction of economic and business cycles and their impact on the economy are crucial to setting the forecast period. Companies invariably forecast stronger earnings and cash flows if they can look forward to a lengthy upward trend in both their industry cycle and much broader national cycle than if one or more both cycles are trending downwards. When the economic cycle trends in one direction and business cycle in another, either for the entire forecast period or crossing over midway through it, forecasting performance is not straight forward. The following assumptions were made for the merger of these two companies:

Taking a cue from the forecasts, the revenue was averaged to grow at 10% per cent year. The economy will experience robust growth after the new Government takes position. The GDP is likely to grow at 6% as per forecasts by renowned economists. The year 2014 will be the beginning of the next boom period. European GDP will lag behind and this is a perfect

13 ACQUISITION OF WBSPL BY BHARTI AIRTEL

opportunity for emerging markets like India and South Africa to take the bull by the horns. Airtel has spread its base in Africa to strengthen ties and improve its growth.

The new economic recovery will be spurred by the new Government’s determination to immediately implement strong deficit-cutting policies. The next boom cycle will begin after 2015.

The inflation will remain close to 4.8%- 5% and cost of raw materials and consumables will grow at the rate of inflation.

The inflation hovering around tolerance level, the interest rates will remain stable. The prime rate will be around 6%-8%.

Unemployment will remain stable throughout. It is predicted that owing to the commitments of the new Government, unemployment might as well decrease. The increase in educated and technically sound personnel is expected to give a boost to the telecom industry.

With all these forecasts, the primary step taken is to assemble a forecast. The two extremely critical rules must be highlighted before proceeding to the next level. First, accurate cash flow forecasts depend upon realistic pro forma balance sheet and income statement forecasts. For a forecast to be acceptable by all stake holders, the projections need to be meaningful and should relate 100% to with related financial statements. Audit trials are also important to ensure acceptability by all parties. Second, pro forma financial statements must be based on functional relationships. The principles of interacting costs at different sales volume are uniform. “What if” analysis of various data through trial and error method is done to arrive at cost functions.

11.Operating expenses forecast:

The forecast of operating expenses comprises several sub-forecasts: personnel forecasts, fringe benefit forecasts, variable expense forecast and occupancy forecasts. The more detailed the analysis, the more accurate the forecast will be; therefore, larger companies or those with a more complex array of expenses should compile each of these forecasts separately. Larger companies may record expenses in many departments such as : manufacturing overhead expenses, selling expenses, administrative expenses and R&D expenses.

Bharti Airtel works on developing new tariff lines, personnel costs and interest on loan.

Some companies prefer to forecast personnel requirements by job category- management, clerical, technical and so on. Others prefer to list the actual names of people currently employed and identify new hires by job classification. The salaries are considered to be indirect

14 ACQUISITION OF WBSPL BY BHARTI AIRTEL

cost as it often doesn’t vary with the number of customers formed. Though, salaries of sales personnel include a variable component.

The data taken for forecasting the growth and economic gains include estimations to a high degree. Yet the analysis has been done to maintain a true and fair balance between practicality and judgment. The merger between two telecom giants will grow at a desired rate only if economic, political, social and legal aspects of the country are stabilized.

12.BIBLIOGRAPHY:

[1] Ray. Kamal G. PHI., New Delhi.2011., Merger & Acquisitions.[2] Airtel. (n.d.) Retrieved. March 15, 2014 http://www.airtel.in/wps/wcm/connect/1584d7d5-592d-4c6d-b06c- 6178d814fb0a/Annual-Report-of-Airtel-Broadband-for-FY-2012-2013.pdf?MOD=AJPERES

[3] Airtel. (n.d.) Retrieved. Macrh 19, 2014http://www.airtel.in/about-bharti/investor-relations/scheme-of-

amalgamation

[4] NCFM curse Module., NSE

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