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Pakistan Telecommunication Limited (PTC): Ufone Merger/Acquisition likely to unlock value

• Pakistan Telecom industry is once again likely to witness another consolidation phase, wherein talks pertaining to merger/acquisition of Ufone with/by other telecom operators are doing rounds.
• As per our channel checks, Pakistan Telecom (PTC) has issued Request For Proposal (RFP) to various financial institutions to submit proposals for advisory role for a possible amalgamation/merger with other telecom operators.
• Earlier in 2015, a Share Swap Agreement of Warid and Mobilink took place wherein, shareholders of Warid got 15% of the joint entity, which was rebranded as Jazz.
• Acquisition of Warid by Mobilink was aimed to strengthen its position in Pakistan’s market and to achieve synergies using a common platform. As per Veon report, through interconnections, site sharing and marketing synergies, the company has achieved annual synergies of Rs8.2bn. This also led to declaration of first Rs5bn dividend after 11 years to its shareholders.
• Synergies are also evident from the EBITDA performance of the merged entity post the transaction. While the EBITDA margins fell in 2016 (the year of transaction) due to transaction related costs, it has continued to improve and has added additional 6-7ppts in EBITDA margin, translating into per annum savings of Rs6-8bn, endorsing Veon statement stated above.
• On the back of the envelope calculations, we have estimated EV/Sales of Warid transaction at around 2.9x, while globally wireless carriers are trading at EV/sales of around 2.5x.
• Among recent transactions, Reliance Jio sold its stake to high profile investors like Facebook, Silver lake, KKR and General Atlantic, with recent transaction implying enterprise value of US$63bn and EV to EBITDA of 21x.
• However, some of the analysts are of the view that forward EV/EBITDA of this transactions is estimated at around 12x.
• In 2007, SingTel acquired Pakistan Warid Telecom 30% stake for US$758mn, taking company value to US$2.9bn. Warid posted revenue of US$427mn in FY08, which translates into EV/Sales of 6.78x. (EV/EBITDA of 61x).
• Later, SingTel sold its whole stake in Warid to existing shareholders for US$186mn along with the commitment that it will also get a 7.5% share of any net proceeds if Warid is sold again. Management estimated one time loss of US$230mn on this transaction. This transaction’s EV/Sales is estimated at 2x.
• Currently, listed wireless communication companies across the globe are trading at EV/EBITDA and EV/Sales of 6.4x and 2.8x, respectively.
• Taking cue from historic transactions and global listed peers multiples, we believe if this transaction sails through, then Ufone could be valued at EV/Sales of ~2.5x which translates into an enterprise value of Rs152bn (close to US$1bn).
• Subtracting liabilities, equity value comes to around Rs76bn (i.e. Rs15/share for PTC).
• We estimate SOTP value of PTC at around Rs29.0, a discount of 63% to current market price. Out SoTP value does not include any upside from property valuation of the company.  Holding companies in Pakistan are trading at average discount of 35-40% from their SoTP value.
• Whether its merger or acquisition, we believe synergies will provide respite to PTC balance sheet. PTC has been injecting cash in Ufone due to its increasing working capital requirements and deteriorating balance sheet. Loans and advances given to Ufone by PTC have touched Rs7.5bn.
• As per Veon, Mobilink and Warid deal resulted in annual synegies of ~Rs8bn. We believe merger/acquisition of Ufone by/with Telenor/Zong can result in more synergies.
• Telenor and Ufone together will result in 50% of the subscribers, higher than Jazz, or Ufone and Zong will result in 35% of the subscribers which will be at par with Jazz.
• Along the above stated synergies, as per our channel checks, Jazz and Warid’s combined tower portfolio was 13,000 wherein 3,000 towers of these both companies were overlapping. As a result, Jazz has sold 3,000 towers recently to Engro Corp and Edotco. Market value of a tower ranges from US$60-100k. This resulted in additional cash inflow of US$200-300mn to the company. Similar kind of synergies can also be expected from possible ufone deal.

Based on our estimates, in case of acquisition, Etisalat can fetch a dividend of ~US$120mn from this transaction which (assuming dividend of Rs15/share) may be used for possible repayment to Govt. of Pakistan.