The ratings agency expects a significant deterioration in Bharti Airtel's cash flow protection measures and a weakening of the company's business risk profile if the Indian company acquires Zain Africa

Standard & Poor's Ratings Services said that it had placed India-based telecommunications service provider Bharti Airtel Ltd's 'BBB-' long-term corporate credit rating (CCR) 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 S&P'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 earnings before interest, taxes, depreciation, and amortisation (EBITDA) to about 3.0x for the fiscal year ending 31 March 2011, from 1.4x for the 12 months ended 31 December 2009, it said.

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

S&P said in its opinion that 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. It expects 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.

The ratings agency said Zain Africa would also gain from Bharti's experience of running efficient operations in a highly competitive environment and generating good margins and it believes the transaction will face limited integration risk as the two companies have almost no overlapping operations.

S&P said that in its view, Bharti's liquidity is adequate, and it expects the company to be able to raise funds for the proposed acquisition.