In April 2010, Bharti Airtel acquired Zain’s African operations for a sum of $10.7 billion…


April 2010: In 2010, Bharti Airtel clinched the deal with Africa’s Zain, putting an end to the month-long palaver on whether the two companies would eventually sign on the dotted line, given Bharti’s two earlier unsucessful attempts to strike a deal with South Africa’s MTN. According to the legally binding definitive agreement signed in Amsterdam, the Zain Group has now effectively sold its African operations, other than those in Sudan and Morocco, to Bharti Airtel for a sum of $10.7 billion.

A jubilant Sunil Bharti Mittal, chairman and managing director, Bharti Enterprises,  noted, “This is an opportunity we have been waiting for. This is a landmark deal, a transformational deal and it is, to my mind, a game-changing deal between India and Africa.”

On the occasion of signing the deal, Mittal thanked Bharti’s partner SingTel for extending its support. “The extremely tight timelines and the enormity of the task posed a real challenge. Bharti was able to achieve this important milestone through much hard work and support from SingTel and the external advisers,” he said.

Zain’s CEO Nabeel Bin was equally satisfied. In a press statement, he said that the company was happy with the deal, as exiting the African markets would enable it to focus on its “highly cash-generative operations in the Middle East and to substantially improve its balance sheet”.

The deal, once all the paperwork is completed, will be India’s second largest overseas acquisition after Tata Steel’s $13 billion purchase of Corus in 2007. With the acquisition, Bharti will emerge as the world’s fifth largest wireless company with operations spanning 18 countries (including Zain’s mobile operations in 15 countries). The acquisition will also increase Bharti’s subscriber base significantly. After adding Zain’s 42 million customers, Bharti’s total subscriber base will climb to 179 million (based on December 2009 figures).

Further, the Bharti-Zain combine is expected to generate annual revenues of $13 billion and earnings before interest, taxes, depreciation and amortisation (EBITDA) of $5 billion a year after the transaction is completed.

To make the deal work though, Bharti has an uphill task ahead of it. It will have to obtain a series of clearances from 15 different regulators and 15 national governments. This may not be simple. Cracks have already started appearing, with the government of the central African nation of Gabon opposing the deal. The government says that Zain Gabon has failed to comply with regulations, and the government, therefore, reserves the right to take “all necessary measures” against the organisation. Zain’s operation in Nigeria, its biggest market in Africa, has also hit a roadblock with Econet Wireless Holdings, Zain’s minority partner in the Nigerian operations, withdrawing its support. It contends that Bharti cannot have access to Zain’s Nigerian assets as Zain and Econet have been involved in an ownership tussle for a number of years.

In spite of the stumbling blocks, which are sure to demand deft handling by Mittal and his top management team, the company is confident of resolving all the issues. Mittal states that the company “will work with the regulators and expects tremendous support from all countries including Gabon. In fact, only a few countries will require specific approvals”. Besides, company officials point out that sufficient indemnities have been put in place in the event of any problems with the transaction.

Africa is an important market for Bharti. The company had been trying to get a foothold in the region for quite a while. Though India continues to remain the fastest growing mobile telephony market in the world, its growth in the business has slowed down somewhat. Intense competition from over 12 operational telecom operators, including new players such as Uninor, MTS and TATA DOCOMO, has led to a brutal tariff war, resulting in the chipping away of margins for most incumbent operators. The mobile penetration rates of 40 per cent in most of Africa against 50 per cent in India give Bharti an incentive to stake a claim (and perhaps do so profitably) in an emerging economy that is also one of the fastest growing  in the world.

Girish Trivedi, deputy director of the South Asia and Middle East technology team at Frost & Sullivan, states, “It’s a good deal because Africa is the last bit left among emerging markets. And Bharti gets access to a lot of synergies in value-added services. Imagine the time it would take to build a leadership position in so many countries through greenfield expansion.”

However, Bharti’s shopping spree has come at a cost, which according to many sector analysts is quite high. Zain has been valued at around ten times its EBITDA, which is more than Bharti’s own valuation. Besides, Zain has reported losses for the first nine months of 2009. Analysts believe that in such a scenario, Bharti has overpaid to enter the African market because even companies such as Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited, which had been a part of a consortium interested in buying Zain, were not willing to pay more than $10 billion.

Bharti officials, however, find the price to be fair and are comfortable with the debt taken to fund the acquisition. Besides, they reason that the price paid is of much lesser value than the potential for growth in the African market. In an interview with a leading business daily, Mittal observes, “Zain is a very well-run company. It’s number one in 10 countries, number two in four countries and number four in just one country, Ghana. It has a $4 billion top line and an EBITDA of $1.2 billion. The company has been doing really well. Now, the question is, will we be able to take it to greater heights? The answer is yes. That’s the confidence with which we’re entering this company.”

Bharti will pay $8.3 billion upfront once the regulatory approvals are in place. The remaining $700 million will be transferred after a year. To finance the deal, the company has secured funds in the form of debt. The 10-bank consortium, which has been formed to provide the $8.3 billion financing (of which $7.5 billion is a dollar loan) to Bharti, has the State Bank of India as the largest contributor while other mandated lead arrangers include StanChart, Barclays, Citibank and JP Morgan.

Raising the required debt with relative ease has provided a major boost to the Bharti Group, especially after the initial dip with which the stock markets greeted the deal negotiations. Dr Mahesh Uppal, director, ComFirst, states, “The fact that the company has been able to secure funds at attractive rates signals that both India and Bharti retain a large part of their flavour in the global financial markets.”

Some analysts point out that while the acquisition will help Bharti in the long run, the increasing debt burden to fund the acquisition may affect the company’s profits in the short term. Besides, the company will need to invest in expanding networks as they have remained underinvested for years. Bharti will also need substantial funds to participate in the ongoing 3G auctions. All of this will impact the financials of the company. Akhil Gupta, deputy CEO and joint

managing director, Bharti Enterprises, concedes that the acquisition has significantly increased the company’s debt burden but adds that it will reduce over time and that “there is no great hurry; Bharti is financially comfortable”.

All industry watchers agree that Bharti’s success in the African markets largely depends on the company’s ability to quickly replicate in Africa its “minutes factory” model that has worked so well in India. Company officials hope to leverage the strength of the brand, coupled with its unique business model to unlock the full potential of the African market.

As a first step, Manoj Kohli has been handpicked to head the company’s African operations. Appointed as CEO of the International Business Group and joint MD, Bharti Airtel, he will shortly move to Nairobi. The new company will be fully owned by Bharti and will be populated by Bharti members on its board. The accounts of the new company will be consolidated with Bharti’s accounts. Some of the people holding key managerial positions in Bharti will relocate to Africa. The new company’s operations will be led by Africans, who will be supported by key members of the Indian team.

The company is hopeful that the revenue market share and EBITDA margins will improve within a year or so of the takeover. It intends to implement the low-cost business model in Africa to minimise its capex and opex. It will also try to contain costs through outsourcing. However, all this will take time and will come much later. Right now, Bharti will be looking to get all the clearances in place and close the deal over the next few months.