Bharti set to buy Zain’s African ops for Rs 50k cr

After failing to swing MTN deal, telco gets a foothold in Africa as Zain board okays offer

Our Bureaus NEW DELHI^| MUMBAI 

    THE board of Kuwait's Zain Telecom has accepted a $10.7-billion (Rs 49,700 crore) offer from Bharti Airtel for the bulk of its African assets, breathing new life into the Indian company's cherished ambition of transforming itself into an emerging market multinational. 
    People familiar with the matter and Kuwait's state news agency, KUNA, said Zain's board had unanimously approved Bharti's offer for all of Zain's African assets, except thin Sudan and Morocco. "Bharti Airtel's bid to buy Zain Africa assets in the Dark Continent... proved successful... The bid involves up to $10.7 billion of investments," KUNA said quoting statements by Zain officials issued after the meeting. 
    Representatives from both companies were not available for comment. Bharti has maintained complete silence since the news broke while Zain said in astatement on Sunday that its board would discuss an offer, but said nothing about the identity of the suitor. A banker familiar with the situation said the acceptance of the offer clears the way for Bharti to carry out a due diligence of the business before a final deal. 
    If the deal fructifies, the acquisition will give Bharti a firm foothold in a relatively untapped market and pit it in direct competition with MTN, with which it has tried and failed twice to merge. The African operations in the 15 countries that Bharti is seeking to buy are grouped under an entity called Zain International. 
    Africa has nearly 450 million mobile phone users and a teledensity under 50%, still offering large room for growth for a company which is under pressure battling a tariff war in India's overcrowded mobile phone market. If it buys Zain's African operations, Bharti will be catapulted past China Unicom, Sweden's TeliaSonera, and Germany's T-Mobile to become the world's seventh-largest mobile phone company by subscribers. 
    The banker said Bharti is under-leveraged and has "enough borrowing capacity" and "financing flexibility". At the end of December, Bharti's net debt was just 0.1 times its equity and it had cash reserves of about Rs 7,600 crore. Another banker with knowledge of the deal said Bharti is likely to maintain flexibility on payment depending on how the talk progresses — it could be financed entirely by cash or be a part-cash and partshare deal. Bharti may even consider raising $500 million-$1billion from the equity market and around $7.5 billion in debt. 
    Last year when Bharti was in talks with MTN, it was looking to raise around $5 billion in debt. For the overseas component of the loan of $3-3.5 billion, it would have had to pay around 315 basis points above the benchmark London Interbank Offer Rater (Libor) plus fees of 50 bps. The pricing is likely to come down by over 50 bps now. Standard Chartered is currently Bharti's sole banker while Zain is being represented by UBS in London. 
    Many analysts see the Bharti stock coming under pressure in the immediate future due to a strain on cash-flow as well as Zain's low-operating margins. "When Bharti had bid for MTN, which was a much larger firm with better operating margins, we had seen a similar trend. It will be some time before the (Zain) buy starts reflecting in Bharti's numbers. It is going to be a 2-4 year story," said DD Sharma, senior V-P, research, Anand Rathi Securities. 
THE RIGHT CALL 
WHAT IS THE DEAL? Bharti has made an offer to buy the African assets of Kuwait's Zain Telecom for $10.7 billion. Zain's board has approved the offer, but details remain sketchy. 
WHAT DOES BHARTI GAIN FROM IT? The deal will herald a meaningful expansion of the Bharti brand overseas and satisfy an unfulfilled ambition of replicating its successful low-cost model in other markets. Bharti's footprint will increase to 20 countries from five countries now, if this deal is consummated. 
WHERE WILL IT PLACE BHARTI GLOBALLY? The combined subscriber base of Bharti and Zain's African assets will be 164 million, making it the seventh-largest telco in the world. 
AND FINANCIALLY... The market value of the combined entity will be just under $42 billion, with annual revenues of more than $12 billion and profits of nearly $2 billion. The combined entity will have under $3 billion in cash & assets.
IS THIS DEAL A SHOO-IN ? Don't know yet because both sides haven't spoken in detail. But it could be a lot less complicated than MTN, as there is no issue of national pride involved here. But individual approvals from authorities of each and every African country involved could pose some worries. 
BUT WHY ZAIN? Because there aren't other operators with a pan-Africa presence around. Bharti tried to merge with the region's largest operator, South Africa's MTN, twice. 
WHY THIS DEAL? Bharti faces mounting competition in its home market. It has been beaten by Tata Teleservices in monthly subscriber additions for the past 6 months. Urban India accounts for more than 60% of Bharti's revenues and is already 100% penetrated. Bharti's revenues grew 1.4% in the October-December quarter, its slowest pace in six years. Profits rose a mere 2.4%.Bharti stock underperformed Sensex in the past one year 
IN the past year, the Bharti stock has vastly underperformed the broader market: the BSE's Sensex index has risen by nearly three-fourths during this period; Bharti's shares have fallen by 1.4%. 
    Romal Shetty, who heads the telecom practice at KPMG, said the valuation may appear slightly stretched right now, but Airtel needs a foothold in Africa. With Zain, MTN and Vodacom the only large players with African operations, Airtel's choice is limited. "There will be some strain on the balance-sheet, but Airtel will become a global player with this acquisition. India is attractive in the long term, but not in the short term and Airtel needs to diversify at a time whennot too many assets are up for sale," he said. 
    Mr Shetty was also of the view that being a pioneer of the low-cost, outsourced model of operations, Bharti can replicate it in Africa, where market conditions are similar. Emeka Obiodu, a senior analyst in Ovum's mobile strategy practice, wrote in a report earlier this month that the competitive landscape in Africa will only get tougher with the disappearance of the pent-up demand for rudimentary telecom services as operators have plucked most of the lowhanging fruit in their markets. "Getting it right for the future relies heavily on a bedrock of cost leadership. As operators in India have shown, achieving a minimalist cost structure is the best foundation an operator in an emerging market can have."