Bharti takes SPV route for safe ride into Africa

NIGERIA DISPUTE: ZAIN TO GIVE INDEMNITY

BHARTI Airtel, which is in the final phase of taking over Zain Telecom's African assets, has formed two special purpose vehicles, or SPVs, in the Netherlands and Singapore to execute the $10.7-billion deal at a lesser financial risk to India's largest telecom company. Senior Bharti officials are expected to reach the Netherlands in the next 48 hours, where the deal is likely to be signed. 

    Zain has also agreed to compensate Bharti for legal costs in case an ownership dispute erupts over the crucial Nigerian operations which contribute 36% to its Africa revenues. The guarantee from Zain, known as an indemnity, will be valid for some years, though ET was unable to find out the exact time period. 
    SPVs are companies formed to carry out a specific transaction. These SPVs, whose dealings will be guaranteed by Bharti, will own the African assets of Kuwait's Zain. SPVs, which mostly feature in large acquisitions, are often used to convey the impression to investors that companies are not taking huge dollops of debt. In this instance, the SPVs have to repay the debt from the cash flows of the African business. But Bharti will have to step in the case of a default. 
    The Indian telecom player will have to pay $8.3 billion to Zain three months after the deal is signed and $700 million within a year. It has arranged loans of $7.5 billion from a host of international banks and the State Bank of India. "While $5.5 billion will be routed through the Netherlands entity, the remaining will be through the Singapore SPV," said a person familiar with the details. A $1-billion rupee loan from SBI and the company's own money will account for the rest. Bharti has $1.5 billion of cash on its balance sheet. 
    Zain, which holds around 65% in the Nigerian arm, is embroiled in a dispute with some shareholders, and the indemnity is intended to protect Bharti in the case of legal trouble. The other important shareholders are Econet Wireless Holdings with a 5% stake, Broad Communications with 14% and First Bank of Nigeria which has an 8% stake. Broad is owned by Oba Otudeko, who is also the chairman of First Bank, Nigeria's largest bank. 
    While Econet continues to be against the deal, Broad is said to be more comfortable with Bharti taking over the operations. Econet is disputing Zain's control over the unit. "The indemnity agreement is part of the sale agreement. Bharti is arming itself against legal costs that may arise in future due to ownership dispute," a person involved in the transaction told ET. Nigeria a key mkt in Africa 
BHARTI said in a statement on Thursday that it had completed due diligence. "Further to our announcement regarding the acquisition of Zain Africa BV, we would like to report that the due diligence has been completed. Bharti is now working with Zain towards finalising the definitive agreements that will address all key terms and findings arising out of the due diligence. Definitive agreements are expected to be signed soon. Upon signing, the parties will move towards obtaining any required approvals," the company said. 
    The two sides are expected to seal the deal in a few days. "The due diligence process has been completed and the parties are finalising definitive agreements, which are expected to be signed in the coming days," Zain said in a statement on Thursday. The sale of Zain's Africa operations does not include Sudan and Morocco. 
    The Nigerian operations contributed 38% of EBITDA (earnings before interest, tax, depreciation and amortisation) of the African operations, but it was a 17% decline on a year-on-year basis in the first nine months of 2009. Analysts believe the number can be improved, if Airtel can replicate its famous minutefactory model and push for outsourcing in Zain's Africa business, including Nigeria. 
    According to a report by Macquarie, Nigeria is a key market both in terms of revenue and EBITDA. Zain is the second-largest player there, with a 25% share behind market leader MTN. Zain has struggled in Nigeria, with its market share sliding from 32% in the third quarter of 2008 to 25% in the corresponding quarter of 2009. Also, its EBITDA margin compares very poorly with MTN's 57.8%, said Macquarie.