(180048995) bhargav assignment

Introduction:-

In the largest ever telecom takeover by an Indian firm, BhartiAirtel today completed a deal to buyKuwait-based Zain Telecom's African business for $10.7billion (about Rs 48,000 crore).Announcing the closure of the deal, Sunil Mittal said, "We aredelighted at the closure of this transformational deal for Indiaand Bharti Airtel. The transaction is the largest ever cross-borderdeal in an emerging market and will result in combined revenues ofabout $13 billion."

On March 30, 2010, Bharti had entered the deal to acquire ZainTelecom's operations in 15 nations, excluding Sudan and Morocco.Zain has operations in 17 African countries.

The closure of the deal implies that Bharti has received all theapprovals from the governments and regulators of each of these 15nations.

This acquisition, besides giving Bharti its much-desired presence inAfrica, makes it the world's fifth largest wireless company withoperations across 18 countries and a subscriber base of around 179million.Bharti had failed twice in the last two year's to forge an $23billion merger deal with South African telecom giant MTN.

The Zain acquisition, the second largest by an Indian entity afterTatas' Corus deal, would take the revenue of the combined entity toan estimated $13 billion.

The African business would widen Bharti's reach, which was hithertorestricted to Asia and the IndianOcean region with businesses in Sri Lanka,Bangladesh and Seychelles.

Of the $10.7 billion enterprise value of Zain, Bharti will be paying$8.3 billion upfront and $700 million after a year. It would alsotake over approximately $1.7 billion of Zain's debts as on December31,2009.

Of the $8.3 billion paid to Zain, Bharti has raised debt from aconsortium of foreign banks and State Bank of India with the lead-arranger and lead-advisor Standard Chartered Bank committing thehighest amount — $1.3 billion, followed by Barclays at $900 million.

The rest of the co-advisors — ANZ, BNP, Bank of America-MerrillLynch, Credit Agricole CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJand Sumitomo Mitsui Banking Corporation — have allocated $600million each.

Bharti Airtel Companybackground:-

Bharti Airtel Ltd is one of the world's leading providers oftelecommunication services with presence in 19 countries includingIndia & South Asia and Africa. The company is the largest wirelessservice provider in India, based on the number of customers. Thecompany offers an integrated suite of telecom solutions to itsenterprise customers, in addition to providing long distanceconnectivity both nationally and internationally. The Company alsooffers Digital TV and IPTV Services. All these services are renderedunder a unifi ed brand 'airtel' either directly or throughsubsidiary companies. The company operates in four strategicbusiness units, namely Mobile, Telemedia, Enterprise and Digital TV.The mobile business offers services in India, Sri Lanka andBangladesh. The Telemedia business provides broadband, IPTV andtelephone services in 95 Indian cities. The Digital TVbusiness provides Direct-to-Home TV services across India. TheEnterprise business provides end-to- end telecom solutions tocorporate customers and national and international long distanceservices to telcos. The company also deploys, owns and managespassive infrastructure pertaining to telecom operations under theirsubsidiary Bharti Infratel Ltd. Bharti Infratel Ltd own 42% ofIndus Towers

Ltd. Bharti Infratel Ltd and Indus Towers Ltd are the largestpassive infrastructure service providers for telecom services inIndia. Bharti Airtel Ltd was incorporated in the year 1995 withthe name Bharti Tele-Ventures Ltd. The company was promotedby Bharti Telecom Ltd, a company incorporated under the laws ofIndia. The name of the company was changed from Bharti Tele-Ventures to Bharti Airtel Ltd with effect from April 24, 2006 inorder to reflect their brand essence, objective and the nature oftheir business activities. During the year 1995-96, the companylaunched mobile services under the brand name 'Airtel' for the firsttime in Delhi and Himachal Pradesh. During the year 1997-98, thecompany became the first private telecom operator to obtain alicense to provide basic telephone services in the state of MadhyaPradesh. They incorporated Bharti BT VSAT Ltd and Bharti BT InternetLtd during the year. During the year 1999-2000, the company acquiredJT Mobiles for providing cellular services operator in Punjab,Karnataka and Andhra Pradesh. Also, they acquired Skycell, Chennaiand thus, they expanded their South Indian footprint. During theyear 2001-02, they launched IndiaOne, India's first private sectornational and international long distance service. They acquiredlicenses for eight new circles across India. In July 2001, thecompany acquired 100% equity interest in Bharti Mobitel Ltd(erstwhile Spice Cell Ltd), which provided mobile services in theKolkata circle. During the year 2002-03, the company launchedcellular mobile services in the circle of Mumbai, Maharashtra, TamilNadu, Kerala, Madhya Pradesh, Uttar Pradesh (West), Haryana andGujarat, fixed line services in the circles of Tamil Nadu andKarnataka and International Long Distance Services. They alsocommenced commercial operations for their submarine cable landingstation. During the year 2003-04, the company obtained the newlicenses for providing the Unified Access Services, which includetelecom circles of West Bengal (including Andaman & Nicobar andSikkim), Bihar (including Jharkhand), Orissa, Jammu & Kashmir and UP(East). They also acquired interest in the telecom circles ofRajasthan and North Eastern States, through the acquisition of 67.5%equity stake in Bharti Hexacom Ltd. During the year 2004-05, BhartiCellular Ltd and Bharti Infotel Ltd, subsidiaries of the company,merged with the company with effect from April 1, 2004. Prior tomerger of Bharti Cellular Ltd with the company, Bharti Mobile Ltdoperated in circles of Karnataka, Andhra Pradesh and Punjab mergedwith Bharti Cellular Ltd. The company acquired an additional stakeof 1% from Fouad M T Al Ghanim Trading & Cont Co Kuwait one of theshareholder of Bharti Hexacom Ltd. During the year, thecompany and Videsh Sanchar Nigam Ltd entered into anagreement to share the company's national long distance network fora period of 15 years for a consideration of Rs 5,000 million. Theyentered into a regional mobile services agreement with six otherleading mobile operators, namely Globe Telecom, Philippines; Maxis,Malaysia; Optus, Australia; SingTel, Singapore; Taiwan CellularCorporations, Taiwan and Talkomsel, Indonesia and formed a

regional alliance, namely Bridge Alliance. In April 2005,the company through their erstwhile 100% subsidiary BhartiInfotel Ltd, which was merged with the company acquired 100% equitystake in Bharti Broadband Ltd (formerly known as Comsat Max Ltd) byacquiring their holding company Satcom Broadband Equipment Ltd(formerly known as CMax Infocom Ltd). Also, Satcom BroadbandEquipment Ltd and Bharti Broadband Ltd were amalgamated with thecompany with effect from October 1, 2005. During the year 2005-06,the company signed a managed capacity expansion contract withEricsson for providing managed services and expands their GSM /GPRSnetwork into rural India in 15 circles. Also, they entered into anagreement with Nokia to expand their managed GSM/ GPRS/ EDGEnetworks in eight circles. The company and IBM launched ManagedServices under their joint go-to-market program. During the year,Vodafone acquired 10% economic interest in the company by way ofsubscription of convertible debentures in Bharti Enterprises Ltd.Also, the company entered into strategic partnership outsourcingagreements for their customer care call center operations with fourinternational BPOs - Hinduja TMT (HTMT), IBM Daksh, Mphasis andTeleTech Services. During the year 2006-07, the company incorporatedseven wholly owned subsidiaries namely Bharti Airtel (USA) Ltd,Bharti Airtel (UK) Ltd, Bharti Airtel (Hong Kong) Ltd and BhartiAirtel (Canada) Ltd, Bharti Infratel Ltd, Bharti Telemedia Ltd andBharti Airtel Lanka (Pvt) Ltd. They received letter of offer fromTelecommunications Regulatory Commission of Sri Lanka for providing2G and 3G mobile services in Sri Lanka. During the year, the companyentered into agreement with Microsoft to offer software and servicesfor the Small and Medium Business (SMB) market in India and to offerMicrosoft's latest Windows Mobile 5.0 technology to its customer.They entered into agreement with Google to offer search services onAirtel Mobile. Also, they entered agreement with Adani Group toconnect Mundra Port and Special Economic Zone and with IBM to

deliver India's first 'Service Delivery Platform'. In July 2006,the company launched 'Airtel Mega' Fixed Wireless Phone (FWP)services. In September 14, 2006, they acquired 43,750 thousandshares of Bharti Hexacom Ltd for an aggregate consideration of Rs875,000 thousand thereby increasing their stake from 68.5% to68.89%. In December 2006 the company announced their foray into USAwith the launch of Airtel CallHome service for Non-Resident Indians.In March 2007, they introduced BlackBerry 8800TM business phone. InApril 3, 2007, Bharti Airtel (Singapore) Pvt Ltd, Singapore, wasincorporated for providing Voice Interconnection, PrepaidInternational Calling Services, International Private LeasedCircuits and VSAT Trading. During the year 2007-08, Bharti AirtelServices Ltd (erstwhile Bharti Comtel Ltd), the wholly ownedsubsidiary of the company, sold their entire shareholding in BhartiTelemedia Ltd to the company and Bharti Enterprise Ltd in the ratioof40% and 60%, respectively. The company acquired 2% stake in asubsidiary of IFFCO Ltd calledIFFCO Kissan Sanchar Ltd at a consideration of Rs 50,125 thousand.Also, they invested USD 1,200 thousand towards 1,200 thousandshares, of Bridge Mobile Pte Ltd, Singapore (Bridge Mobile).During the year, the company entered into a joint ventureagreement with Vodafone Essar Ltd andIdea Cellular Ltd and formed an independent tower company namely,Indus Towers Ltd for providing passive infrastructure services in16 circles of India. In September 7, 2007, the company acquired49% of the equity in Bharti Aquanet Ltd, India, at a considerationof Rs 159,549 thousand making Bharti Aquanet Ltd a 100% subsidiaryof the company. In September 28, 2007, they acquired 100% of theequity in Network i2i Ltd, Mauritius, at a consideration of USD133,400 thousand. In October1, 2007, the company incorporated a new company namely, BhartiAirtel Holding (Singapore) Pte Ltd in Singapore as an investmentholding company of the company. In January 2008, the companytransferred the passive telecom infrastructure business of thecompany to Bharti Infratel Ltd. During the year 2008-09, the companymade their foray into media and television by redefining homeentertainment with Airtel digital TV. They launched theirvirtual calling card service 'AirtelCallHome' in UK, Singapore and Canada. The service is targeted atthe huge Indian Diaspora, Non- Resident Indians (NRIs) and Indianstudents in these markets. The company launched their mobileservices in Sri Lanka under the Airtel brand. They expanded theirfootprint by launching their Mobile Services in Lakshadweep. Theyalso launched VeriSign Identity Protection (VIP) Services for theirenterprise customers in India in partnership with VeriSign. InFebruary 19, 2009, the companyincreased their stake in Bharti Hexacom Ltd by 1.11% throughacquisition of 2,780,306 equity shares for an aggregateconsideration of Rs 166,818 thousand. In March 4, 2009, thecompany subscribed1,470,000 equity shares (49% stake) in Bharti TeleportsLtd for an aggregate consideration of Rs.14,700 thousand. InOctober 2009, the company launched live mobile comic service ontheir mobile entertainment portal, Airtel Live. In October 23, 2009,they acquired an additional 55% equitystake in their subsidiary, Bharti Telemedia Ltd for a considerationof Rs 7.38 crore. Consequently, the total equity interest of the

company in Bharti TelemediaLtd increased to 95%. In January 12,2010,the company agreed to acquire 70% stake in Warid Telecom,Bangladesh, a wholly owned subsidiary of the Dhabi Group. WaridTelecom is offering mobile services across all the 64districts ofBangladesh. As of January 2010, the company had an aggregate ofover 131 million customers inSouth Asia, including 121.7 million mobile customers in India. InMarch 11, 2010, the company made their debut into Media &Entertainment with the launch of the Airtel Digital Media Business.With this, the company is able to offer Content Delivery Solutionsfor media and entertainment sector. In June 2010, the companyacquired Zain Group's mobile operations in 15 countries acrossAfrica for an enterprise valuation of USD 10.7 billion. With this,the company has become the first Indian brand to go truly globalwith a footprint that covers over 1.8 billion people. Also, thecompany has become a major Indian MNC with operations in 18countries across Asia and Africa with a customer base of over 180million. During the year 2010-11, the company introduced acompletely new, fresh and vibrant brand logo and identity.Apart fromIndia and Sri Lanka, the brand also started to offer its services toconsumers in Bangladesh making the Company a powerhouse acrossSouth Asia. Across the seas, the Company established a strongpresence in the 16 countries across the African continent. Duringthe year, Airtel won the 'Most Preferred Cellular Service ProviderBrand' award in the CNBC Awaaz Consumer Awards 2010 for the 6th yearin a row. The CNBC Awaaz Consumer Awards were based on an extensiveconsumer survey done by Nielsen, wherein the customers rated brandsacross different categories which delivered true value for money.During the year, the company launched 3G Services in 9 of 13circles with 3G spectrum, empowering all 3G customers to managetheir data

usage and avoid 'bill shock' with proactive, personalised and timelydata usage alerts coupled with introduction of easy-to-understandintuitive tariffs with personalised data usage limits. They launchedvarious new and innovative products and services, such as airtelmoney, airtel call manager, airtel voice blog, airtel world SIM,Live Aarti, LearnNext, IPTV, airtel broadband TV, Unified ServiceManagement Centre (uSMC), Global Data Services, airtel digital TVrecorder, MAMO (My Airtel My Offer) and i-Care directly and throughits subsidiaries, which enabled it to strengthen their leadership inan intensely competitive market. During the year, the companylaunched their New Vision for India and South Asia 'By 2015, airtelwill be the most loved brand, enriching the lives of millions'inspiring and directing all stakeholders for the next stage ofgrowth. Also, they launched their vision for Africa 'By 2015airtel will be the most loved brand in the daily lives of Africanpeople'. In August 27, 2010, the ccquired the 100% interest inTelecom Seychelles Ltd, a telecom operator of Seychelles, for anenterprise value of USD62 million. In September 2011, the companychoose Ericsson India, Nokia Siemens Networks and HuaweiTechnologies as network partners to launch 3G Services in India.These partners will plan, design, deploy and maintain a 3G HSPANetwork in Bharti Airtel 3G license circles. In January 2011, thecompany and State Bank of India (SBI) entered into a Joint Venture(JV) agreement to make available banking services to India'sunbanked millions. The newly formed entity, will harness the powerof State Bank's strengths and airtel's mobile telephony to add valueto the banking and financial services sector and empower millions offinancially excluded in the country to enhance their livelihoodand quality of life. The Joint Venture will become theBusiness Correspondent of SBI and offer banking products andservices at affordable cost to the citizens in unbanked and otherareas.

Zain Company background

Zain is a leading mobile telecommunications provider in theMiddle East and North Africa.

We began life in 1983 in Kuwait, as Mobile TelecommunicationsCompany (MTC), the region’s first mobile operator, and commencingwith the initiation of our expansion strategy in 2003, we grewrapidly in both the Middle East and Africa through the acquisitionof several mobile operators across the region.

In September 2007, MTC rebranded to Zain in order to better reflectour growing status as a leading multi-national mobile serviceprovider with global aspirations. Zain was thus adopted as theGroup’s corporate master brand.

In 2008 we became the 4th largest mobile operator in the world interms of geographical presence, with operations in 15 Africancountries and 7 in the Middle East.

We continued on our journey of growth and development, and in March2009, entered into a 50/50 partnership with Al Ajial Investment FundHolding to acquire a 31% stake in Inwi, the third mobile telecomoperator in Morocco.

By 2010, Zain had taken the strategic decision to focus on itshighly cash generative Middle East and North Africa operations,investing in new growth opportunities in these markets. Thisdecision led to the sale of 100% of Zain Africa BV (‘Zain Africa’)to Bharti Airtel Limited in June 2010 for the total consideration ofUSD 10.7 billion on an enterprise value basis.

This represented a bitter-sweet moment in our history as we wereboth proud of what we had been able to achieve in Africa, while atthe same time humbled by the success and value Bharti Airtelidentified in the operations on the continent.

The 15 countries that Bharti Airtel acquired from Zain inAfrica were: Burkina Faso, Chad, Democratic Republic of theCongo, Republic of the Congo, Gabon, Ghana, Kenya, Madagascar,Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia.

Having exited Africa, Zain Group re-defined itself as a leadingmobile and data services operator in the Middle East and NorthAfrica, with a commercial footprint in 8 countries in the region.Today over 6,000 employees provide a comprehensive range ofmarket-leading mobile voice and data services to a base of over44.3 million active customers as of 30 September, 2013.

We operate as Zain in Bahrain, Jordan, Kuwait, Iraq, SaudiArabia, Sudan, South Sudan; and inLebanon as touch (under amanagement contract).

Listed on the Kuwait Stock Exchange, there are no restrictions onZain shares as the company’s capital is 100% free float andpublicly traded. The largest shareholder is the Kuwait InvestmentAuthority with a 24.6% stake.

Bharti Airtel rings as Zain board clears acquisition ofAfrican assets

Becoming the world's fifth largest mobile operator, Sunil Mittal ledBharti Airtel on Tuesday announced that it had completed theacquisition of Zain Telecom's Africa operations for $10.7 billion.

The company has now 180 million subscribers in 18 Asian andAfrican nations. The company announced that it would launch theAirtel brand in Zain's operations in all the 15 nations in October.

Announcing the completion of the deal at a press conference here,Bharti group Chairman Sunil Mittal said “the transaction is thelargest ever cross-border deal in an emerging market and will resultin combined revenues of about $13 billion.''

Bharti finally entered Africa after aborting negotiations twice formerger with MTN since 2008, withMr. Mittal stating that in the Zain's case Airtelwould have a total control.

He said Zain Africa would now be 100 per cent subsidiary of BhartiInternational. This deal would signal many new investments thatwould go to Africa, he added.

At present, China Mobile is the world's largest mobile player with asubscriber base of 522 million, followed by Vodafone (348 million),Telefonica (206 million) and American Movil (201 million).

Africastrategy

Elaborating on Africa strategy, Bharti's international operationsin-charge Manoj Kohli said the company had set a target of 100million subscribers and $5 billion revenues by 2012-13.

Bharti has acquired Zain Telecom's operations in 15 African nations,excluding Sudan and Morocco. Zain has operations in 17 countries inthe region and is claiming to be the second largest operator afterMTN.

Asked whether he regretted missing a deal with MTN twice and whetherthat was his first choice, Mr. Mittal said “MTN was the firstopportunity that was available at that time. In MTN's case, we wouldhave had board control but no management control and no change inbrand.

“There were compromises to be made (in MTN). Zain is the secondlargest operator and that is theonly difference. But we will have fullcontrol and our own brand.''

“With this acquisition, we will have an unparalleled footprint inone of the fastest developing regionsin the world. We are looking at more opportunities as we build moreroll outs in Africa,'' he remarked.

The company has also reached a settlement with BroadCommunications, the single largest shareholder in Zain Nigeria,following which its chief Otudeko would now head Bharti's operationsin Nigeria.

“There is no extra payment made for the settlement. The company doesnot see any problem with another small shareholder Econet Wirelessin Nigeria.For completing the deal, Bharti paid $7.9 billion and the balance$400 million from the total upfront payment would be done in a fewdays on completion of certain formalities,'' Mr. Mittal said.

Bharti Airtel challenges inAfrica

In June 2010, Bharti Airtel, the largest mobile operator in Indiaservices acquired African assets of Bahrain-based Zain Telecom for $10.7 billion in the largest cross-border deal in emerging markets.Bharti leaders on is assumed that they will copy a very successfulhigh volume, low-cost telecommunications model, they first for theIndian masses in Africa. But when they started to integrate thecompanies, leaders Bharti found many unexpected challenges,including cultural differences between Indian and African staff,poor infrastructure than they expected with higher than expectedcosts, the monopoly distribution network, strong competition, weakpartner ecosystem, and market, which was responsive to tariffreduction. In early 2012, one and a half years later, the companyhas its external networks, IT and customer service operations, asit was in India, has launched a single brand across the continent,and culturally integrated with the new environment. Key businessindicators, including profit and market share, showing the firstsigns of improvement. But questions remain about how the companywill be able to catch up with MTN, a leading player in Africa, byreducing tariffs, as it was in India, and that his strategy is to goforward. “Hide.

African Venture: Promises and Pitfalls of Bharti’s Dealwith Zain

For several months, the principal shareholders of the Zain Groupof Kuwait, one of the region’s largest telecom service providers,have been looking for a buyer for the company’s assets in Africa.Meanwhile, in India, Sunil Bharti Mittal, the chairman of thecountry’s largest telecom company, Bharti Airtel, has been seekingan African venture for the past two years. He negotiated twice withMTN of South Africa, but talks broke down. The two sides had reasonto come together – and so they did.

In a deal announced on February 14, the US$8.15 billion Bharti andthe US$4.14 billion Zain told their respective stock exchangesthat they were in “exclusive discussions” until March 25. On thetable were the African assets of Zain – Zain Africa BV –

which comprises 15 countries. The combined firm would haverevenues of some US$13 billion, and earnings before interest, taxes,depreciation and amortization (EBITDA) of around US$5 billion, afterthe deal closes in May, as Bharti expects. Left with Zain would beKuwait, Jordan, Bahrain, Lebanon, Iraq, Saudi Arabia and Palestine,and two African markets – Sudan and Morocco – which are consideredpart of the Middle East cluster.

“Bharti Airtel and Zain have agreed to enter into exclusivediscussions until March 25 for the acquisition of Zain’s Africanunit based on an enterprise value of US$10.7 billion,” Bhartiinformed the Bombay Stock Exchange (BSE). “This potentialtransaction does not include Zain’s operations in Morocco and Sudanand remains subject to due diligence, customary regulatory approvalsand signing of final transaction documentation. There can be noassurance that a transaction will be consummated. Furtherannouncements will be made in due course.”

The note is, of course, a measure of caution. Talk to the people atBharti and they will tell you off the record that they expect thisdeal to be smooth sailing. “The MTN deal was complicated and neededmany interventions from both governments,” Mittal told weeklybusiness magazine BusinessWorld. “In Zain, there are no multipleclearances required. Only the Zain board has to give a go ahead,and we have to pay.”

Yet the proposed deal has given rise to misgivings. Bharti sharesplunged some 14% on the Mumbai stock exchange in just two days.Almost every research house has been critical of the deal. Thecomments range from “Pained by Zain; Rating Cut” from Bank ofAmerica Merrill Lynch to “Very expensive diversification” by CreditSuisse.

High-debtDeal

On February 19, credit rating agency CRISIL, the Indian arm ofStandard and Poor’s, placed Bharti’s long-term debt on rating watchwith negative implications. “(This) reflects CRISIL’s belief thatBharti Airtel’s proposed acquisition of Zain Africa BV’s businessfor an enterprise value of US$10.7 billion will be largely debt-funded; the acquisition can thereby adversely affect Bharti Airtel’sgearing [debt- to-equity ratio] and debt protection indicators overthe short term. Bharti Airtel’s gearing, after the acquisition, isexpected to increase to more than 1 time, from around 0.15 times ason 31 December,2009,” says CRISIL. The agency adds, however, that the company’sfinancial risk profile is expected to improve subsequently, as cashaccruals will be used to de-leverage. “CRISIL believes that BhartiAirtel will benefit from the proposed deal by way ofdiversification of revenues and the growthopportunities offered by the under-penetrated African market.”

The principal issue is one of valuations. Everyone seems to agreethat Zain is a good target for acquisition, but is it worth theprice Bharti is paying? Zain’s African operations are losing money.In the nine months to September 2009, they reported a net loss ofUS$112 million against a profit of US$169 million in thecorresponding period the previous year. Seven of the 15 countriesreported losses. The highest revenue earner, Nigeria, which wasnudging the US$1 billion mark, lost US$88 million.

These are markets where the telephone penetration rates range from14% in the Democratic Republic of the Congo to 123% in Gabon, thoughmost are in the low double digits. Zain has 42 million subscribersin Africa (September 2009) while Bharti has 121.7 million in India(December 2009). Customer growth rates range from -14% in Kenya and-6% in Nigeria to 51% in Niger. The average revenue per user (ARPU)is US$3 in Ghana and US$25 in Gabon. The ARPU, a frequently usedyardstick in the telecom industry, is an average of US$6 for Zain’sAfrican operations against US$5 for Bharti in India.

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These numbers can be used to paint an optimistic picture or apessimistic one. For instance, low penetration rates could meaneither a huge upside opportunity or lack of demand needing manyyears of expensive market development. Low ARPUs could imply poorrevenue streams or future growth potential. In contrast to Africa,in its Middle East portfolio, Zain has an ARPU of US$55 in Kuwaitand US$26 in Bahrain. But if Bharti can successfully transpose itshigh minutes of use model — described as a “minute-factory” — toAfrica, it could be highly profitable even at these low ARPUs.Besides, some operations are showing losses because ofmismanagement. Bharti might argue it would change all that.

“A roadmap for synergy backed with flawless execution is whatwould drive success,” says K. Raman, practice head of infocomm,media and education at the Tata Strategic Management Group, anindependent management consulting firm. “For a company like Bharti,this deal, if it goes through, will test its ability to integratemultiple operations across various countries and derivesynergies.”

Bharti has operations in Sri Lanka and has recently bought 70% ofWarid of Bangladesh from theUAE-based Dhabi Group. But Zain is in adifferent league.

“We believe that Zain’s Africa unit is an attractive acquisitioncandidate for Bharti, given relatively low penetration in itsfootprint and high ARPU, which could enable Bharti to export its‘minute factory’-based business model,” says Motilal Oswal, perhapsthe only research house that has been positive about the buy. “Onlythree out of 15 countries in the Zain Africa portfolio have a mobilepenetration in excess of 50%. Moreover, Zain is a market leader inmost of its operations, with 50%-75% market share in seven countries and 25%-50% share in sixcountries…. The balance sheetposition appears comfortable forfunding the deal.”

Business daily The Economic Times looks at the acquisition alonganother dimension. Bharti will be paying Zain US$252 per subscriber.In September 2009, when Bharti was trying to strike a deal with MTN,the two sides had valued each customer of the South African firm atUS$394. Vodafone paid US$743 per user when it acquired Hutchison’sIndia operations in February 2007. Deals a few years ago haveattracted even higher valuations in the US$361 to US$1,050 range.“What needs to be noted is that these higher valuations of the pastwere out of expectations of a stupendous growth in India’ssubscriber base,” the paper points out.

Views about whether Bharti is overpaying for Zain depend on people’sassessments about the growth potential of Africa’s mobile telecommarket. “In the long run, the strategy of getting its footprintacross the 15 African countries is definitely a great valueproposition,” says Sudip Bandyopadhyay, group president of SpiceFinance. ”Yes, the ARPUs are low in Africa at this stage, but thepotential for growth over the next three to five years issignificant both in terms of the number of customers as well asARPUs.”

“Bharti has demonstrated to the world its low-cost model,” saysNishna Biyani, telecom analyst at equity research house PrabhudasLilladher. “The targets are (relatively) high ARPU countries withlow usage. Over time, high minutes of traffic can be generated withlower dilution in ARPU. Africa has average minutes of use persubscriber/month at just 100. In India, the numbers range from 350to400 depending on theoperator.”Other issues, too, could impact valuations. There is an ownershipissue with the Zain Nigerian unit. (Bharti says Zain has to resolvethat, and it is none of the India company’s concern.) MTN is a majorcompetitor in most of the markets.

CulturalFactors

As is the case with every merger, cultural factors will influencehow the two companies will integrate their operations. Zain waslaunched in 1983 as the region’s first mobile operator. It was knownat that time as MTC. In 1994, the company introduced GSM technologyin Kuwait, becoming one of the first companies in the region to doso. The company embarked on an aggressive growth path after Saad AlBarrak took over as CEO of the Zain Group in 2002. He worked hard toconvert a Kuwaiti telecom operator into a global one. With 24countries and 71.8 million customers, Zain was close to fulfillingAl Barrak’s dream. The target set for 2011 was to be among thetop 10 telecom companies in the world with more than 150 millioncustomers. The proposed sale of Zain Africa BV represents achange in course in the company’s strategy.

A few days before the Bharti deal was announced, Al Barrak announcedhis resignation, which was promptly accepted. But the Zaincorporate culture is imbued with his go-getting style. Bharti couldrun into integration problems in Africa. Also, though Mittal saysthat no government permissions are necessary (in fact, both Indiaand Kuwait have welcomed the deal), the telecom regulators of allthe countries will have to approve the takeover. If there is aproblem on any of these fronts, it could make the deal look moreexpensive.

If valuations are a cause for concern, raising the money is not. “Wemanaged to get the resources in place when the bigger MTN deal wasbeing discussed,” Mittal told BusinessWorld. “The company will haveno problems in getting the resources in place for this deal, too.All calculations have been made and there is no issue over which weneed to fret. It is an all-cash deal and there is no issue of stocktrading.”

“I don’t think raising funds for the proposed deal will bedifficult,” says Bandyopadhyay of Spice Finance. “A share swap mayhave led to legal complications. [In the MTN case, the problem wasthe Indian shareholding in Bharti-MTN combined entity falling belowthe government-stipulated floor.] Raising funds for the deal frombanks or other institutions in the international markets should bean easier and workable option. The strength of Bharti’s existingbalance sheet and some structure around Zain Telecom’s shares orcash flows should do the trick.”

According to the agreement, Bharti will assume US$1.7 billion indebt and pay US$700 million after one year. This reduces the cashrequirement to US$8.3 billion. Bharti has about US$1.5 billion incash on its balance sheet. The amount of funding needed thus comesdown to US$6.8 billion.

Funding theDeal

Although the funding pattern is yet to be worked out, the consensusview is that it will be entirely in debt. “Equity is expensive inthe current depressed share price valuations and cash can beborrowed at a relatively low cost,” says Bundeep Singh Rangar,chairman of IndusView, a cross-border M&A consultancy. “Bharti islikely to borrow in short-term currency loans. These loans will bereplaced with longer-term debt after the March 25 deadline.”

Mittal says his team is working out the details of variousfunding options. “All I can say is that funding has never been anissue and will never be an issue for Bharti,” he told The EconomicTimes. “We have obviously got into the deal with our eyes open —very much open — and we are, therefore, very excited about thisopportunity. We are also very happy that the Indian business model,that is the talk of the world, is now going global.”

The Bharti-Zain deal is also likely to usher in a year of mergersand acquisitions for India Inc. According to a report byinternational consultancy firm Grant Thornton, January saw CorporateIndia announce 56 M&A deals worth US$2.5 billion. The bigger ones –Zain and the US$13.5 billion offer by Reliance Industries forbankrupt petrochemicals firm LyondellBasell – are still works-in-

progress. Zain, if it goes through, will be the second biggest dealin Indian history after the US$12 billion Tata takeover of Corus.

“I think we will see a perceptible increase in outbound mergers overthe course of the year,” says Srivatsan Rajan, a partner atBain. “This is primarily because assets in developed marketsare available at valuations more reasonable than they were at thepeak a couple of years ago. However, we will need to seeincreased availability of external leverage [funding] for themomentum to increase.”

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