Airtel’s Acquisition of Zain , Africa -Ib Ppt

Airtel’s Acquisition of Zain

CHRONOLOGY OF KEY EVENTS

• May 5, 2008 Bharti Airtel announces that it has entered into exploratory discussions with the MTN Group.

• May 24, 2008 Bharti Airtel withdraws from the talks, following

the MTN board presenting a structure completely unacceptable to Bharti Airtel.

• Bharti Airtel sees this new proposal as a convoluted way of getting indirect control of the proposed combined entity, which would have made Bharti Airtel a subsidiary of MTN.

• May 26, 2008 Reliance Communications (“RCom”) enters into exclusive merger discussions with MTN.

• July 2, 2008 Financial Express reports that Bharti Airtel is in talks with Zain for acquisition of its African assets.

• News denied by Bharti Airtel’s spokesperson.

• July 19, 2008 RCom and MTN formally end talks.

• Bharti Airtel makes a media statement announcing that it has entered into talks with MTN for a strategic merger with exclusivity period till July 31, 2009.

• September 30, 2009 The proposed transaction between Bharti

Airtel and MTN called off for the second time in two years on the expiry of the exclusivity period.

• February 15, 2010 Bharti Airtel and Zain agree to enter into exclusive discussions till March 25, 2010 for the acquisition of Zain Africa for an enterprise value of USD 10.7 billion.

• On March 30, 2010 Airtel entered into a legally binding definitive agreement with Zain Group (“Zain”) to acquire Zain Africa BV .

• Mr. Sunil Bharti Mittal, Chairman and Managing Director of Bharti Airtel and Mr.Asaad Al, Banwan, Chairman, Zain Group executed the definitive agreements at Netherlands.

• The enterprise valuation was of USD 10.7 billion.

• Under the agreement, Bharti acquired Zain’s African mobile services operations in 15 countries, total customer base under of over 42 million.

http://www.airtel.in/about-bharti/media-centre/bharti-airtel-news/corporate/

• In the Indian telecom space, the deal is the second largest after the USD 11.2 billion (approximately) Vodafone Hutchison transaction in 2007.

• USD 8.3 billion within three months from the date of closing.

• USD 700 million after one year from the date of closing.

• USD 1.7 billion assumed as debt on the books of Zain.

• Bharti group’s global telecom footprint will expand to 21 countries along with the operations in Seychelles, Jersey, and Guernsey.

ZAIN AFRICA

• Wholly owned subsidiary of Zain, incorporated in Netherlands and held the African operations of Zain.

• The company was originally named Celtel which was acquired by Zain in 2005 and renamed as Zain Africa BV.

• The same has been acquired by Bharti Airtel through Bharti Airtel Netherlands BV.

• Zain Africa BV has mobile operations in the following 15 countries - Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda, and Zambia.

WHY EXPANSION WAS NECESSARY?

• Bharti Airtel overtook BSNL to become India’s largest telecom company by revenues but there was continuous drop in the margin of profit over the years.

• The mounting competition in the Indian telecom market with the service providers battling out for a chunk of the revenue.

• The Indian telecom market had almost reached its saturation point with scope of expansion left only in the inner part of rural India.

• Being a core telecom company it could not diversify its portfolio into other business and geographic expansion into new markets was the only strategic alternative to escape slowing profit growth in India.

• The acquisition provides Bharti with meaningful growth opportunities in Africa, which still has relatively low mobile phone penetration, and an opportunity to improve Zain Africa’s relatively lower EBITDA [earnings before interest, taxes, depreciation and amortization] margins.

• This realization is what compelled Bharti Airtel to establish its presence in Africa.

• Also, concerns about pending litigations which threatened to upset Bharti’s entry in Africa have somewhat been put to rest with the Indian telecom company saying it has signed an agreement with Broad Communications Ltd., which owns a 14% stake in Zain Nigeria, to settle all legal cases Broad had in 2009 filed a suit with the Federal High Court in Lagos, seeking an order to restrain Zain from selling a stake.

• The Nigerian unit is also involved in another long-standing dispute with South African telecom company Econet Wireless Holdings, a Zain Nigeria shareholder, attempting to overturn a 2006 deal through which Zain bought a 65% stake in the Nigerian business.

• A challenge for Bharti Airtel will be to integrate the operations of Zain Africa in all 15 countries, which currently operate largely as stand-alone units, said Kamlesh Bhatia , a principal research analyst at Gartner.

• Bharti was able to achieve this important milestone through

much hard work and support from SingTel and the external advisors.

• The total population of these 15 countries stands at over 450 million with telecom penetration of approximately 32%.

• With this acquisition Bharti’s total customer base will increase to around 179 million in 18 countries.

http://articles.economictimes.indiatimes.com/2010-06-08/news/27617925_1_zain-s-africa-zain-telecom-largest-ever-cross-border-deal

• The Zain acquisition, the second largest by an Indian entity after Tatas' Corus deal, was contemplated to take the revenue of the combined entity to an estimated US $13 billion.

• Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion upfront and $700 million after a year.

• It would also take over approximately $1.7 billion of Zain's debts as on December 31, 2009.

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

http://articles.economictimes.indiatimes.com/2010-06-08/news/27617925_1_zain-s-africa-zain-telecom-largest-ever-cross-border-deal

• A $1 billion rupee loan from SBI and the company's own money will account for the rest of the deal amount.

• The rest of the co-advisors -- ANZ, BNP, Bank of America-Merrill Lynch, Credit Agricole CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation -- have allocated $600 million each.

• Bharti Airtel has formed two special purpose vehicles (SPVs) in the Netherlands and Singapore to execute the $10.7 billion deal with a minimum financial risk.

• Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.

• The SPVs, whose dealings will be guaranteed by Bharti, will own the African assets of Kuwait's Zain.

• While $5.5 billion of the total loan amount will be routed through the Netherlands SPV, the remaining will be routed through the Singapore SPV.

• The two SPVs will be responsible for repaying the debt from the cash flows of the African business. But Bharti will have to step in if there is a default.

• The SPVs will take the borrowings, aggregating to USD 8.3 billion, on its balance sheet Bharti Airtel Netherlands BV will avail loan to the tune of USD 5.5 billion and the Singapore SPV will borrow the rest of the amount.37 Once Bharti Airtel is able to transplant its Indian model to Africa, the negative earnings per share of the African assets on Bharti AirteL’s financials would diminish.

Is the transaction expensive for Bharti Airtel?

• Bharti Airtel is paying Zain an enterprise value of USD 10.7 billion10 which is 10 times the enterprise value (“EV”) to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBIDTA”) multiple for Zain.

• Zain Africa has made a net loss of USD 112 million in the nine months to September 2009

• Seven of Zain’s African units are loss-making, including its highest revenue earner, the Nigerian arm, Zain Nigeria.

• It will be a major challenge for the Indian telecom giant to turn around Zain Africa’s operations in these seven African regions, which are currently reeling under losses.

• The turnaround would be tougher in loss-making regions including Nigeria, Kenya, and Ghana where Zain plays second fiddle to market leaders MTN, and Safaricom.

• Bharti Airtel’s decision to opt for the SPV route makes a lot of sense since it will not impact the parent’s balance sheet in the near term.

• At the end of the quarter to December 2009, Bharti Airtel’s debt-equity ratio was 0.4 and this would have shot up to 1.2, had Bharti Airtel taken the loan on its books.

• Views about whether Bharti is overpaying for Zain depend on people’s assessments about the growth potential of Africa’s mobile telecom market.

• 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 at US$394.

• The ARPU(Average Revenue per User), a frequently used yardstick in the telecom industry, is an average of US$6 for Zain’s African operations against US$5 for Bharti in India.

• In the long run, the strategy of getting its footprint across the 15 African countries is definitely a great value proposition.

CURRENT ONGOING CASE

• $85 million tax dispute between Uganda Revenue Authority and Zain International BV of Kuwait.

• The appeal arises out of an earlier High Court ruling that struck down the capital gains tax case on a technicality and effectively left Zain the winner.

• It is a capital gains tax from Zain International’s sale of its pan-African mobile telephone business to Airtel in 2010 for $10.7 billion.

• Zain International argues that URA does not have jurisdiction over it for purposes of charging capital gains tax as it is registered and incorporated in the Netherlands.

• Zain International owned Zain Africa BV, which had equity in 26 companies all registered in the Netherlands, but effectively owning the telephone operator business in as many African countries..

• One of them, Celtel Uganda Holding BV, owned 99.99 per cent of the Kampala-registered Celtel Uganda Limited.

• The disposal of Zain Africa BV comprised of the disposal of indirectly held interests in the assets of Celtel Uganda Limited, a company resident in Uganda.

• The shares disposed were held indirectly by Zain International in Celtel Uganda Ltd and consist primarily of immovable property.

• Out of a total capital gain of $7.339 billion, URA argued that Zain Uganda’s contribution was $302.3 million, of which 30 per cent was due as capital gains tax.

• Zain International declined to pay and contested the claim.

• PricewaterHouseCoopers Uganda, the telecom company’s tax advisors, also argued that URA had no jurisdiction to levy tax on Zain Africa BV because it was resident in the Netherlands and did not source the income from Uganda.