By International Herald Tribune Feb 14 2010 , New Delhi
Bharti Airtel, the largest Indian mobile phone
company by subscribers, has
offered to buy
the African operations of the Kuwaiti telecom
company Zain in a deal valued at about $10.7 billion.
The two companies are now in exclusive talks until the
end of March to work out the details of the deal, said
one person involved in the negotiations who was not
authorised to speak to the press.
This will be Bharti’s second overseas acquisition, after
it took over Warid Telecom of Bangladesh last month, and
help its stock to get re-rated on the street.
Zain’s assets in Africa have been on the block for about
seven months, and have attracted interest from several other
telecom companies, including Vivendi and China Mobile.
But Bharti put in the most ‘‘compelling offer,’’ this person said.
Zain, which has 71.8 million subscribers in west Asia and
Africa, said in a statement on Sunday that it had received
an offer for its African operations excluding Morocco and
Sudan, but did not name the bidder.
(News agency reports said Zain’s board met and decided to
accept the Bharti offer. There was no statement from the
Indian company on the development.)
The Zain offer is Bharti’s third attempt to expand outside
the cutthroat mobile market in India by purchasing something
in Africa. Bharti Airtel has 125 million mobile subscribers.
About 42 million of Zain’s customers are in Africa. The company
is 25 per cent owned by Kuwait’s sovereign fund, the Kuwait
Investment Authority, and any deal is expected to require the
approval of the Kuwaiti government.
Sometime ago there were reports that BSNL and MTNL too were
interested in Zain. But nothing came of it.
Unlike after its two attempts to take over South Africa’s MTN
flopped, the Bharti success with Zain will help its stock.
After the failure in South Africa, Bharti’s stock saw a sharp
drop. Most analysts said at the time that for continued growth
Bharti had to enter markets outside, as margins at home were
under pressure in the face of rising competition.
However, even with Zain in its fold, Bharti’s earning per share
may not see much gain in the short term. The real gain will come
in a few years, after it turns around some of Zain’s loss-making
operations. Bharti has a proven track record of cutting costs
by outsourcing some functions to hardware suppliers.
Nevertheless, there is a huge opportunity for Bharti to improve
Zain, which is already No. 2 or 3 in most markets it is present in.
Besides, it will also be able to penetrate other countries which
Zain couldn’t because its operating cost were high.
In the short term, the valuation Bharti is paying for Zain could
cause concern. The Indian company has about $2 billion in cash and
will have to borrow to meet the cash component of the deal, raising
its interest cost. The long term looks better as Bharti will get
access to Africa where the next round of telecom growth is expected
to happen.
Zain, one of the Gulf region’s first telecom companies, has been in
turmoil in recent months. Earlier in February, Zain’s chief executive
for nearly a decade, Saad al Barrak, stepped down without giving a
reason for his departure.
Al Barrak oversaw an ambitious expansion plan in recent years
that increased subscribers, but the company’s profitability has
disappointed investors. Zain’s net income for the first nine months
of 2009, the latest figure available, was $677 million, a 17 per
cent drop from the same period in 2008.
Zain said last summer it would sell its African operations.
Later last year Zain’s second largest shareholder, the Kharafi
group, said it was lining up buyers for a controlling stake in
the business. This January the Saudi Arabian unit of Zain missed
some loan covenants, spooking investors. Morgan Stanley cut its
target price for Zain’s stock by 29 per cent in February.
In January, when Bharti bought 70 per cent of Warid Telecom of
Bangladesh at a cost of $700 million (plus $300 million of promised
investments in that market), chairman & managing director
Sunil Bharti Mittal said the deal ‘‘underlines our intent to
further expand our operations to international markets where
we can implant our unique business model.’’
There is agreement among analysts that Bharti has made the right move.
KPMG’s director for telecom, Romal Shetty said, “In the next three or
four years India will continue to be the most difficult market
with 12 to 13 operators. Getting into Africa market could be the
right move at the right time for Bharti. It can replicate its India
success in Africa. Moreover, the average revenue per connection
in Africa is much higher than in India.”
The managing director of Taurus mutual fund, R K Gupta, said,
“Costumer growth in India will become stagnant in three to four
years and Bharti has to look out for growth beyond Indian geography.
Africa is an unexplored territory where growth can happen. Besides,
the acquisition of Zain will add to Bharti’s subscriber numbers and revenue.
The only major area of growth in India is 3G.”
An investment banker who wished to remain anonymous said the Zain
acquisition would help Bharti beat the pressure on its margins,
which have seen a decline.
