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Mergers & acquisitions

Bharti Closes In on African Acquisition

The board of Kuwait's Zain Group has approved the sale of its African assets to India's largest mobile operator, Bharti Airtel Ltd. (Mumbai: BHARTIARTL), with "definitive agreements" set to be signed in the coming days.

Bharti announced earlier this week that it had secured the US$8.3 billion in financing it needs for the acquisition, which includes all of Zain's African operations (more than 41 million customers in 15 markets) except for those in Morocco and Sudan. (See Bharti Ties Up Zain Deal Finance.)

The "enterprise value" of the Zain Africa assets is $10.7 billion, of which $1.7 billion is debt. Bharti is therefore paying $9 billion -- $8.3 billion initially and $700 million a year after the deal closes.

Bharti has been looking at international expansion for some time, particularly in Africa, where it engaged in two aborted merger attempts with MTN Group Ltd. (See Bharti, MTN Abandon $23B Merger.)

"Bharti's acquisition of Zain Africa can be seen as a natural evolution of its business, given it has now reached critical mass in terms of size and share in the domestic market," says Kamlesh Bhatia, a principal research analyst at Gartner Inc.

"The hyper competition in the domestic market, coupled with expected stagnation in subscriber growth over the next two years, lends credence to the timing of this deal. Zain presents a suitable opportunity to expand in a region that has similar market conditions [to India], allowing Bharti to leverage its nearly perfected low-cost, high-volume model," adds Bhatia.

Once the deal is closed, the combined entity "...will be one of the largest emerging market telcos globally with revenues of around $13 billion and EBITDA [earnings before interest, tax, depreciation, and amortization] of around $5 billion," according to a report from Karvy Stock Broking Ltd. "It would be one of the top five telcos globally with over 200 million subscribers and [in] the top three in terms of population coverage," the report states.

But there has been criticism of the deal, as Zain Africa, which generated revenues of around $2.8 billion in the nine months ending in September 2009, is reportedly a loss-making operation. Its fifteen markets reported a cumulative net loss of around $112 million in that nine-month period, though eight of those 15 markets generated a net profit.

However, there is a lot of potential for growth, as the 15 markets have an average mobile penetration level of around 35 percent. Only three of Zain Africa's markets (Ghana, Congo Brazzaville, and Gabon) having a mobile penetration rate higher than 50 percent, while six have a rate lower than 25 percent.

And, in general, the markets are less competitive than in India (which has 12 mobile operators, and more to come). Most of the Zain Africa markets have two, three, or four operators, with only three markets (Congo, Ghana, and Niger) having five.

Bharti's biggest challenge will come in Nigeria, the largest of the Zain Africa markets, believes Pyramid Research analyst Badii Kechiche. (See Mobile Growth Strategies in Africa.)

Zain Nigeria generated revenues and a net loss in the first nine months of 2009 of $986 million and $88 million respectively from its 15 million customers.

In a recent Pyramid Points column, "Bharti’s African Adventure," Kechiche noted that "Bharti's success in Nigeria will not lie in cutting costs; instead, the operator will have to support existing efforts to expand its network in rural areas to generate subscription growth, roll out targeted services across segments to retain and attract clients, target the youth and enterprise segments to generate value, and develop data services to mitigate the decline in voice revenue. These tough challenges will ultimately determine just how wise Bharti's African investment turns out to be."

Throughout the continent, Gartner's Bhatia believes Bharti will need to impose greater operational efficiency. "The immediate challenge, besides a host of regulatory approvals that Bharti will have to seek, includes the need to bring predictability into operations, and to streamline revenue flow from a largely loss-making business," says Gartner's Bhatia.

"This will require deft maneuvering from the Bharti management, taking into account cultural and local challenges in each of the 15 countries. A slightly different but relatively bigger challenge for Bharti is a change in mindset from being market leader to challenger. The ability to think like a challenger and act as a market leader will be vital for Bharti’s success in the African sub-continent," adds the analyst.

— Gagandeep Kaur, India Editor, Light Reading

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