/ 15 February 2010

Bharti confirms $10,7bn bid for Zain

India’s Bharti Airtel launched its third attempt to gain a foothold in Africa, entering exclusive $10,7-billion talks to buy most of Kuwaiti telecom Zain’s cellular assets in a continent that offers the last opportunity for major subscriber growth.

Bharti, controlled by billionaire chairperson Sunil Mittal, said on Monday its agreement for exclusive negotiations with Zain lasts until March 25 for a potential deal that excludes the Kuwaiti firm’s Morocco and Sudan operations. It said any deal was subject to due diligence and required regulatory approvals.

Bharti’s move comes after two failed attempts to agree a possible $24-billion deal with MTN.

“The competitive pressure in the Indian telecoms sector is so high that players such as Bharti will have to redefine themselves and look for overseas expansion,” said Rishi Sahai, director at Cogence Advisors, an M&A advisory firm. “The chances of a deal happening this time is very high unless some regulatory issues come up.”

Bharti’s 119-million cellphone users in India account for about 23% of the world’s fastest-growing cellphone market, but margins in India have been hit by a vicious price war which has seen some call charges slashed to a fraction of a US cent.

Norway’s Telenor launched Indian operations in December and sixth-ranked Tata Teleservices, part owned by Japan’s NTT DoCoMo, has outpaced Bharti in recent months.

Shares in Bharti, India’s eighth-most valuable firm at about $25-billion, were trading down 5% at 298,70 rupees at 5.21am GMT, in a flat Mumbai market.

Zain’s board has approved the sale to Bharti, which is 30 percent-owned by Singapore Telecommunications, a person familiar with the issue said on Sunday.

Africa represents about 62% of Zain’s 64,7-million customers, but only 15% of the group net profit.

“It’s going to be a big challenge for Bharti to make money out of Zain’s African assets and some may think it’s not a value acquisition, but the key factor is there are not enough sellers available in the global telecoms market,” said Sahai of Cogence.

The person familiar with the development said Bharti put forward the “most compelling offer”, but there were other suitors for the assets who could come back if the Indian firm fails to deliver a deal.

Third time lucky?
Bharti has been hunting for emerging market acquisitions as its home market becomes increasingly competitive. It reported its slowest profit growth in more than three years for the December quarter.

“In three to four years, the Indian operations will be saturated and they need new markets,” said RK Gupta, managing director at Taurus Asset Management in New Delhi.

Bharti’s planned tie-up with MTN failed in September, for a second time, with political rather than commercial factors seen as the deal-killer.

Africa is seen as a natural fit for Bharti, which has thrived in an Indian market with low incomes and tariffs and a heavily rural population — characteristics shared by African countries.

Cellphone penetration in half of Africa’s countries was below 40% as of August, and a dozen countries had penetration below 30%, according to a research report.

Last month, Bharti agreed to buy 70% of Bangladesh’s Warid Telecom for an initial investment of $300-million.

It also set up a new unit and said current CEO Manoj Kohli would head the international business unit from April to drive foreign expansion, focused on emerging markets, where it can replicate its low-price, high-volume model.

Bharti, the only cash generating firm among listed Indian telecoms firms, has a low gearing, which should help it take more debt on its books.

As of end-December, Bharti had net debt of 19,31-billion rupees at a debt/equity of 0,05 and cash balances of 5,04-billion rupees, according to its quarterly report.

Offloading the African operations would mark a strategic reversal for Zain, which has spent more than $12-billion expanding in Africa since 2005.

Its reach from Burkina Faso to Zambia and its ubiquitous logo transformed it into a symbol of national pride synonymous with Kuwait’s faltering aspirations to diversify beyond oil.

Analysts have pointed to Zain’s underperforming assets in Nigeria and Kenya as a burden on the group, but note its presence in sub-Saharan Africa harbours valuable growth.

Zain pulled back from an expansion spree last year and rejected an offer from France’s Vivendi for its African assets. It then halted talks to sell the assets to appease potential buyers of a 46% stake in the parent company.

A consortium of Asian investors has been trying to buy that 46% stake from Kuwaiti family conglomerate Kharafi Group for about $13,7-billion. The sale of the African operations would likely end that initiative.

Zain last week appointed Nabil bin Salama as chief executive, replacing Saad al-Barrak, seen as the driving force behind the growth into around a couple of dozen African and Middle East markets. – Reuters