/ 17 February 2010

Bharti hopes to be third time lucky with Zain bid

Indian telecom tycoon Sunil Bharti Mittal is hoping to make it third time lucky as he seeks to gain a presence in Africa, one of the world’s least developed cellphone markets.

After two failed attempts to tie up with MTN, the founder-chairperson of cellular giant Bharti Airtel announced this week a $10,7-billion bid to buy the African unit of Kuwait’s Zain telecom group.

The takeover would be one of India’s biggest cross-border deals and give Bharti a significant foothold in the continent’s cellular market where just 36 out of every 100 people own a cellphone.

Step in right direction
That compares with Europe and other developed markets where there are more cellphones than people, while in India cellphone use stands at about 44 connections per 100 people.

“Africa is under-penetrated, it has less competition [than the Indian market]. It is a step in the right direction” for Bharti, said Romal Shetty, senior telecom analyst at international consultancy KPMG.

Bharti, India’s largest celllphone firm which is 32% owned by Singapore Telecom, and Zain, Kuwait’s biggest phone company, said on Monday they had agreed to hold exclusive talks until March 25 to conclude a deal.

Mohamed Al Kharafi, head of the Kharafi Group, one of Zain’s key shareholders, told India’s Economic Times newspaper the Zain board is “very happy with the price”.

Bharti, which already has 125-million subscribers, would get 42-million of Zain’s 65-million subscribers in 15 African countries from Burkina Faso to Zambia.

But critics note that Africa represents just 15% of Zain’s profits.

In Nigeria, for instance, where cellphone ownership is growing fastest, Zain has been losing subscribers to rivals.

Bharti shares plunged 4,5% to 272,45 rupees Tuesday after sliding 9,2% the previous day on investor worries the New Delhi-based company is overpaying for underperforming assets.

Analyst Shubham Majumder of Australia’s Macquarie Securities said “quick comparisons with MTN suggest this business is significantly inferior in terms of profitability”.

“This is a loss-making business at the profit-after-tax level,” he noted.

Bharti’s two attempts at a merger with MTN to create an emerging market powerhouse collapsed amid fears in South Africa that one of the country’s crown corporate jewels would lose its national character.

The Zain venture will mark the first big foreign foray by Mittal who hails from the northern Indian wheat-bowl state of Punjab.

The latest international thrust comes just a month after he set up a new unit to pursue acquisitions abroad, declaring: “The next phase of our journey is set to be another game-changer.”

Mittal started out making bicycle parts, steel sheets and yarn in 1976 and then began importing portable generators — a business with big potential in power-starved India which still has frequent blackouts.

He then spied an opportunity in the telecoms business — making push-button handsets which were a novelty in India. But his fortunes really turned when the government threw open cellphone telephony to the private sector in 1992.

Analysts say if anyone can make a go of the Zain deal it is 52-year-old Sunil Bharti Mittal, who describes himself as a business “junkie” — always “looking for the next big fix”.

Bharti’s strength has been in making profits in an industry where the average customer spend on mobile services is tiny, with call rates of less than a cent a minute, analysts say.

But after years of soaring profits, Indian industry revenues are flattening as rivals engage in brutal tariff wars, forcing firms to look overseas for growth.

Some analysts say Bharti has little choice but to go after Zain as it seeks to maintain its revenue growth momentum in a crowded domestic market that is reaching saturation point in cities.

“This acquisition is a long-term strategic necessity for Bharti to grow its revenues abroad,” telecom analyst Harit Shah at Karvy Stock Broking said. – AFP