/ 3 March 2010

Indian telecoms tycoon spooks investors with Africa move

Indian telecoms tycoon Sunil Bharti Mittal may be known for his Midas touch, but investors are questioning if his multibillion-dollar bid to gain a foothold in Africa is a step too far.

Mittal, chairperson of Bharti Airtel, has seen shares of India’s biggest mobile firm tumble since he made his $10,7-billion offer for the loss-making African assets of Kuwait’s Zain telecom last month.

Mittal, stymied in two previous bids to tie up with MTN, Africa’s largest mobile operator, has staunchly defended his latest attempt to break into the African market.

Huge growth potential
Africa represents “the most under-penetrated market in the world”, offering huge potential growth, said Mittal, who built Bharti into an Indian telecom powerhouse in just 15 years.

But that hasn’t eased worries over what India’s media has dubbed Bharti’s African safari with investors driving down the value of the company’s shares by eight percent since the bid was announced in mid-February.

Ratings agencies Standard and Poor’s and Fitch have warned about the expected heavy debt burden from the takeover, which Bharti says will be funded through borrowings.

Investors are also wondering how Bharti will turn around Zain and the acquisition’s effect on earnings, analysts say.

Zain’s decision to sell its assets “underscores the difficulty in operating profitably in these markets”, said Dubai-based Shubham Majumder, Asia head of telecoms research at Macquarie Capital Securities.

Zain’s board has already accepted the offer. Mohamed Al Kharafi, head of the Kharafi Group, a key shareholder, said board members are “very happy with the price” which has left analysts wondering if Bharti is overpaying.

Zain’s African operations racked up losses of $111-million for the first nine months of 2009 as it ran into the high cost of building networks.

Growth story
Mittal conceded in a conference call with analysts last week the deal will have an unspecified impact on earnings “but in the long run, we are looking for a growth story in this. And therefore it’s not a cause of worry”.

Bharti’s move on Africa is part of a push to maintain its growth momentum as India’s urban markets get saturated and domestic revenues are hammered by cut-throat competition.

The two sides are in exclusive talks until March 25 and the deal is expected to be wrapped up by mid-May, according to Bharti.

It would give the company entry to 15 African countries and 42-million new customers on top of its existing 125-million and make it into a global emerging markets player.

“They don’t have much choice — Africa’s the only market where there is this kind of growth left,” said telecom analyst Harit Shah of Karvy Stock Broking.

In Africa, just 36 out of every 100 people own a cellphone compared to India where subscribers total 45 out of every 100, and advanced economies where cellphones outnumber people.

The trick for Bharti, which pioneered low-cost telecoms in India, will be to bring down Zain’s high cost base and win subscribers, say analysts — and to get subscribers to talk more using lower tariffs.

Bharti is famous for its so-called “minutes factory” business plan — the low-cost, high-volume model that has made it India’s leading celllphone company.

Mittal said Bharti expects to be able to “substantially increase usage” and sign up more callers that would boost call traffic and improve margins.

Bharti’s strength is “bringing down costs of operations and prices”, said Romal Shetty, head of Indian telecom at global consultancy KPMG.

Also as fixed lines are rarer in Africa than India, cellphones phones are really the only communication option.

One other upside in Africa is there are fewer rivals — Zain has between one and four competitors in its markets. In India, Bharti faces nearly two dozen competitors.

But nobody says turning a profit from the African assets will be easy.

“Significant management effort and capital” will be needed, said Macquarie’s Majumder. – AFP