Bharti moves closer to seal $9 bn Zain deal

Bharti, which failed twice to acquire African telecoms operator MTN Group, is desperate to expand in new markets, as cut-rate competition in its home turf -- the world’s fastest growing -- squeezes margins and clouds growth outlook.

Controlled by billionaire Sunil Bharti Mittal, who started his career selling bicycle parts in India, Bharti is battling newcomers such as Norway’s Telenor and Tata Teleservices, part owned by Japan’s NTT DoCoMo.

“It’s a good deal because Africa is the last bit left among emerging markets. And Bharti gets access to a lot of synergies in value-added services," said Girish Trivedi, deputy director of the south Asia and middle east technology team at consultancy Frost & Sullivan. “Imagine the time it would have taken them to build a leadership position in so many countries through greenfield expansion?"

Zain’s board approved the deal on Wednesday and the company expects to sign the deal in the next few days.

Africa has already attracted global players such as Vodafone and France Telecom , while China Unicom, China’s No. 2 mobile carrier is keen to participate in the privatisation of a Nigerian telecom company.

Bharti, 32% owned by Singapore Telecommunications, will also battle with MTN, with which it tried to seal a $24 billion deal before tie-up talks collapsed in October.

Bharti is expected to make an announcement as the deadline for exclusive talks with Zain ends on Thursday.

“The reaction of the stock price reflects the deal being done at attractive financing terms. But how Bharti is going to benefit from it will only be known in the next 2-3 quarters," said Deepak Jasani, head of research at HDFC Securities.

Due diligence for the deal, the second-biggest overseas acquisition by an Indian buyer after Tata Steel’s $13 billion purchase of Corus in 2007, has been completed successfully, Zain said on Wednesday.

Replicating India Strategy

Bharti, with 125 million subscribers, has thrived on low incomes and tariffs and a large rural population -- characteristics shared by African nations -- and is keen to replicate its Indian model in the 15 African countries where it is buying Zain’s assets.

But some analysts have said Bharti is paying a high price for the deal, with enterprise value of $10.7 billion at around 10 times EBITDA, and may be a drag on the Indian firm’s earnings.

“We can know whether the valuation was right only after some time. So yes, there are opportunities, but there are also mine-fields and pitfalls ahead. We have to see what comes first," Jasani said.

Shares of Bharti were up 1.14% at Rs310.30 in early afternoon trade, defying an overall falling market.

“We believe Bharti would be getting a strong business opportunity," said Mumbai’s Angel Broking in a note to clients.

Sunil Mittal, who built Bharti into an Indian telecom powerhouse in 15 years, said last month Africa represents “the most under-penetrated market in the world", offering huge potential growth for his company.

Just 36 out of every 100 people in Africa own a mobile phone, according to industry figures.

But the takeover will require all of Mittal’s legendary Midas touch to turn around Zain’s struggling African operations, particularly in Nigeria, the Kuwaiti company’s key market, where it has been losing clients.

Bharti would pay $9 billion in cash to Zain, including $700 million to be paid one year after the deal closes. Bharti will also assume $1.7 billion debt on the target firm’s books.

Bharti said on Sunday it had secured $8.3 billion in loans from a clutch of lenders, led by Standard Chartered, Barclays and State Bank of India. Banking sources said Bharti was getting an attractive interest rate of around 200 basis points over Libor.

Standard Chartered and Barclays were advising Bharti on the deal, while Zain was being advised by UBS.

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