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Bharti’s familiarity with MTN may give it an edge

Bharti’s familiarity with MTN may give it an edge
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First Published: Mon, Feb 15 2010. 11 29 PM IST

Graphic: Ahmed Raza Khan / Mint
Graphic: Ahmed Raza Khan / Mint
Updated: Mon, Feb 15 2010. 11 29 PM IST
New Delhi: Six months after its talks with South Africa’s MTN Group Ltd fell through, for the second time, Bharti Airtel Ltd is close to acquiring one of the former’s rivals in Africa.
Graphic: Ahmed Raza Khan / Mint
A statement from Bharti issued early Monday said the company has entered into negotiations with Zain for the acquisition of the Kuwait-based firm’s telecom business in Africa with an enterprise valuation of $10.7 billion (around Rs50,000 crore).
The acquisition of Zain’s African business would give Bharti access to an estimated 42 million customers across 15 African countries.
MTN Group operates in many of these markets and Bharti’s familiarity with that company’s plans and operations (it did, after all, almost acquire it, twice) should give its African operations—should the deal go through—an edge.
“While MTN is the No. 1 in most of the markets it is present in, Zain is either No. 2 or No. 3. Bharti knows the market very well now and has been gunning for the African market for quite a while now. Zain is the next best opportunity after MTN,” said Kunal Bajaj, managing director of consulting firm BDA Connect.
Zain and Bharti have set a deadline of 25 March for “exclusive negotiations”. The deal remains subject to due diligence, customary regulatory approvals and signing of final transaction documentation, the statement from Bharti said.
Bharti is the 10th largest mobile phone company in the world, Zain is at 20th position. A merger will create the world’s ninth largest telco by subscribers.
The deal does not include Zain’s operations in Morocco and Sudan.
Bharti, India’s largest mobile telephony firm by subscribers as well as revenue, has been looking to buy a telco in Africa as it seeks to expand geographically in an attempt to keep growing and to maintain its profitability. Intense competition in India has eroded the profits of most telcos.
Bharti entered into similar talks with South Africa-based MTN for merger of their operations in a $23 billion deal. However, on 30 September, the two telcos called off the deal. Bharti and MTN had called off a similar deal in May 2008. This time, Bharti is in a better position (in terms of knowledge of the African market),” added Bajaj.
“It all boils down to the fact that they have to enter the African market and then after that the Latam market (Latin America).”
Zain and MTN compete in five African markets, including Nigeria, considered by many to be the most lucrative African market for telcos.
Analysts, however, fear that Bharti may be paying too much—and all in cash—for operations that are, at best, marginally profitable currently. That, and the fact that Bharti will have to raise debt for the purchase, beat the telco’s stock down 9.22% to Rs285.40 on the Bombay Stock Exchange. Bharti will also need money to bid for third generation spectrum (radio waves) in India.
“Funding is the primary concern. Domestic revenues are under tremendous pressure due to the ongoing price war, so many are not to optimistic about their domestic cash flows,” said an analyst at a Mumbai-based brokerage who asked not to be named as he is not allowed to speak to the media.
Bharti’s offer is very expensive based on valuation multiples, Macquarie Group Ltd’s regional head of telecom research for Asia, Shubham Majumder, wrote in a note to clients on Monday. Zain’s Africa unit is unprofitable and its business outlook is significantly inferior to top African phone operator MTN, he added.
The offer values Zain’s African assets at more than 10 times their estimated earnings before interest, taxes, depreciation and amortization, according to Macquarie. That compares with multiples of 6.3 for Bharti, 4.2 for MTN and 4.8 for Vodacom Group Ltd.
Bank of America-Merril Lynch downgraded the Bharti stock to “underperform” after news of the deal-in-the-making.
Still, Bharti’s expertise in running a low-cost operation may help it leverage the buy to its advantage, the first analyst added.
“Zain has an Ebitda (operating profit) margin of 33% which Bharti may be able to improve significantly by implementing its minutes factory business model. Nigeria is a key market which Bharti may be able to turn around.”
If successful, Zain will be Bharti’s second overseas buy this year. The company spent $300 million to acquire a 70% stake in the Bangladesh assets of Abu Dhabi-based Warid Telecom International Ltd.
For Zain’s main shareholders, led by the Kharafi Group, the success of the transaction will end an almost year-long effort to sell the company, in whole or in parts. Previous attempts to sell the group or some of its assets have failed. Saad al-Barrak resigned as Zain’s chief executive this month after delays in the proposed sale of the company by the Kharafi Group, Zain’s second largest shareholder.
Bharti’s move signals the efforts by other phone companies seeking growth in emerging markets as profits slide in their home markets. Vivendi SA, owner of French mobile operator SFR, said on 13 November that it gained control of Brazil’s GVT (Holding) SA, after its $4.18 billion offer topped Spanish firm Telefonica SA’s $4 billion bid.
Newbury, England-based Vodafone Group Plc made acquisitions in India, Turkey and Qatar to make up for slumping demand in its main European markets. In 2008, it took control of South Africa’s Vodacom Group Ltd.
All operators are in the same process of finding growth in emerging markets, said Emmanuel Soupre, who helps manage about $15.6 billion at Neuflize OBC in Paris.
Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria, the continent’s most populous nation. The company has at least 40 million subscribers in Africa, about 62% of its client base. More than half of its $7.4 billion of annual sales in 2008 came from Africa, according to Bloomberg data.
Zain’s African units have not been coveted just by Vivendi. In the past year, Luxembourg-based Millicom International Cellular SA said it would be interested in some of Zain’s assets. MTN chief executive Phuthuma Nhleko said on 27 August that it may consider buying Zain’s Africa units if there were no regulatory problems.
At $10.7 billion, Bharti would be paying about $250 for each of Zain’s 42 million African customers, excluding Sudan and Morocco. When Vodafone Group paid $10.7 billion in May 2007 to buy a controlling stake in India’s Hutchison Essar Ltd, it valued each Indian subscriber at about $720.
Zain shares were suspended from trading in Kuwait. They last traded on 11 February when they advanced 3.9% to 1,080 Kuwaiti dinars. The stock has soared 23% in the last week, giving the company a market value of 4.64 billion Kuwaiti dinars ($16 billion).
Bloomberg contributed to this story.
shauvik.g@livemint.com
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First Published: Mon, Feb 15 2010. 11 29 PM IST