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Why is Bharti chasing Zain’s Africa assets?

Airtel is in $10.7 billion talks with Zain to buy most of the telecom's cellular assets in Africa.

Bharti Airtel is in $10.7 billion talks with Zain to buy most of the Kuwaiti telecom’s cellular assets in Africa — the Indian firm’s third attempt to gain a foothold in the region.

The deal,if clinched,would be India’s biggest overseas acquisition since Tata Steel’s $12 billion purchase of European steel maker Corus in 2007.


Mobile subscriber additions are running at a monthly average of about 15 million in India,making it the world’s fastest-growing wireless market. The rapid pace has attracted new foreign operators such as Telenor and Sistema,making competition more intense.

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Call charges have fallen sharply,to as low as a fraction of a US cent per minute,squeezing margins and clouding earnings growth potential.

Bharti reported its slowest profit growth in more than three years for the December quarter,and average revenue per user (ARPU) — a key operational gauge — fell 29 per cent to 230 rupees ($5). The market is also showing early signs of saturation,with penetration reaching about 45 per cent.

To beat the slowdown,Bharti has been scouting overseas,with a focus on high growth-potential emerging markets. After failing to get a deal with South Africa’s MTN Group,the company has set up a new unit to drive overseas expansion. It also agreed last month to acquire control of Bangladesh’s Warid Telecom.

Africa is attractive for Bharti as the mobile user base is low there,with just over a third of the population having a mobile.


Zain’s 15 African operations included in the deal have a combined user base of about 42 million,and the operator is No.1 in 10 markets,ranking second in another four,according to brokerage reports. ARPU in these operations ranges from $3 to $25,with 10 of the 15 having higher ARPU than Bharti.


Bharti is yet to say how it will finance the transaction,but analysts assume it would be mostly by debt. Bharti is the only free cash generating firm among listed Indian mobile firms and has a low gearing — debt is 0.05 times equity — which should help it take more debt onto its books.

It had managed to line up several leading banks in its attempt to strike a deal with MTN last year,signalling the confidence the financial sector has in the company’s management and growth prospects. Once that deal fell through,Bharti scrapped a planned $3-$4 billion loan.


SingTel,which owns 32 per cent of Bharti,could also help in funding. The Singapore firm said on Monday it was actively involved in Bharti’s decisions,including major investments. In 2008,when Bharti and MTN were in talks for the first time,SingTel said it would support Bharti financially in any M&A activity.

A large Zain shareholder said the firm would receive cash in the deal,implying Bharti will not pay with shares.


Bharti shares slumped more than 9 per cent on Monday,wiping around $2.4 billion off its market value,as some investors worried the cost of what is seen as a potentially pricey acquisition will weigh on profits.

The stock fell another 2 per cent by 0432 GMT on Tuesday.

Zain’s African business has $2 billion of debt on its books,leading Zain shareholder Mohamed Al Kharafi said.


Regulatory issues,which were widely blamed as a deal-breaker in the Bharti/MTN talks,are not seen as a major concern.

But legal disputes surrounding Zain’s Nigerian unit,the biggest among its African assets,could potentially delay or disrupt a deal.


French conglomerate Vivendi,MTN,Sweden-based emerging market mobile firm Millicom and Bharti’s home rivals,Reliance Communications and Essar Group,have also been linked with Zain Africa assets — and could return to the fray.

Bharti and Zain’s exclusive talks run to March 25.

First published on: 16-02-2010 at 10:42:33 am
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