The initial reactions of the stock markets confirm this writer?s belief that Bharti Airtel may be overpaying for Zain in its bid to satisfy Sunil Mittal?s long-held ambition to become a major global telecom player. Currently, the only overseas operations of Bharti are minor ones in Sri Lanka, Seychelles, and Jersey Islands, and a recently acquired majority stake in Bangladesh?s fourth largest telecom operator.
Mittal?s hopes of becoming a major international player were dashed when the South African government refused permission to his acquisition of MTN last year. Mittal had earlier bid for licences in several emerging market countries, but had failed to win any. While there are several long-term positives that could come out of the Zain deal, it appears that a realistic price for Zain?s African assets would be about $2 billion lower than the $10.7 billion offered by Bharti.
Zain?s shares surged by 9.3% on the Kuwait stock exchange, while Bharti?s fell by 9.3% on Monday, 15 February 2010, and then by 4.2% on Tuesday, 16 February 2010. Bharti?s valuation per subscriber of Zain is around $250-255, whereas this writer?s estimate is that $190-210 is a more realistic price. Bharti is paying 11.5 times Zain?s EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortisation), whereas my assessment is that it should be paying about 8.5 to 9.5 times Zain?s EV/EBITDA.
Bharti should have taken advantage of the Kharafi Group?s desperation to exit Zain, and driven a harder bargain. Nasser Al-Kharafi is reported to be delighted with Bharti?s offer. For over a year, Zain had been attempting to sell its African assets, and had held discussions with over half a dozen international operators, including Vivendi of France, France Telecom, Etisalat of UAE, and an Indo-Malaysian consortium that included Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd. Vivendi and Etisalat were reported to have walked away because they felt that the price demanded by Zain was not justifiable.
Several countries in Africa are quite saturated, having teledensity levels of 45%. In the three most lucrative markets of Nigeria, Ghana and Uganda, Zain is lagging far behind MTN, and is in fact losing money there. Moreover, Sudan, which generates about 10% of Zain?s revenue and about 15% of its operating profit, is excluded from the deal, as is Morocco. It is only in Chad, Niger and Malawi that Zain has an edge over MTN and is generating considerable profits.
Misgivings aside, Bharti is probably the only operator in the world that can make a success of this acquisition. Bharti has probably the lowest cost of operations of any major telecom operator in the world, due to its innovative use of outsourcing and pay-per-use agreements with suppliers. With its operational and equipment sourcing expertise, Bharti could reduce costs by as much as 15% in Zain?s African operations. Further, the ARPU for Zain in Africa, at $5 to $25, is much higher than the $5 (Rs 230) for Bharti?s Indian operations.
Zain is also not likely to walk away from the deal like MTN did. MTN has long been dubbed the ?Runaway Bride? because of its track record in entering into merger negotiations with leading international telecom operators, and then breaking the negotiations at the last minute. MTN never had any real intentions of consummating its negotiations with either Bharti or Reliance. The current deal with Zain includes a $150 million break fee, payable by either side, if the deal fails.
Apart from Nigeria, the regulatory hurdles are much less in this instance than in the case of the broken MTN deal. In the case of MTN, it was the South African government that broke the deal after it was almost completed by declaring that MTN was a crown jewel and could not be sold to a foreign entity. This was even after the intervention by the Indian government, which had praised the merger as a shining example of South-South cooperation. There is a potential roadblock in Nigeria where Econet Wireless Holdings has already declared that it would object to the deal. (Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria. Econet is trying to overturn a 2006 deal in which Celtel bought a 65% stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria.)
The Indian government should also provide assistance in negotiating with the governments and regulators in each of the 15 countries where approvals are required, so that the debacle of the South African government?s veto is not repeated. In particular, it should intervene to smoothen the obstacles in Nigeria.
The author heads a telecom consulting firm in Delhi