As the markets react nervously to Sunil Bharti Mittal?s proposed acquisition of Zain?s Africa operations and Mittal finds himself defending his business plan, he too knows that no defence would be convincing enough until he once again proves his entrepreneurial skills, and until he turns around the fortunes of the unprofitable company that he is proposing to acquire.
Who else would know this better than Mittal himself? Way back in 1995, when he entered the telephony business, everyone was convinced that the small town graduate would not be able to do more than just create and lead a telecom company to anything more than mid-size and sell it to a large industrial house. However, Mittal proved the sceptics wrong by steering the company to take the position of the country?s largest telecom operator?a Rs 37,000-crore empire.
Almost 14 years after creating the country?s most profitable and biggest telecom venture, Mittal is all poised to replicate his success. History may be in the making once again as Mittal finds himself defending his business decision. Once again, he appears eager to prove his critics wrong.
The last 10 years in Bharti?s lifecycle were spent in establishing itself in India. With growth almost reaching a saturation point in the domestic market due to fierce competition amongst a large number of operators and returns falling due to declining tariffs and higher teledensity in urban areas, the next obvious move would be to enter newer markets. Only this can keep the momentum of growth intact. Known for its financial conservativeness, the company has always kept out of bidding wars?it has never overpaid for any of its ventures so far. However, an all-cash deal would radically alter its financials at this point of time, making it a highly leveraged company at least for the next three to four years.
If Bharti has to go for an overseas acquisition and if this has to be in an emerging market, then the choice is limited. Latin America already has giants such as America Movil and Telefonica that can indeed gulp Bharti down. The Middle East is an attractive market but poses a big problem for an acquirer, especially for a company like Bharti. The acquisition values of companies there are very high and these markets typically have high revenue per user, a business model contrary to Bharti?s low-tariff high-volume. Finally, in Africa, MTN and Zain were the only two possibilities.
MTN would have been a picture-perfect partner for Bharti Airtel. This explains why it was Mittal?s first choice, making him go for it twice. MTN, which is a truly African homegrown brand, commands immense market share and occupies the number one slot in its 22 markets, barring a handful. It has massive brand value and is as profitable as Bharti. What Bharti offered it was a price to get its brand and what Bharti would have received in exchange was an instant footprint in 24 countries and global recognition. While MTN would have continued its African operations, Bharti would have focused on India and other emerging markets.
Zain, however, is a completely different game. It is an unprofitable business, recording 11% decline in revenues, 16% decline in the Ebitda margins and even a net loss in a market where MTN commands over 40% Ebitda margins! All that Mittal buys in this case is instant access to 15 high-growth markets and an opportunity to test his entrepreneurial nerves. This would be a litmus test for the man credited with creating India?s most successful telecom company and pioneering the concept of the low-cost, lean business model by outsourcing supporting functions and retaining only the core telecom activity.
There is no doubt that the proposed Zain deal offers an immense opportunity for Mittal. He has the chance to once again test his proven business acumen by successfully turning around Zain?s loss-making operations into a profitable, low-cost business. After all, no one has so far mastered the art of successfully running a telecom business at high Ebitda margins of close to 40% in as fierce a market as India where tariffs are the lowest. Of course, Bharti has also developed what qualify as the most enviable human capital resources not only in the country but also globally.
At the same time, the proposed Zain deal would also offer Mittal new challenges. MTN would now be its archrival. MTN is the largest telecom operator in Africa and occupies the position enjoyed by Bharti in India. Secondly, both Africa and India are emerging markets but the similarities end there. The regulatory and political environment are different in the two regions and Bharti will have to learn new ropes. In certain markets such as Kenya, mobile banking is a huge draw and this is an area where Bharti would have no prior experience, as this is a minimal revenue earning stream in India so far. With the network of Zain in place in 15 countries, Bharti?s efforts would be concentrated on cracking the distribution and marketing network in Africa.