Domestic equity markets on Monday censured Bharti Airtel?s move to acquire the African assets of Kuwaiti telecom firm Zain Telecom, saying the $10.7-billion pricetag was too expensive. Bharti?s shares fell more than 9% on the BSE to close at Rs 285.40, wiping out around $2.4 billion from the firm?s market value and marking its biggest daily fall since October 6.
However, if India?s largest telecom operator succeeds in consummating the deal it would emerge the fiercest competitor to South Africa?s MTN, which it failed to acquire twice. On the face of it, Zain is the second best option for Bharti to carve a global footprint.
Consider the vital statistics: had Bharti succeeded in buying out MTN it would have created a joint entity with more than 200 million subscribers, over $20 billion in revenues and operations in 26 countries. In the case of Zain, the combined user base will be 165 million, with overall revenues of $12 billion and operations in 20 countries.
?(MTN) was a giant, pan-Africa telecom operator. It has revenues of close to $10 billion and an enterprise valuation of over $40 billion. MTN is an African brand with a presence in 20 countries. It occupies the number one slot in 90% of the markets it is present in and is clearly the leader in the African telecom market,? explained KPMG telecom analyst Romal Shetty. Further, MTN is also the official sponsor of the 2010 FIFA World Cup and is a far better established brand than Zain.
On the other hand, the Kharafi family-owned telecom company is among the newer players in African markets and its operations aren?t very profitable, either.
Despite a lower teledensity in Africa–less than 40%–the company has not performed well. It recorded falls of 11% in revenues and 16% in Ebidta for the nine months of the current fiscal, compared with the same period last year.
Nevertheless, Zain?s biggest advantage over MTN is that Bharti can acquire the company relatively easily. Unlike the complex $23-billion share-cum-swap deal proposed in the case of MTN, Zain?s is a straight cash affair. Moreover, the management structure for the planned acquisition of MTN was turning out to be way too complicated, while Bharti will get a free hand in running Zain.
The Kuwaiti firm has already made initial investments in its 15 African markets, which obviously means Bharti gains entry into them without having to establish the businesses from the scratch. Current average revenue per user in African markets is $8-12, while in India it is around $4.
In this backdrop, Bharti will emerge a major rival to MTN and could give it a run for its money on home turf should the Indian telecom player successfully transplant its low cost-high volume model. Bharti?s advent could also herald a tariff war in the region, placing an additional burden on MTN, despite its greater experience of operating in those markets.
Meanwhile, Bharti Airtel on Monday confirmed that it has entered into exclusive discussions until March 25 with Zain for the acquisition of its African units, based on an enterprise value of $10.7 billion.
?This potential transaction does not include Zain?s operations in Morocco and Sudan and remains subject to due diligence, customary regulatory approvals and signing of final transaction documentation. There can be no assurance that a transaction will be consummated,? Bharti said in a guarded statement a day after the Zain board accepted its preliminary offer.
Though Bharti?s statement did not divulge any details about the deal, Mohamed Al Kharafi, chairman of Kuwait?s Kharafi group that owns 11.47% of Zain through one of its units, said he was confident a deal would go through and that an all-cash transaction was planned.
Kharafi said if the deal goes ahead, Bharti aims to pay $10 billion in April for the African assets of Zain, which have $2 billion of debt on their books, and the remaining $700 million by the end of the year.