Africa's seduction of Sunil Mittal

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"As sure as Kilimanjaro rises like Olympus above the Serengeti, I seek to cure what's deep inside, frightened of this thing that I've become"
- The song Africa by Toto

Frankly, he was pushed. Six months ago, it looked as if Sunil Bharti Mittal's play for MTN, Africa's largest mobile operator, was an act of great strategic choice. On February 15, when Bharti said that Zain, the third-largest telecom operator in that continent, had accepted its bid, it was clear that there wasn't much of a choice left in such matters.

Bharti Airtel's home market is bleeding after the latest price war. Revenues have been falling for all operators. Fresh spectrum to improve quality of services isn't available. Bharti's new ventures are nothing much to write about today. "Telecom has kept Mittal so busy that he has missed the boat in insurance. In retail, everybody is struggling including him," says a telecom industry veteran.

Mittal has to stick to what he knows best and that's telecom. The only emerging market that can offer scale and future growth is Africa. The 53 countries that make up Africa have a combined population of a billion people. That's almost as big as India and only a little smaller than China, where Bharti can't go. Only two out of five Africans have access to mobile services. The demand for mobile services is growing at an average rate of 25 percent across top 16 African markets. African countries are poor as well, just like large parts of India.

Here is the question: if it is such a good idea, why are the Indian stock markets so pessimistic? Bharti's share fell 9.22 percent on February 15, the day it announced the Zain deal. The reaction was quite opposite in Kuwait, the home country for Zain, where the market soared 126 points, the largest single day gain in over six months. The markets don't understand anything, do they now? Actually, they do.

They know that it will be easier for Sania Mirza to win the Wimbledon than for Bharti to make money in Africa in the short-term. This is not going to look pretty, but try to watch. One large fund manager had this to say: "Regulatory difficulties of operating in so many African countries, repatriation of money from these countries, lack of clarity on mobile technology in Africa [are all] worrying the market."
Investors are also concerned over the price Bharti is seeking to pay Zain for the African operations. "Valuation of nine-times EBITDA is too high; six-times would have been more appropriate," the fund manager says.

After being the king of the hill in India for almost 15 years, Bharti will for the first time (not counting its Bangladesh investment) learn to be a challenger in a major market. Zain is present in 17 African countries and is a market leader in two: Tanzania and Congo. In two others, Kenya and Nigeria, it is a distant second. "In Africa, the three big markets are South Africa, Nigeria and Egypt. Zain is present only in Nigeria," says Dobek Pater, partner, Africa Analysis. Even in Nigeria it has an ownership dispute with Econet Group, but let's assume that to be a minor niggle.

The major issue will be to turn around Zain, whose African operations are in losses right now. And it is not because Zain is a laggard. But it is no MTN either, which is the market leader by far and quite profitable too. And that begins at getting the organisational culture right.

Fixing the interiors
Unlike MTN, Zain has had a centralised command-and-control structure but most of its presence in Africa has been built through acquisitions, biggest being that of Celtel. The model hasn't worked. Its outgoing CEO Saad Al Barrak led the telco's acquisition drive. He paid $3.4 billion for Netherlands-based Celtel in 2005 to enter sub-Saharan Africa, as he wanted to turn Zain from a local company with 600,000 customers in 2002 into a top-10 global operator by 2011.

All of these acquisitions will be diverse companies and to lash them together into a composite corporate culture will be perhaps the toughest task. "If you look at the deal itself, you have two independent entities - Zain Africa and Bharti - both of which are struggling in their own markets. When they merge, it will be a tall order," says Angel Dobardziev, analyst, Ovum, a telecom research firm.

This is where Sunil Mittal will be hoping its top team will deliver. As a first step, Mittal has recently entrusted the responsibility of managing the international business to his trusted lieutenant, Manoj Kohli. The domestic business is now led by Sanjay Kapoor. At the same time, in preparation for its global surge, Bharti group human resources head Inder Walia had already begun to build up a global cadre of senior managers who have worked in different geographies. There is Shireesh Joshi who is from Pepsi China. Chief Financial Officer B. Srikanth is from Unilever, UK. Joachim Horn, director - networks, was the CTO of German Telecommunication major T-Mobile. None of these guys has any Africa experience but each understands how multinationals build their presence in a new market and that should help.

Actually the way to understand is to analyse MTN's approach. It has a strong culture that encourages the understanding of local culture. Best practices from one location are transplanted into other geographies. "Secondments were routine and that helped bring in best practices from different parts rather than [being] just HQ driven," says Pater of Africa Analysis. That also makes MTN's local units better run and more empowered to tailor the product etc. to the local market.

Till now, Zain has had a very top-down approach and its local units are not empowered. This is revealed in the company's name itself. "Zain's culture is not quite equipped to understand Africa. In fact, even the brand Zain has no meaning in Africa. It is primarily a middle-eastern name that was brought in here underscoring the point that headquarters play a big role," says Pater.

Mittal's team will have to find a solution to these seemingly touchy-feely issues but which will determine how employees see themselves and how customers connect to the brand. "Different Zain businesses have been run like a loose entity, so processes are weak. This cuts both ways as it may be easier for Bharti to bring in its own processes etc. and knit it closely together," says a telecom analyst from an accounting firm. Mittal, on the other hand, is simply too canny to thrust his own cadre of managers in the difficult markets of Africa. While there is no official word, senior officials in Bharti reckon that he will initially rely on Zain's local managers. Kohli is likely to provide the overall supervision, supported by a few key corporate finance and technology professionals.

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