Bharti-Zain to study asset sale till March 25, stk dips 9%

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The board of Kuwait's mobile telecom firm Zain has accepted Bharti Airtel 's USD 10.7 billion offer to sell its African assets, excluding Sudan and Morocco. It will pay USD 10 billion to Zain by mid-April and the remaining USD 700 million by 2010-end.

Both firms have agreed to enter into exclusive discussions till March 25. The deal would give Bharti a foothold in a largely untapped African region with significant growth potential.

A Bharti press release says the deal 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," it stated. The deal requires the nod of the Kuwait Investment Authority which holds 25% in Zain.

Rajan Mittal, Managing Director, Bharti Enterprises, says the Zain talks are aimed at tapping opportunities in emerging markets. He says it is too early to comment on the deal timeline or disclose any financial details. "We hope we will be lucky the third time around in Africa."  According to him, Africa is strategic play for the company. "Bharti already has a presence in South Asia."

Bharti's move comes after two failed attempts to agree a possible UD 24 billion deal with South Africa's MTN Group. "The competitive pressure in the Indian telecom sector is so high that players such as Bharti will have to redefine themselves and look for overseas expansion," said Rishi Sahai, Director at Cogence Advisors, an M&A advisory firm told Reuters. "The chances of a deal happening this time is very high unless some regulatory issues come up."

Bharti's 119 million mobile users in India account for about 23% of the world's fastest-growing mobile market, but margins in India have been hit by a vicious price war which has seen some call charges slashed to half a paise per second.

Street thumbs down to Bharti deal
The Bharti-Zain announcement does not seem to have gone down well with the markets. Bharti closed at Rs 285.40, down Rs 29, or 9.22%.

Zain's African business is loss making at the profit after tax level. Africa represents about 62% of Zain's 64.7 million customers, but only 15% of the group's net profit. The deal at USD 255 per subscriber seems expensive. There is also no clarity on how much debt there is on Zain's books. It had placed its African assets on the block for the past seven months.

"It's going to be a big challenge for Bharti to make money out of Zain's African assets. Some may think it's not a value acquisition. But the key factor is there are not enough sellers available in the global telecoms market," Sahai says.

Brokerage firm Macquarie too feels the deal looks expensive on first look. "It has earnings before interest, taxes, depreciation and amortization margin of 31.4%. The business is also significantly inferior to MTN." Macquarie is not changing its earnings estimate on Bharti for now. It has a 12-month price target of Rs 280 per share.

However, Manishi Raychaudhuri, MD and Head of Research, BNP Paribas Securities, and Nilesh Shah, MD and CEO, Envision Capital, feel it is too early to draw any conclusions on whether this deal is valuable or not. "All we know is that they have a presence in about 15 countries in the African region where they have about 45 million subscribers," Raychaudhuri explained.

Shah says the African market has a high potential for telecom and that Bharti may have synergies with Zain. "We will remain neutral on Bharti till the deal dynamics are known."

Road ahead for Bharti
Raychaudhuri and GV Giri of IIFL feel the main task for the Indian telecom major will be the turnaround of Zain's loss-making African assets. According to Raychaudhuri, some of Zain's African assets are geopolitically sensitive countries and could turn out to be a challenge for Bharti. "It is likely to be a challenge for Bharti at least in the near-term."

Ambareesh Baliga, Vice-President, Karvy Stock Broking, told Reuters that growth will come only in 5-8 years. "In the short-term, there is a risk of straining Bharti's balance sheet."

Third time lucky?
Bharti has been hunting for emerging market acquisitions as its home market becomes increasingly competitive. It reported its slowest profit growth in more than three years for the December quarter. "In three to four years, the Indian operations will be saturated and they need new markets," says RK Gupta, Managing Director at Taurus Asset Management.

Bharti's planned tie-up with MTN failed in September, for a second time, with political rather than commercial factors seen as the deal-killer.

Africa is seen as a natural fit for Bharti, which has thrived in an Indian market with low incomes and tariffs and a heavily rural population -- characteristics shared by African countries. Mobile phone penetration in half of Africa's countries was below 40% as of August, and a dozen countries had penetration below 30%, according to a research report.

Last month, Bharti agreed to buy 70% of Bangladesh's Warid Telecom for an initial investment of USD 300 million. It also set up a new unit and said current CEO Manoj Kohli would head the international business unit from April to drive foreign expansion, focused on emerging markets, where it can replicate its low-price, high-volume model.

Bharti, the only cash generating firm among listed Indian telecoms firms, has a low gearing, which should help it take more debt on its books. As of end-December, Bharti had net debt of Rs 19.31 billion (USD 416 million) at a debt/equity of 0.05 and cash balances of Rs 5.04 billion, according to its quarterly report.

Reversal for Zain:
Offloading the African operations would mark a strategic reversal for Zain, which has spent more than USD 12 billion expanding in Africa since 2005. Its reach from Burkina Faso to Zambia and its ubiquitous logo transformed it into a symbol of national pride synonymous with Kuwait's faltering aspirations to diversify beyond oil.

Analysts have pointed to Zain's underperforming assets in Nigeria and Kenya as a burden on the group, but note its presence in sub-Saharan Africa harbours valuable growth. Zain pulled back from an expansion spree last year and rejected an offer from France's Vivendi for its African assets. It then halted talks to sell the assets to appease potential buyers of a 46% stake in the parent company.

A consortium of Asian investors has been trying to buy that 46% stake from Kuwaiti family conglomerate Kharafi Group for about USD 13.7 billion. The sale of the African operations would likely end that initiative. Zain last week appointed Nabil bin Salama as Chief Executive, replacing Saad al-Barrak, seen as the driving force behind the growth into around a couple of dozen African and West Asian markets.

(With inputs from Reuters)