By Mehul Srivastava and Nicky Smith, Bloomberg
March 30 (Bloomberg) — Billionaire Sunil Mittal’s Bharti Airtel Ltd. agreed to buy the African assets of Zain, Kuwait’s largest phone operator, for $9 billion in cash in the second- biggest overseas acquisition by an Indian company.
In its third attempt to expand in Africa through an acquisition, New Delhi-based Bharti, India’s biggest wireless company, said in a statement today it entered into a legally binding agreement to buy Zain’s African mobile assets. Bharti will assume $1.7 billion in Zain’s debt as part of the deal.
Mittal’s success in entering Africa gives Bharti access to a population of about 470 million people from the Atlantic coast to the Indian Ocean, with just over a third of them carrying mobile phones. The purchase puts Bharti in direct competition with South Africa’s MTN Group Ltd., the regional market leader that Mittal failed twice to buy.
“The deal with MTN would have been a much better fit (since) they are a better company,” said Taina Erajuuri, a fund manager at Helsinki-based Fim Asset Management. “Bharti needs to expand, and Africa is a great place for growth. It will offer growth opportunities in the future.”
The takeover is the largest by an Indian company since Tata Steel Ltd. paid $12.9 billion for Corus Group Plc in 2007. With the purchase, Bharti gets 42 million more customers in 15 countries and will become the world’s fifth-largest wireless company, it said.
“With this acquisition, Bharti Airtel will be transformed into a truly global telecom company,” Mittal said in the statement.
This diversity will present Bharti with challenges in each market, Nick Jotischky, an emerging markets analyst for London- based Informa Telecoms & Media, said before the announcement. “This is a key point where Bharti is going to struggle; the markets are all different,” he said.
Bharti shares lost 0.4 percent to 310.85 rupees in Mumbai trading on March 30, extending their decline this year to 5.7 percent, while the benchmark Sensitive Index has added 0.7 percent in the period. Zain shares were unchanged at 1,400 fils in Kuwait.
Zain said in an e-mailed statement that the company plans to distribute a large part of the proceeds from the sale to shareholders in the form of dividends. The payment will be subject to the size of available reserves and the repayment of a $4 billion revolving credit facility, the company said.
Bharti will pay $8.3 billion upon the closing of the deal and $0.7 billion a year from the closing, the company said.
Competition in India
Mittal has spent almost two years seeking assets in other emerging markets as profit growth slowed for 10 straight quarters. South Asia’s largest mobile phone company has been forced to drop some call rates for many of its 125 million customers to as little as half a U.S. cent a minute because of competition from newcomers such as Japan’s NTT DoCoMo Inc. and Norway’s Telenor ASA.
“What Bharti is doing is trying to secure a new stream of revenues outside of its domestic market,” said Julian Watson, a London-based director of telecoms research for consultant IHS Global Insight. “In India, it’s seeing really heightened competition and it’s looking for opportunities elsewhere.”
Bharti, which started operations in Sri Lanka last year, in January agreed to pay $300 million for a 70 percent stake in the Bangladesh assets of Abu Dhabi-based Warid Telecom, to add about 3 million customers in the neighboring nation.
Singapore Telecommunications Ltd., Southeast Asia’s largest phone company, which owns a 32 percent stake in Bharti and operates in eight countries from Australia to Pakistan, has said it will back affiliates in their expansion plans.
Bharti’s moves mirror efforts by other telecommunications companies to seek growth in emerging markets as profits slide in their home markets. Vivendi SA, owner of French mobile operator SFR, said in November it gained control of Brazilian phone company GVT (Holding) SA, after its $4.18 billion offer topped a $4 billion bid by Spain’s Telefonica SA.
Newbury, England-based Vodafone Group Plc, which made acquisitions in India, Turkey and Qatar to make up for slower growth in its main European markets, in 2008 took control of South Africa’s Vodacom Group Ltd.
Still, Mittal may find competition in Africa to be as intense as at home. Bharti is buying into regions where in addition to MTN, it will compete with rivals such as Vodafone, which owns a 40 percent stake in Kenya’s Safaricom Ltd., and with local competitors such as Nigeria’s Globacom Ltd.
“MTN has got the upper hand at the moment,” said IHS Global Insight’s Watson. “It is performing better and it’s already the larger company in most markets.”
Bharti will try to grow sales in Africa by increasing the number of customers and the amount of time clients spend talking or using the network, G.V. Giri, an analyst at IIFL Capital Ltd., wrote in a note Feb. 26, citing comments by the carrier’s management on a conference call the previous day.
Funded 90 percent through loans, the Zain purchase will add more than $10 billion in borrowings to Bharti’s books as it takes on $1.7 billion of the African unit’s debt. The Indian carrier could see earnings per share drop as much as 23 percent in the year ending March 2011 because of the transaction, Morgan Stanley analyst Vinay Jaising wrote in a Feb. 16 note.
Bharti’s purchase was financed by a group of banks led by Standard Chartered Plc, Barclays Plc and State Bank of India. Other lenders include Australia & New Zealand Banking Group Ltd., Bank of America Merrill Lynch, BNP Paribas SA, Credit Agricole CIB, DBS Group Holdings Ltd., HSBC Holdings Plc, Bank of Tokyo-Mitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corp.
Global Investment House KSCC was Bharti’s regional financial adviser on the deal. UBS Investment Bank was Zain’s lead financial adviser, with BNP Paribas SA a co-adviser.
Should African operators be fidgety? Check out the views of ITNewsAfrica analysts in our earlier post, Should African operators be afraid of Bharti?