Group 5_Bharti Airtel-Zain Africa

About Bharti Airtel Limited Bharti Airtel Limited, a group company of Bharti Enterprises is among Asia’s leading integrated telecom services providers with operations in India, Sri Lanka and Bangladesh. The company has an aggregate of around 137 1 37 million customers across its operations. Bharti Airtel has been ranked among the six best performing Technology Company’s in the in  the world. Bharti Airtel is structured as four strategic business units - Mobile, Tele media, Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh. The Tele media business provides broadband, IPTV and telephone services se rvices in 94 Indian cities. The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to carriers. The Digital TV business provides DTH services across India. All these services are provided under the Airtel brand. Airtel’ s national high-speed optic fibre network currently spans over 118,337 km across India.

About Zain Zain Group is a mobile telecommunications company founded in 1983 in Kuwait as MTC or Mobile Telecommunications Company, and was later rebranded to Zain in 2007. Zain has commercial presence in 8 countries across the Middle East and North Africa with about 46.1 million customers as of 31 December 2013. It employs over 6000 people. The group CEO is Scott Gegenheimer, who was appointed in December 2012

Telecom Sector in Africa: Business Overview Africa presents great opportunities in the telecom sector. The liberalisation of the sector, the extension of services by multinational conglomerates and the active competition currently in place in the sector have all contributed to the telecom revolution. Since the processes of liberalisation and privatisation have been taken into consideration by African countries such as Uganda, Tanzania, Nigeria, the Sudan, South Africa and Kenya, their telecommunication infrastructures have improved drastically. Many African governments have developed their telecommunication infrastructure by privatising their former state-owned enterprises. As a result, the telecom sector in the African sector has opened up new vistas v istas of business opportunities. Africa has been the fastest-growing mobile market in the world during the past five years. There are now more than 82 million mobile users in Africa: Nigeria's mobile market is growing at over 100% per year. Mobile telephony has a positive and significant impact on economic growth, and this impact may be twice as large in developing countries as in developed countries.

Attractiveness of African Market The tariffs had declined significantly in India and the penetration levels had crossed c rossed 45% in India, there was little opportunity left in the domestic market for Bharti The penetration levels in Africa were around 33% and the ARPU levels were high varying from $8 – $8  – 12  12 (apart from Kenya and Ghana where it is closer to India ARPU levels of $4) Bharti could replicate its low cost model in the African market which would not only bring the cost down but would also result in significantly higher subscriber addition The level of competition in Africa was not as intense as India as most of the countries had no more than 4-5 operators. Airtel’s

acquisition of Zain in Africa

Airtel acquired Zain at about US $ 10.7 billion to become the fifth biggest telecom major in the world. Since Zain is one of the biggest players in Africa covering over 15 countries, Airtel’s acquisition gave it the opportuni ty to establish its base in one of the most important markets in the coming decade. Bharti Airtel Limited Asia’s leading telecommunications service provider entered into a legally binding definitive agreement with Zain Group to acquire Zain Africa. Under the agreement, Airtel had acquired Zain’s African mobile services operations in 15 countries with a total customer base of over 42 million. Zain was market leader le ader in ten of these countries and ranks second in four countries. With this acquisition, Bharti Airtel became the world’s fifth largest wireless company with operations across 18 countries. Bharti group’s global telecom footprint will expand to 21 countries along with the operations in Seychelles, Jersey, and Guernsey. The company’s network had now cover co ver over 1.8 billion people, the second largest population coverage among Telco’s globally.

Benefits from the Deal Airtel had got a total hold in the African market that would help them get a stronger presence in the continent. Africa was attractive for Airtel as the mobile user base was low there, with just over a third of the population having a mobile. Telecom Zain's 15 African operations included in the deal have a combined user base of about 42 million, and the operator is No.1 in 10 markets. The market was also showing early signs of saturation, with penetration reaching about 45 percent. To beat the slowdown, Airtel has been scouting overseas, with a focus on high

growth-potential emerging markets. After failing to get a deal with South Africa's MTN Group, the company had set up a new unit to drive overseas expansion. Reasons for Bharti 

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Having covered the footprint in India, they wanted to enter other emerging markets (Sri Lanka, Bangaldesh, Africa) Larger operations give higher ability to negotiate better rate with the vendors Africa was the only continent available where there was low penetration rate and license costs Zain was the obvious choice after MTN

Reasons for Zain 

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Zain was the second largest operator in Africa and was being bein g consistently beaten by MTN They were run by a Kuwait based business group and wanted to focus their management time on Middle East operations Most of the money they got was distributed to investors as dividend, which means they were under pressure to provide returns rather than infuse capital

Why Zain accept the acquisition deal The principal issue is one of valuations, that Zain’s African operations are losing money. When the acquisition was taken place the Zain was in the losses, that is why they accept the acquisition deal of Airtel. In 2009 the principal shareholders of the Zain Group of Kuwait service providers, had been looking for a buyer for the company’s assets in Africa In the nine months to September 2009, they reported a net loss of US$112 million against a profit of US$169 million in the corresponding period the previous year. Seven of the 15 countries reported losses. The highest revenue earner, Nigeria, which was nudging the US$1 billion mark, lost US$88 million.

Deal structure –  Financials  Financials This was all in cash deal Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion upfront and $700 million after a year It also take over approximately $1.7 billion of Zain's debts as on December 31, 2009 Of the $8.3 billion paid to Zain.. 

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Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion upfront and $700 million after a year It also take over approximately $1.7 billion of Zain's debts as on December 31, 2009 Of the $8.3 billion paid to Zain, Bharti raised debt from a consortium of foreign banks and State Bank of India with the lead-arranger and lead-advisor Standard Chartered Bank committing the highest amount — $1.3 billion, followed by Barclays at $900 million.

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The rest of the co-advisors — ANZ, BNP, Bank of America-Merrill Lynch, Credit Agricole CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation — allocated $600 million each. State Bank of India agreed to an up to $ 1 billion loan

Source of funds Airtel raised debt from a consortium of foreign banks and State Bank of India with the lead arranger and lead-advisor Standard Chartered Bank committing the highest amount $1.3 billion, followed by Barclays at $900 million. The rest of the co advisors ANZ, BNP, Bank of America-Merrill Lynch, Credit Agricola CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation allocated $600 million each. State Bank of India agreed to an up to $ 1 billion loan.

VALUATIONS The deal enterprise value of USD 10.7 billion implied a valuation of: USD 320 per proportionate subscriber 3.6 times revenue 11.6 times EBITDA, a 30-70% premium p remium versus Bharti's valuation at that time Zain's peer, MTN traded at 5.5-6 times EV/EBITDA E V/EBITDA

Analysis The deal made sense for Bharti for the following reasons: Low Financial leverage 

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Airtel had a very low “Net Debt to Equity Ratio” of 0.05 at the end of Dec. 2009 which means that it was virtually a debt free company. It is good to have low debt but zero debt is not a desirable de sirable situation as debt can increase the shareholders’ return on their investment due to tax advantages associated with borrowing. Airtel is a profitable company with over 40% EBIDTA E BIDTA margins which is higher than the cost of debt. This means that it is better for the company to pay interest than paying dividends to a large number of shareholders and hence it should either reduce the shareholding (through share buyback) or increase debt and deploy debt in a profitable way. Bharti selected the second option and took debt to buy Zain that would return higher profits in the long term.

Free Cash Bharti is one of the few carriers across the world that has free cash flow and it didn’t make sense for the company to keep sitting on the pile of cash when it can deploy it in productive assets The capex in the Indian operations had started to decline and hence the free cash flow was likely to increase even e ven further in future The company would not have found much problem in servicing the debt raised to fund the acquisition due to generation of free cash flow in the years to come 

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“Due Diligence

Objective    

Validating the assumptions underlying valuation Identify and confirm sources of value Mitigate real or potential liability by looking at fatal flaws that reduce value Create comprehensive checklists

Three primary reviews:Strategic/ Operational/ Marketing review - Focus on seller’s management team, operations and sales & marketing strategies

Financial review - Focus on accuracy, timeliness and the completeness of the seller’s financial statements

Legal review - Corporate records, management and employee issues, material contracts and obligations of the seller (e.g. litigations and claims) and tangible & intangible assets of the seller

Need for Due Diligence (Strategic Review) 

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Zane’s African business had $2 billion of debt on its books, when acquisition was taking place in 2010. Regulatory issues, which were widely blamed as a deal-breaker in the Bharti/MTN talks, are not seen as a major concern. But legal disputes surrounding Zain's Nigerian unit, the biggest among its African assets, could potentially delay or disrupt a deal Airtel’s success with Zain was hinge upon how fast it is able to grow the African operations, post-acquisition. But this looks much more daunting. This is because nine out of Zain’s 15 African markets are well penetrated with more than 33% subscriber population. Further, mobile penetration exceeds 45% in five markets. These T hese include Ghana and Nigeria where Zain’s operations are bleeding due to stiff competition from MTN. Zain was also suffering losses in Uganda, again a territory with 35% penetration and has MTN as the market leader. With substantial market penetration and MTN as a bigger competitor, Bharti found it very tough to turn around Zain’s loss -making operations. Zain’s African operations had posted a loss of $111 million in nine months ended September 2009. A dispute over the ownership of Zain’s crucial Nigerian unit as well as a legal offensive by a minority shareholder could complicate for this deal.

Need for Due Diligence (Financial Review) 

Any Indian company if wants to acquire or invest in foreign company, it must comply with the the FEMA ((Transf ((Transfer er or Issue of of any Foreign Foreign Security) Security) Regulati Regulations, ons, 2004 2004 ( ODI Regulations

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It means under ODI regulations, an Indian company is permitted to invest in a joint venture/wholly owned subsidiary up to 400% of the net worth of the Indian company in the form of equity/loan or guarantee without seeking prior approval of RBI. Regulation 13 of the ODI Regulations permits a wholly owned subsidiary setup by an Indian company to set up a step down subsidiary In case of Bharti-Zain deal, Bharti created two SPV`s, one in Netherlands & one in Singapore It means, a company in India promoting or setting up joint venture or subsidiary company has to give guarantee on behalf of the subsidiary company to the bankers for the loan. In this case, Bharti has to provide corporate guarantee on behalf of o f its SPV`s i.e. both Singapore & Netherlands SPV`s to bank for the loans for financing the transactions. Hence it attracts the regulation 5 (b) ) of Foreign Exchange Mana Manage geme ment nt(G (Gua uara rant ntees ees)) Regul Regulat atio ions ns,, 2000 2000 ( Guara Guarant ntees ees Regu Regula lati tion onss

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Need for Due Diligence (Legal Review) Competition Commission Commission of India/Anti-Trust laws Competition Act 2002 enacted to replace Monopolies & Restrictive Trade Practices Act, 1969 It was enacted to provide institutional support to healthy and fair competition. The Competition Act seeks to:-Prohibit anti-competitive agreements including cartels;-Prohibit abuse of dominant position; and-Regulate combinations (mergers and amalgamations, and acquisitions). In the current case:-Bharti-Zain has to give details of the acquisition to CCI.-Upon receipt of such notifications, CCI will conduct investigation on the basis of cr iterion mentioned above.-CCI shall give its ruling within a maximum period of 210 days 

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Nigerian Law Hurdles Econet WIreless International: A major telecom player in Nigeria, wanted to use its pre-emption rights In respect of shares had been breached when Econet"s predominantly Nigerian partners decided to sell their shares in Vee Networks (or V-Mobile) to Zain in 2006. Econet has also applied for interim measures to prevent Zain from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until the matter is resolved. Till the time the ownership issue over Zain Nigeria is resolved, Zain faces a hurdle in transferring its Nigerian assets to Bharti Airtel 

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Congo Controversy The Government of Republic of Congo said that they had not been informed of Bharti Airtel’s deal with Zain and that the deal was a clear violation of the law in our country The Government also claimed that the deal is in contravention to Zain`s local mobile license Until it would be difficult for the Bharti to get all regulatory approval 

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Gabon Glitch In this case, the Government of Gabon G abon raised a regulatory objection to the deal de al alleging that Zain had not complied with certain telecom regulations in Gabon. The Gabonese Government has disapproved the sale of Zain`s Gabone ’s assets & reserves the right to take all necessary measures. But off late, Government of Gabon gave its approval to the sale of Zain ’s assets in Gabon to Bharti. 

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Need For Due Diligence ( IT Due Diligence) 

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Business operations; Management Information Systems; Financial Reporting capital and operational expenditure item To establish with greater certainty that The impact of the acquisition process on combined c ombined business operations is minimal Assess the further investments required in IT to maintain the EBIT of the acquired business Strategies for managing the IT related aspects of a transaction including legacy issues Reduce risk associated with integrating ” IT systems The IT systems supporting the target business are fit for purpose and identifying resources critical to continued business as usual operations