Feb. 15 (Bloomberg) -- Bharti Airtel Ltd., South Asia’s biggest mobile-phone company, offered $10.7 billion to buy most of Zain’s African assets, a deal that would create one of the largest emerging-markets wireless carriers.
Kuwait’s Mobile Telecommunications Co., or Zain, and India’s Bharti will hold exclusive negotiations until March 25, the companies said in statements today. The proposal doesn’t include Zain’s Morocco or Sudan businesses and is subject to due diligence and regulatory approval. Bharti fell as much as 9.6 percent in Mumbai trading, the most since Oct. 6.
Bharti’s third attempt to enter Africa highlights billionaire Chairman Sunil Mittal’s ambitions to expand overseas as competition intensifies at home, where call rates have fallen to less than a penny a minute. Zain’s African business would give Bharti access to an estimated 42 million customers across 15 African countries from Nigeria to Uganda.
“Domestic growth is slowing and Bharti has been looking at expanding in Africa,” said Nishna Biyani, an analyst at Prabhudas Lilladher. “On the face of it, it looks expensive but it depends on the amount of debt Bharti will acquire.”
There’s no guarantee the transaction will be completed, according to the statements. France’s Vivendi SA, owner of Maroc Telecom, walked away from buying Zain’s African assets in July, saying the purchase didn’t fit “its usual criteria of profitability and financial discipline.”
Zain Shares Suspended
Zain shares were suspended from trading in Kuwait. They last traded on Feb. 11 when they advanced 3.9 percent to 1,080 Kuwaiti dinars. The stock has soared 23 percent in the last week, giving the company a market value of 4.64 billion Kuwaiti dinars ($16 billion).
Senjam Raj Sekhar, vice president of communications at Bharti, didn’t reply immediately to an e-mailed request for further comments on the acquisition plan.
Bharti’s offer is “very expensive” based on valuation multiples, Macquarie Group Ltd. Regional Head of Telecoms Research-Asia Shubham Majumder wrote in a note to clients today. Zain’s Africa unit is unprofitable and its business outlook is “significantly inferior” to top African phone operator MTN Group Ltd., according to the report. For Zain, saddled with $4.6 billion of debt, the sale highlights the difficulty of generating profits in the African markets, according to the report.
Enterprise Value
The offer values Zain’s African assets at more than 10 times their estimated earnings before interest, taxes, depreciation and amortization, according to Macquarie. That compares with multiples of 6.3 for Bharti, 4.2 for MTN Group and 4.8 for Vodacom Group Ltd., Majumder wrote.
New Delhi-based Bharti’s move mirrors efforts by other phone companies seeking growth in emerging markets as profits slide in their home markets. Vivendi, owner of French mobile operator SFR, said Nov. 13 it gained control of Brazil’s GVT (Holding) SA, after its $4.18 billion offer topped Spanish company Telefonica SA’s $4 billion bid.
Newbury, England-based Vodafone Group Plc made acquisitions in India, Turkey and Qatar to make up for slumping demand in its main European markets. In 2008, it took control of South Africa’s Vodacom Group Ltd.
All operators are “in the same process” of finding growth in emerging markets, said Emmanuel Soupre, who helps manage about $15.6 billion at Neuflize OBC in Paris.
Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria, the continent’s most populous nation. The company has more than 40 million subscribers in Africa, about 62 percent of its client base. More than half of its $7.4 billion of annual sales in 2008 came from Africa, according to Bloomberg data.
Zain’s African units have not just been coveted by Vivendi. In the past year, Luxembourg-based Millicom International Cellular SA said it would be interested in some of Zain’s assets.
MTN Chief Executive Officer Phuthuma Nhleko said Aug. 27 that it may consider buying Zain’s Africa units if “there were no regulatory problems.”
At $10.7 billion, Bharti would be paying about $250 for each of Zain’s 42 million African customers, excluding Sudan and Morocco. When Vodafone Group paid $10.7 billion in May 2007 to buy a controlling stake in India’s Hutchison Essar Ltd., it valued each Indian subscriber at about $720.
Competitive Indian Market
Since then, India’s mobile phone market has grown more competitive, as newcomers including Japan’s NTT DoCoMo Inc. and Norway’s Telenor ASA have started services, bringing the total number of mobile-phone operators in India to 11, prompting Bharti to look outside of the world’s second-fastest-growing mobile-phone market for opportunities to increase profit growth.
“My only worry is that there is this dangerous trend of Indian companies trying to buy overseas assets at any cost,” said R.K. Gupta, portfolio manager and managing director at Taurus Asset Management in New Delhi. “If you get a company at cheap valuation or fair cost it’s O.K., but if you pay aggressively it’s going to affect profitability for years.”
Bharti’s purchase of Zain assets would be the second- largest overseas acquisition by an Indian company, after Tata Steel Ltd. paid $12.9 billion for U.K.-based steelmaker Corus Group Ltd. in 2007. Mittal failed twice to buy MTN Group.
“I have no doubt that this is an operationally sensible decision, as Bharti can probably cut costs even further than Zain” said G.V. Giri, an analyst with IIFL Capital Ltd. in Mumbai. “Bharti does need to come up with that sort of cash, and that could lead to some weakness in the stock for a while.”
Kohli Heads Expansion
The company announced a $300 million bid on Jan 12 to buy a 70 percent stake in the Bangladeshi assets of Abu Dhabi-based Warid Telecom, adding 2.92 million subscribers. The following day, it named Chief Executive Officer Manoj Kohli, 51, to a new role to head overseas expansion. Kohli hung up when contacted Feb 12, and hasn’t replied to a request for comment.
For Zain’s main shareholders, led by the Kharafi Group, the transaction would end an almost yearlong effort to sell the company as a whole or in parts.
“This sale will surely affect Zain Africa and whatever is left in the Middle East,” said Hajjaj Bu Khudour, an independent Kuwaiti economist. “It will devalue Zain.”
He said whatever profit is made from selling most of the African assets won’t compensate for Zain’s investment in the market to fund expansion.
Previous attempts to sell the group or some of its assets have failed. Saad al-Barrak resigned as Zain’s chief executive officer this month after delays in the proposed sale of the company by the Kharafi Group, Zain’s second-largest shareholder.
Kharafi announced in September it signed a preliminary agreement to sell a 46 percent stake in Zain, valued at $13.7 billion, to a group led by India’s Vavasi Group and Malaysian billionaire Syed Mokhtar Al-Bukhary. At the time, the sellers and buyers pledged to complete the deal in four months.
source: bloomberg
