End-March 2010, Bharti Airtel clinched the deal with Africa's Zain, putting an end to the month-long palaver on whether the two companies would eventually sign on the dotted line, given Bharti's two earlier unsucessful attempts to strike a deal with South Africa's MTN. According to the legally binding definitive agreement signed in Amsterdam, the Zain Group has now effectively sold its African operations, other than those in Sudan and Morocco, to Bharti Airtel for a sum of $10.7 billion.

A jubilant Sunil Bharti Mittal, chairman and managing director, Bharti Enterprises, noted, "This is an opportunity we have been waiting for. This is a landmark deal, a transformational deal and it is, to my mind, a game-changing deal between India and Africa."

On the occasion of signing the deal, Mittal thanked Bharti's partner SingTel for extending its support. "The extremely tight timelines and the enormity of the task posed a real challenge. Bharti was able to achieve this important milestone through much hard work and support from SingTel and the external advisers," he said.

Zain's CEO Nabeel Bin was equally satisfied. In a press statement, he said that the company was happy with the deal, as exiting the African markets would enable it to focus on its "highly cash-generative operations in the Middle East and to substantially improve its balance sheet".

The deal, once all the paperwork is completed, will be India's second largest overseas acquisition after Tata Steel's $13 billion purchase of Corus in 2007. With the acquisition, Bharti will emerge as the world's fifth largest wireless company with operations spanning 18 countries (including Zain's mobile operations in 15 countries). The acquisition will also increase Bharti's subscriber base significantly. After adding Zain's 42 million customers, Bharti's total subscriber base will climb to 179 million (based on December 2009 figures).

Further, the Bharti-Zain combine is expected to generate annual revenues of $13 billion and earnings before interest, taxes, depreciation and amortisation (EBITDA) of $5 billion a year after the transaction is completed.

To make the deal work though, Bharti has an uphill task ahead of it. It will have to obtain a series of clearances from 15 different regulators and 15 national governments. This may not be simple. Cracks have already started appearing, with the government of the central African nation of Gabon opposing the deal. The government says that Zain Gabon has failed to comply with regulations, and the government, therefore, reserves the right to take "all necessary measures" against the organisation. Zain's operation in Nigeria, its biggest market in Africa, has also hit a roadblock with Econet Wireless Holdings, Zain's minority partner in the Nigerian operations, withdrawing its support. It contends that Bharti cannot have access to Zain's Nigerian assets as Zain and Econet have been involved in an ownership tussle for a number of years.

In spite of the stumbling blocks, which are sure to demand deft handling by Mittal and his top management team, the company is confident of resolving all the issues. Mittal states that the company "will work with the regulators and expects tremendous support from all countries including Gabon. In fact, only a few countries will require specific approvals". Besides, company officials point out that sufficient indemnities have been put in place in the event of any problems with the transaction.

Africa is an important market for Bharti. The company had been trying to get a foothold in the region for quite a while. Though India continues to remain the fastest growing mobile telephony market in the world, its growth in the business has slowed down somewhat. Intense competition from over 12 operational telecom operators, including new players such as Uninor, MTS and TATA DOCOMO, has led to a brutal tariff war, resulting in the chipping away of margins for most incumbent operators. The mobile penetration rates of 40 per cent in most of Africa against 50 per cent in India give Bharti an incentive to stake a claim (and perhaps do so profitably) in an emerging economy that is also one of the fastest growing in the world.

Girish Trivedi, deputy director of the South Asia and Middle East technology team at Frost & Sullivan, states, "It's a good deal because Africa is the last bit left among emerging markets. And Bharti gets access to a lot of synergies in value-added services. Imagine the time it would take to build a leadership position in so many countries through greenfield expansion."

However, Bharti's shopping spree has come at a cost, which according to many sector analysts is quite high. Zain has been valued at around ten times its EBITDA, which is more than Bharti's own valuation. Besides, Zain has reported losses for the first nine months of 2009. Analysts believe that in such a scenario, Bharti has overpaid to enter the African market because even companies such as Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited, which had been a part of a consortium interested in buying Zain, were not willing to pay more than $10 billion.

Bharti officials, however, find the price to be fair and are comfortable with the debt taken to fund the acquisition. Besides, they reason that the price paid is of much lesser value than the potential for growth in the African market. In an interview with a leading business daily, Mittal observes, "Zain is a very well-run company. It's number one in 10 countries, number two  in four countries and number four in just one country, Ghana. It has a $4 billion top line and an EBITDA of $1.2 billion. The company has been doing really well. Now, the question is, will we be able to take it to greater heights? The answer is yes. That's the confidence with which we're entering this company."

Bharti will pay $8.3 billion upfront once the regulatory approvals are in place. The remaining $700 million will be transferred after a year. To finance the deal, the company has secured funds in the form of debt. The 10-bank consortium, which has been formed to provide the $8.3 billion financing (of which $7.5 billion is a dollar loan) to Bharti, has the State Bank of India as the largest contributor while other mandated lead arrangers include StanChart, Barclays, Citibank and JP Morgan.

Raising the required debt with relative ease has provided a major boost to the Bharti Group, especially after the initial dip with which the stock markets greeted the deal negotiations. Dr Mahesh Uppal, director, ComFirst, states, "The fact that the company has been able to secure funds at attractive rates signals that both India and Bharti retain a large part of their flavour in the global financial markets."

Some analysts point out that while the acquisition will help Bharti in the long run, the increasing debt burden to fund the acquisition may affect the company's profits in the short term. Besides, the company will need to invest in expanding networks as they have remained underinvested for years. Bharti will also need substantial funds to participate in the ongoing 3G auctions. All of this will impact the financials of the company. Akhil Gupta, deputy CEO and joint managing director, Bharti Enterprises, concedes that the acquisition has significantly increased the company's debt burden but adds that it will reduce over time and that "there is no great hurry; Bharti is financially comfortable".

All industry watchers agree that Bharti's success in the African markets largely depends on the company's ability to quickly replicate in Africa its "minutes factory" model that has worked so well in India. Company officials hope to leverage the strength of the brand, coupled with its unique business model to unlock the full potential of the African market.

As a first step, Manoj Kohli has been handpicked to head the company's African operations. Appointed as CEO of the International Business Group and joint MD, Bharti Airtel, he will shortly move to Nairobi. The new company will be fully owned by Bharti and will be populated by Bharti members on its board. The accounts of the new company will be consolidated with Bharti's accounts. Some of the people holding key managerial positions in Bharti will relocate to Africa. The new company's operations will be led by Africans, who will be supported by key members of the Indian team.

The company is hopeful that the revenue market share and EBITDA margins will improve within a year or so of the takeover. It intends to implement the lowcost business model in Africa to minimise its capex and opex. It will also try to contain costs through outsourcing. However, all this will take time and will come much later. Right now, Bharti will be looking to get all the clearances in place and close the deal over the next few months.

Deal structure
Bharti Airtel has formed two special purpose vehicles (SPVs) in the Netherlands and Singapore to execute the $10.7 billion deal with a minimum financial risk. The SPVs, whose dealings will be guaranteed by Bharti, will own the African assets of Kuwait's Zain.

According to the deal between Bharti and Zain, the Indian telecom player will have to pay $8.3 billion to Zain three months after the deal is signed and $700 million within a year. For this, it has arranged a $7.5 billion dollar funding and a $1 billion rupee loan.

With regard to the dollar funding, Standard Chartered, the lead arranger, is lending $1.3 billion while Barclays, the joint lead adviser, is funding $900 million. A group of eight international banks are lending $600 million each. These are ANZ, BNP , Bank of America-Merrill Lynch, Credit Agricole CIB, DBS, HSBC, Bank of Tokyo Mitsubishi and the Sumitomo Mitsui Banking Corporation. The State Bank of India (SBI) has agreed to lend $500 million.

A $1 billion rupee loan from SBI and the company's own money will account for the rest of the deal amount.

While $5.5 billion of the total loan amount will be routed through the Netherlands SPV, the remaining will be routed through the Singapore SPV. The two SPVs will be responsible for repaying the debt from the cash flows of the African business. But Bharti will have to step in if there is a default.

Meanwhile, Zain has agreed to compensate Bharti for legal costs in case an ownership dispute erupts over the crucial Nigerian operations, which contribute 36 per cent of Zain's revenues in Africa. The indemnity from Zain will be valid for a few years. Zain, which holds around 65 per cent of the Nigerian mobile market, is embroiled in a dispute with some shareholders, and the indemnity is intended to protect Bharti in case of legal trouble.

Deal analysis
At a deal value of $10.7 billion, Zain's African assets are pegged at an enterprise value (EV)/EBITDA of 11.6x (as against Bharti's valuation of 7.6x). Also, on an EV/subscriber basis, Bharti is paying $255.4 per subscriber, as against its own valuation of $214 per subscriber. Although the acquisition appears expensive on various parameters such as EV/EBITDA and EV/subscriber, another way of looking at the deal would be in terms of the opportunities it holds.

Some of the opportunities that are likely to accrue from the deal are as follows:

This deal provides Bharti the opportunity to apply its learnings, particularly its rural strategies, to a large and developing market. In fact, a key argument favouring the deal is that Africa is the only underpenetrated market in the world and is likely to evolve multifold over the next few years. Its large population, coupled with low teledensity, will provide considerable scope for Bharti to add new subscribers.

Zain's ARPU is 63 per cent higher than Bharti's Rs 250 per subscriber, as tariff rates in Africa are ten times higher than those in India.

The total minutes of usage (MoUs) per subscriber for the combined Zain operations in Africa are one-fifth of Bharti's MoUs of 446. Many analysts are of the view that Bharti will be able to deploy its trademark "minutes factory" model, which will result in strong market share accrual to the new company.

Some of the issues and challenges for Bharti are:

The deal involves a heavy debt component with Bharti raising a huge loan from the market. It will also inherit an existing debt of $1.7 billion on Zain's assets. This will lead to a strain on Bharti's balance sheet in the short term.

The political and regulatory uncertainty in the countries where Zain operates has been an additional cause for the stakeholders' anxieties. The fact that some of Zain's African assets are in geo-politically sensitive countries could turn out to be a major challenge for Bharti. The next 15-18 months will also reveal the quality of Zain's assets once they enter the Bharti fold.

Brand building will be a key challenge.

Human Resources integration is a challenge in all crossover deals, but many believe that successful global organisations like Bharti have the sensitivity, maturity and capability to handle the issue well.

Expert speak
"This is a good move in the right direction. Bharti Airtel has set an example for others to follow. I hope more companies will make acquisitions abroad." –­ Salman Khurshid, Corporate Affairs Minister

"The deal's success is based on the company's ability to export the "minutes factory" model. The ARPU in Africa is much higher although the MoUs are lower." –­ Vis Shankar, CEO, EMEA and Americas, Standard Chartered

"The deal will enhance Brand India globally." –­ Amit Mitra, Secretary General, FICCI

"This is one more step for India in the overseas markets." –­ Venu Srinivasan, President, CII

"Bharti will encourage other Indian companies to look beyond the country's border." –­ S.K.Kapur, Additional Secretary General, PHDCCI

"Africa is where the next round of telecom growth, the next round of development, will happen. So, it makes a lot of sense for the company to get into Africa to widen its risk portfolio from India. I think this is the start of being a truly global player." –­ Romal Shetty, National Telecom Head, KPMG India

"This is the beginning of even bigger things for Bharti, and many of the lessons it learnt in India would be particularly relevant in Africa. After the setback from the MTN deal, Bharti has recovered rather well and moved on to something quite exciting." –­ Dr Mahesh Uppal, Director, ComFirst

"The upside will come from transforming the business from what exists at present to what Bharti wants it to be, and driving up the profitability of that business. The Zain operations could well be the nucleus for Bharti to expand to other African markets." –­ Prahlad Shantigram, Global Head, Mergers & Acquisitions, Standard Chartered

"Zain is a badly managed affair with low ARPUs compared to MTN. This would be a big challenge for Bharti." –­ Subodh Aggarwal, Chairman, Euromax Capital