Induvidual Research Project

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Induvidual Assignment Submission Form

Course Name: Merger and Acquisition

Assignment Title: Bhart Zain merger

Submitted by: Sahil Kapoor

Roll no Gnov09ibwm026

SPJCM Honour Code

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I will not fabricate or plagiarize any information with regard to curriculum I will not seek, receive, or obtain an unfair advantage over other students

I will personally uphold and abide, in theory and practice, the values, purpose, and rules of the SPJCM

Honour Code

I will respect the rights and property of all in the SPJCM community

I certify that I have adhered to the Honour Code of the SPJCM in completing this assignment.

_________________________________________________________________________________

Signature: sd/- Date: Sept 2, 2010


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Introduction

This agreement is a landmark for global telecom industry and game changer for

Bharti

Sunil Mittal

.

*:

Acquirer Bharti Airtel Limited

Seller Mobile Telecommunications

Company KSC

Target Zain Africa International BV

Consideration USD 10.7 billion

Mode of Payment Cash 9 billion , ZAF Debt

1.7 billion

Mode of acquisition Security (Share) Sale

May 5, 2008 BAL approaches MTN

May 24, 2008 Discussions discontinued due deal structuring issues

May 25, 2009 Renewed potential merger discussion

July 31, 2009 First deadline for exclusivity talks period ends

August 3, 2009 Extended till August 31 due to issues regarding deal pricing

August20, 2009 Deadline extended till September 30 due to issue dual listing

September30,2009 Talks called off

February 14, 2010 Zain announces board meeting to discuss potential merger

February 15, 2010 BAL gets into exclusive talks with Zain for acquiring its 15 country African operations

March 21, 2010 Bharti Airtel says has tied up $8.3 billion from a clutch of foreign banks and State Bank of India to

fund the acquisition of Zain telecom's African assets

March 25, 2010 BAL announces definite merger as it completes due diligence

March 30, 2010 Bharti Airtel signs deal to buy African assets of Kuwait-based Zain Telecom for $10.7 billion.

Bharti Airtel Ltd ( henceforth referred as BAL) finally managed

to the enter the African telecom market after it managed to

acquire Zains African operation (henceforth referred as ZAF)

including Sudan and Morocco for a whooping 10.7 Billion

(total enterprise value). This is the second largest Indian

acquisition after the Tata Corus deal and the largest in the

Indian telecom sector making BAL as the sixth largest

telecom provider in the world. This was BAL third attempt to

enter into the African market after its earlier attempts to strike

a merger with South Africas MTN failed, ironically MTN will

be its main competitor in the African markets.BAL will expandits operation in 15 African countries by Oct 2010.

Chronology of BAL ticket to the African Safari


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reflects a shift in the companys strategy which earlier targeted to be one of the top ten telecom

operators in the world with more than 150 million customers.

($mm)

CY06 CY07 CY08 9m,CY 09

Revenue 2,486 3,164 4,160 2,732

EBITDA

1,055 1,129 1,397 870

PAT 330 374 122 -112

Capex 1,136 1,519 1,882 844

Subs 16,871

26,818

41,018

42,190

Margins %

EBITDA

42.4 35.7 33.6 31.8

PAT 13.3 11.8 2.9 -4.1Growth %

Revenue

27.3 31.5 -12.4

EBITDA

7.1 23.7 -17

PAT 13 -67.3 -221.8

Subs 59 52.9 3

Indian Telecom Sector

India continues to be the most sought after

destination for the telecom sector. It set a new

world record in Jan 2010 by adding 19.9 million

new subscribers. This is equal to 1.5 times the

annual subscribers added in the US. In the year2009 India continues to outpace China by adding

177 million subscribers vs 106 million in China.

Growth opportunities in the rural India are huge.

The ARPU for data service in India is extremely lo

at $ 0.5 cents compared to China (data ARPU is

32%) and other developed markets. The nest

spurt of growth is expected from rural India and

the data segment. The 3 G services are also at a

nascent state in India and will provide good

growth opportunity.

BAL holds a dominant position in the Indian

telecom market and has a strong hold in rural

region but is now facing stiff competition from new

and existing players. The Industry is becoming

extremely competitive. The recent price war

among the players has adversely effected the

margins of the telecom players. They have

underperformed the broader market.

The competitive landscape of the Indian market

leading to declining profitability, its already large

market share has forced it to look out for higher

growth regions like Africa.

Zain Africa

Zain International BV, incorporated

in Netherlands, is a wholly owned

subsidiary of Zain. It holds its

African operation and was

acquired by Zain in 2005


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Rationale for the Acquisition

Geographical Diversification

Indian telecom market has become highly competitive with 13 service providers

battling out for a chunk of the revenue. BAL will experience a number of speed

breakers along its growth path in India. The Indian telecom sector seems to have

reached its saturation point with scope of expansion left only in the inner part of rural

India.BAL is a core telecom company and will engage in product diversification leaving

geographic expansion as the only strategic alternative to counter slowing profit growth

in India.

The Lure of Africa

Africa is where the next destination which will experience a revolution in the telecom

Sector. Factors which make Africa the hottest destination are

Favourable Demographic


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Aggregate population of 470m .The African population is expected to

double to 2 billion people outpacing India and China which are expected to

grow to 1.6 billion and 1.4 billion respectively

The median age is 17-18 compared to the Indian median age of around

25-26.It is forecasted that 25% of the world youth will reside in Africa.

Spending Power

Consumer spending potential is estimated to be around $1.4 trillion. The

GDP is growing at rate of more than 5% in 27 of the top 30 economies in

Africa. Social ad Democratic reforms are further cementing the growth

potential of the continent

Huge potential

Also the industry teledensity is only 20% with some countries as low 10-12%, BAL managements expects to grow this to around 60%.

MoU at 50 60 min vs Global average of 300 min and Indian Average of

450 min but ARPU (Average revenue per unit) is higher than India (7 US

cents vs 1 US cents). MOU elasticity has played out in BAL current existing

markets like India and Seychelles.

Low competition, only 4 or less telecom operators in 12 countries (out of

the 15 countries in ZAF operation).

Strong market position of ZAF, it is the biggest operator in 10 countries,the second largest in the remaining 4 out of the 5 operators. An

opportunity to increase its presence in Africa by venturing into other

markets using ZAFs exiting infrastructure.

ZAF African Operation

Country Stake(%) Sub(Mn) MktShare(%) TotalMkt(Mn)

Pop(Mn) GDP/Capita($ PPP) Penetration(%) Peers Rank ARPU(US$)

Burkin Faso 100.0 1.4 51 2.8 15.8 1,259 23 2 1 7

Chad 100.0 1.2 70 1.7 11.5 1,670 19 1 1 10

Congo 90.0 1.4 53 2.7 4.0 4,044 75 2 1 12

DRC 98.5 3.6 45 7.9 67.5 340 14 4 1 8

Gabon 90.0 0.9 62 1.4 1.4 14,747 123 2 1 25

Ghana 75.0 1.2 9 13.4 24.5 1,513 61 4 4 3

Kenya 95.0 2.2 17 12.9 39.9 1,735 48 3 2 4

Magadscar 100.0 1.4 38 3.8 20.9 995 23 2 2 5

Malawi 100.0 1.7 72 2.4 14.8 850 17 1 1 8


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Niger 90.0 1.4 67 2.1 15.4 691 16 4 1 10

Nigeria 65.7 14.9 25 59.7 155.8 2,142 45 3 2 7

SierraLeone

100.0 0.6 46 1.2 6.1 6,095 39 3 1 7

Tanzania 60.0 4.8 39 12.2 45.8 1,352 33 3 1 5

Uganda 100.0 2.2 37 6.1 33.3 1,148 35 3 2 4Zambia 78.9 2.9 70 4.2 12.5 1,397 33 2 1 8

Country Competition

rkin Faso Telemob (35%; Moov (14%)

Chad Tigo 30%

Congo MTN (40%); Warid (7%)

DRC Vodacom (30%); Tigo (14%);CCT (11%)

Gabon Libertis (22%); Moov (16%)Kenya Safaricom (78%); Orance (4%);Yu (1%)

Magadscar Orange (40%); Telma (22%)

Malawi TNM (28%)

Niger Orange (14%); Moov (13%);

Nigeria MTN (45%); Glomobile (19%);

Sierra Leone Africell (34%); Comium (15%);

Tanzania Vodacom (33%); Tigo (23%);

Uganda MTN (50%); UTL (8%);

Zambia MTN (23%) and Zamtel (7%)

Valuation

Expensive at Prime facie

BAL acquired ZAF at an enterprise value of USD 10.7 Billion which is at an EV/EBITDA of

9.8x making it one of the most expensive valuation for a emerging market telecom

player.USD 8.3 billion will be paid in cash three months after the deal closes and the

remaining 700 million will be paid one year after the closure of te deal.BAL will assume

debt of 1.7 billion on the books of ZAF. The valuation looks extremely expensive when

you take in account the BAL was quoting at an EV to EBITDA of 7.2 times and it paid an

EV to EBITDA of 9.8x for ZAF. The price appears ridiculously high if we consider that

seven units are loss making. The cumulative losses in these segment till CY03 are $

248 million offsetting the profits from the other segments. Nigeria poses a great threatas its a large revenue earner but the current operati[Type a quote from the document

Headroom to implement its

successful low cost high usage

model

African markets BAL the

opportunity to leverage its

management which has the

expertise to operate effectively in

Indian markets characterised by

low income, low tariffs (but high

margins) and a large ruralpopulation these characteristic

are shared by the African

markets.BAL should be successful

in scaling its business model in

Africa as efficient telecom business

models are highly scale able.

Vodafone has displayed this India.

Replicating BALs Match

Box strategy. A distribution model

which ensures that Sim cards and

recharge voucher are available in

every possible store. Such a

distribution mechanism is unheard

of in Africa but if successfully

replicated it could boast sales for

BAL.

Operational synergies can be obtained by rationalizing

operation and capital by implementing BALs

outsourcing strategy. BAL has outsourced it entire

network to IBM.

Passive sharing on the same lines as that of Bharti


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or the summary of an interesting point. You can position the text box anywhere in the

document. Use the Text Box Tools tab to change the formatting of the pull quote text

box.]

on are not profitable , a possible turnaround will be difficult as ZAF is not the market

leader in this region. The huge incurred for the acquisition will increase the financialrisk of the company and servicing this debt will reduce it profits.BAL will also be

exposed to foreign currency risk as capex expenditure will be incurred in dollars but

revenues will be earned in the local currency. The African region is marred with political

instability, high Inflation and volatile currency

($mm) Full Value Adj for MI

CY08 CY09E*

CY08 CY09E*

Enterprisevalue

10,700

10,700

10,700

10,700

EBITDA 1,397 1,159 1,087 923EV/EBITDA

7.7 9.2 9.8 11.6

Revenue 4,160 3,643 3,310 2,936EV/Sales 2.6 2.9 3.2 3.6Subscribers ('000)

41,018

42,190

32,416

33,742

EV/Subscriber

261 254 330 317

A gamble worth taking

A few important consideration before using the EV multiple to pass a judgement on the

deal

Start up operation such as Ghana have negative EBITDA which distort the

EV/EBITDA to some extent

The African operation deserve a higher multiple as the effective tax rate in Africa

is less

The valuation should take into account the control premium

ZAF has made cumulative capital investment to the tune of US$ 9 bn.BAL will

require a capital expenditure of only 800 million to kick start its operation in the

highly densely populated in Africa region

The huge reported losses may be misleading as the financial crises lead to significant

devaluation of the African currency as the African economy is highly dependent on

crude and remittance. The sharp currency devaluation contributed majorly to the

revenues declining by 12.6% and the company reporting a negative PAT but with the

global economy showing signs of revival we can expect stable currency. Performance in

EV to subscriber multiple

Looking at the EV per subscriber multiple the

deal looks fairly valued if compared to some

deals in the past. Tata Tele acquisition by

DoCoMo and Vodafone in Hutch Essar were at

similar valuation

.


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the previous years has been exceptional. The company reported a revenue growth of

86% and maintained an EBITDA margin of 35% in CY07-08.

Revenue local Currency (mm) Growth %

CY06 CY07 CY08 CY09* CY07 CY08 CY09*

BurkinFaso

31,998

48,167 57,668 57,130 51 20 -1

Chad 34,194

43,853 55,605 63,401 28 27 14

Congo 66,683

117,387

127,529

164,786

76 9 29

DRC 117,660

164,830

213,125

261,751

40 29 23

Gabon 86,060

111,718

122,286

120,217

30 9 -2

Ghana 0 0 14 66 N/A N/A 370

Kenya 12,560

13,077 11,232 12,097 4 -14 8

Magadscar 77,113

93,078 141,491

149,104

21 52 5

Malawi 5,737 9,954 17,917 20,950 73 80 17

Niger 31,946

44,332 57,937 71,052 39 31 23

Nigeria 78,367

147,308

195,684

196,329

88 33 0

Sierra 131,058

129,213

143,398

150,342

-1 11 5

Tanzania 1,283 1,541 1,564 1,081 20 1 -31

Uganda 72,863

157,576

235,684

206,356

116 50 -12

Zambia 682,792

1,007,116

1,327,276

1,431,215

47 32 8

Country CurrencyDevaluati

on

BurkinFaso

-5

Chad -5Congo -31

DRC -31

Gabon -5

Ghana -24

Kenya -10

Magadscar

-13

Malawi -

Niger -5

Nigeria -20Sierra -12


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Tanzania

22

Uganda -15

Zambia -26

The deal will be fully financed by debt which will improve the capital structure of BAL.

Unlike other Telcos BAL is comparatively under levered and has a net debt- equity ratio

of 0.11x compared to the global average of 0,44 x this has helped BAL borrow at a

cheap rate. The deal has been structured as an LBO .BAL has created 2 SPV at

Singapore and Netherland. The cost of debt is Libor+195 bp which will result in a

annual interest cost of USD 200 million. The company can also further leverage the

African operation which also acts a hedge against currency fluctuation. The company

has given guidance that it will be able to pay up most of its debt by FY 16/17 backed by

its strong FCFF generating capacity and the deal will be EPS accretive by FY13

Considering the growth opportunities and huge scale presented the acquisition may be

slightly expensive but will prove beneficial in the long run and will increase shareholder

value.

($mm) FY11E FY12E

FY13E

FY14E

Revenues 9,082 10,223

11,208

12,148

EBITDA 3,683 4,097 4,529 5,008

PAT 2,101 2,411 2,834 2,849

EPS 24.9 28.6 33.6 33.8

PAT 178 277 310 347

Interest 642 514 385 257

Interest 514 411 308 205

Adjusted 1,765 2,277 2,835 2,991

Adjusted 20.9 27 33.6 35.5

O/s Shares 3,796 3,796 3,796 3,796

Accretion/(dilution) %

-16 -6 0 5

Market Reaction

The market reaction to the acquisition was not positive and BALs stock corrected by 11% post the

announcement as the deal was considered expensive and the market was sceptical if BAL will be able to turn

around a loss making company but as more clarity emerged on the deal structure the market has bee divided.


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Post Merger Integration and Challenges

Bal has a fully staffed integration team. They have already made changes in the existing management

and a few Africans have been bought to work in India to understand the operation of BAL and scale

at which they operate. Nairobi has been designated at the Head quarter and around 40 to 50 people

from India have been moved to Africa.BAL is mainly encouraging local talent.

BAL wants to go for Re branding in October but before that they working to improve the quality of

their network as well as their service and distribution. They are keen to replicate their low cost high

usage model, Match box (distribution strategy) and outsourcing strategy in the existing countriesbefore they plan to leverage their existing African asset to expand further in the region. Initially they

want to concentrate on higher income and commercial areas , they want to increase penetration in

these areas.

BAL realises that the opportunity in Africa is huge and is even greater than that in India. They are

viewing the African assets in an independent fashion.

There will significant amount of challenges BAL will face in order to achieve successful post merger

Integration

Firstly handling 15 regulatory will be a challenge. Addressing cultural misfits in a cross border deals is of paramount importance. Failed

negotiation with MTN can attributed to some extent to cultural misfit between the two

parties. Language barriers will cause be a major road block as they replicate their Match

Box Strategy and increase penetration through the masses.

Macroeconomic environment is not exactly welcoming for business, the continent has faced

political instability and corruption and high crime rate. Theft of equipment and inadequate

electricity would slowdown the operations.

Competition in Africa will only grow as it is the most sought out destination for companies

chasing growth

Interacting and managing local talent will something new and challenging for the BALmanagement

CRISIL placed a rating watch with negative

implication on BAL long term debt on Feb 19

2010. The debt being financed by debt will affect

the gearing ratio adversely increasing the

financial risk of the company. CRISIL also

believes that the deal is good in hte long term as

it will improve the business profile due to the

diversification of revenues.


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Zain Nigeria may cause legal hassle for Bal as Econet a major telecom player in Nigeria

claims that it has the first right of refusal was breached when V mobile was sold to Zain in

2006.A legal battle is on in the UK court. Nigeria is one of the highest revenue grosser in

ZAF operation

Conclusion

BAL cross border acquisition of ZAF has made it one of the top global players in the telecom

industry. Though the acquisition was not cheap and the stock price corrected post the merger

announcement there is huge potential in Africa and if BAL is able to leverage it management team

capability and experience to replicate its successful business model in Africa the deal will be able to

create shareholder value in the long run. Cross border acquisition was also the best strategy for BAL

to counter the hyper competition India. It also provides it the much needed diversification in

revenues. The funding of the deal is strategically done through an LBO providing BAL the levy to

consolidate it operation in rural India and in the 3G space. Though the potential is huge the road

ahead is not easy BAL will have to turn around the ZAFs current loss making operations and grow

at the rate of 22 to 25% to justify the valuation behind the deal. Given the cultural differences,

challenging macro and business environment the turnaround will no be easy for the BAL

management.

.

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