Bharti board clears decks for Zain buy

The board of Bharti Airtel today gave its nod to the proposed acquisition of the African assets of Kuwait-based Zain Telecom for $10.7 billion. Executives from SingTel, which holds 31 per cent in Bharti Airtel, were also present at the board meeting. This has brought into the final lap the largest cross-border acquisition from India in the telecommunications space.

Bharti Airtel, India’s largest provider of telecommunication services, is confident of meeting the deadline of March 25, which is the last date for exclusive talks with Zain.

The board also discussed the fund-raising plans for the purchase, people close to the developments said. The details of the plan could not be ascertained.

Bharti Airtel had earlier said that Zain’s enterprise value of $10.7 billion is likely to result in a payout of about $9 billion (which includes any loan payable by the operating companies to Zain Group), based on the estimated net debt of about $1.7 billion as on December 31, 2009. Further, an amount of $700 million out of the total payable amount will be paid one year after the deal is closed. A Bharti Airtel spokesperson declined to comment on the issue.

According to analysts, the acquisition of Zain could move Bharti Airtel’s debt from just 0.4 times the Ebitda (earnings before interest, tax, depreciation and amoritsation) forecast for 2010 to more than 2.5 times, which is likely to bring in new challenges. Bharti Airtel needs to invest in the upcoming auction of spectrum for third-generation telecommunication services in India as well as to upgrade the Zain network. While debt is the easiest option currently, other options that could be considered later include a public issue of Bharti Infratel, its tower subsidiary. Bharti Airtel could also come out with a rights issue.

Bharti Airtel, promoted by the Mittal family, has been looking for opportunities in emerging markets for a while now. The fierce competition and the resultant low tariffs in the domestic market have begun to erode profit margins. This is Bharti Airtel’s third attempt to enter Africa, after its merger talks with MTN of African failed twice.

Outside India, Bharti Airtel offers mobile telephony services in Sri Lanka. If the deal with Zain goes through, it will have access to 42 million subscribers in 15 African countries.

Further, Bharti Airtel may ask Zain for legal protection from a dispute in Nigeria. Econet Wireless Holdings is disputing control of Zain’s unit in Nigeria. The Nigerian operations are the single-largest source of revenue for Zain. Econet Chief Executive Officer Strive Masiyiwa said on March 18 that there has been no agreement or settlement in the dispute over the Nigerian unit.

Econet is seeking to overturn a 2006 deal in which Celtel bought a 65 per cent stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria. Econet, with 5 per cent of Zain Nigeria, says it should have had the right of first refusal on those shares. Masiyiwa has said that the case is still in arbitration and until that process has been completed the unit in Nigeria cannot be sold.

Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria. In 2008, Zain generated about 21 per cent of its total earnings before interest, tax, depreciation and amortisation in Nigeria and about 22 per cent of its total sales.