Bharti inks $10.7 bn Zain deal to become 5th largest

The country’s largest telecom service provider — Bharti Airtel — today inked a definitive agreement with Kuwait’s telecom firm, Zain, to acquire its African assets at an enterprise value of $10.7 billion.

With this acquisition —signed in Zain’s headquarters in Amsterdam — Bharti Airtel would become the fifth largest wireless company in the world, with a subscriber base of about 179 million across 18 countries.

Zain Africa has mobile operations in 15 countries with over 42 million customers.

Bharti is expected to bring its brand name to the African market, where operations would be headed by Manoj Kohli, currently head of international business group.

Sunil Bharti Mittal, Chairman and Managing Director, Bharti Airtel said: “This agreement is a landmark for global telecom industry and game changer for Bharti. We are excited at the growth opportunities in Africa and believe that the strength of our brand and the historical Indian connect with Africa, coupled with our unique business model, will allow us to unlock the potential of these emerging markets. “

Bharti has already arranged a $8.3 billion (Rs 37,750 crore) loan to finance the Zain buy. Standard Chartered Bank, State Bank of India and Barclays are the major contributors to this debt portfolio.

The company had earlier said the deal would result in a payout of $9 billion (Rs 40,887 crore), which includes any loan payable by the operating companies to Zain Group based on estimated net debt of about $1.7 billion (Rs 7,723 crore) as on December 31, 2009. A further $700 million (Rs 3,180 crore) is to be paid a year after the deal closes.

Bharti Airtel expressed an interest in Zain in the second week of February. The deal has fructied almost one and a half months after the start of the discussions.

Bharti Airtel has made two unsuccessful attempts to enter Africa earlier, through a merger with South African telecom firm MTN.

The other countries in which Bharti offers mobile services are Sri Lanka and Bangladesh.

Bharti Group’s global telecom footprint will expand to 21 countries along with the operations in Seychelles, Jersey and Guernsey and would cover 1.8 billion people across Asia and Africa, which is the second largest among telecom firms, a statement from the company said.

ANALYSTS CAUTIOUS
Analysts continue to be cautious about the impact of the deal on Bharti. “We need to understand at what rates the debt has been raised. There are challenges for Bharti because the acquisition entails an upfront cost and it will take two or three years to see any benefits that might come out of the deal. I do not think it will be positive and don’t expect the stock price to go up,” said Harit Shah, an analyst with Karvy Stock Broking.

Rahul Jain, an analyst with Angel Broking, however, says they are “positive” on the deal. “Bharti’s balance sheet is very strong and it has tied up enough debt to fund the deal. This will only add value to the stock. The benefit that it will get in the long term will be more than the cost they will pay.”

Zain’s promoters, led by the Kharafi family which owns over 11 per cent in the company, have been looking for a buyer some months. Last year, they announced a preliminary agreement with a consortium led by Vavasi Group — a Delhi-based realtor and communications company — and Malaysian billionaire Syed Mokhtar Al-Bukhary to sell 46 per cent for $13.7 billion. The consortium included state-owned Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd.

Both these companies withdrew from the consortium because they found the asking price too high. They were unwilling to pay more than $10 billion.

Zain has been on the radar of many suitors including Vivendi, Europe’s largest entertainment group, Etisalat of Egypt as well at MTN.