Corporate Control, Mergers and Acquisitions

Project
Date of Submission :

Group Number:
Group Members:
1. Name
Noopur Shah

Roll No.

Signature

Contents
1.

Company Profile.............................................................................................. 3
A.

Business Description.................................................................................... 3

B.

Positioning in world and India.......................................................................3

C. Product Offerings.......................................................................................... 3
D. Share Value.................................................................................................. 4
E.

Continued Strong Performance ...................................................................4

F.

Growth strategies and plans........................................................................4

2.

Rationale for choosing Telecom industry:........................................................5

3.

Rationale for choosing the company...............................................................5

4.

Acquisition Strategy........................................................................................ 6

5.

SWOT Analysis................................................................................................. 7

6.

Rationale behind choosing Idea Cellular..........................................................8

7.

Synergies expected out of this acquisition......................................................9

8.

Synopsis of the Deal...................................................................................... 10

9.

Structuring the Deal...................................................................................... 10

A.

Objective of the Acquirer:........................................................................10

B.

Objective of the Target:...........................................................................11

C. Sharing of risks....................................................................................... 11
D. Acquisition Vehicle:................................................................................. 11
E.

Post-Closing organisations:.....................................................................11

F.

Purchase considerations (Form, Amount &Timing of payment):..............11

G. Form of Acquisition:................................................................................. 12
H. Legal form of selling the entity...............................................................12
I.

Tax Considerations..................................................................................12

J.

Accounting Considerations......................................................................13

K.

Representations & Warranties.................................................................13

L.

Closing Conditions................................................................................... 13

M.

Common linkages within the deal structuring process:........................14

10.

Key Challenges post acquisitions...............................................................15

11.

References................................................................................................. 15

1.

Company Profile

A. Business Description
Bharti Airtel Limited is a leading global telecommunications company with operations in 20
countries across Asia and Africa. It was established on July 07,1995. Headquartered in New
Delhi, India, the company ranks amongst the top 4 mobile service providers globally in terms
of subscribers. Its Chairman is Sunil Bharti Mittal and MD & CEO of India and South Asia is
Gopal Vittal. BAL is part of the Bharti conglomerate with businesses in telecom, agriculture,
insurance, mutual funds and retail space. The company is structured into five strategic
business units Mobile, Telemedia, Airtel Business, Tower infrastructure services and Digital
TV. The mobile business offers services in India, Sri Lanka and Bangladesh.

B. Positioning in world and India

o 3rd largest in country wireless operator in the world
o Largest telecom company in India by number of Subscribers
o 4th Largest Mobile telecom operator in the world

C. Product Offerings

B2C
Mobile Services

Cellular
mobile
service
across 20
countries
Indian
customer
and revenue
market
leader
Approx. 251
m wireless
subscribers

B2B

Telemedia
Services

Offers fixed

telephony
and
broadband
internet
(DSL +
IPTV)
Customer
base of 3.3
m
Services
provided in
87 cities

Digital TV
Services

Pan India
DTH
operations
7.9 mn
customers
Coverage
across 632
districts

Airtel Business

Serves as
single POC
for all
telecom
Covers 50
countries
across 5
continents

Tower
Infrastucture
services
Owns 42%
stake in
Indus
Towers
11,240
towers
across 15
circles

D. Share Value
Bharti Airtel Ltd.
As of Sep 09, 2014 3:45PM IST
Current

Prev
Close

Todays
High

Todays
Low

52 Week
High

52 Week
Low

Volume

BSE1

406.05

403.20

410.80

399.95

410.80

282.10

367,889

NSE2

406.10

403.75

410.95

399.70

410.95

281.90

3,554,074

Exchange

(Source: Airtel website)

Market capitalization is approx. Rs.1,623 billion as on Sep 09, 2014.

E. Continued Strong Performance

Particulars
Wireless CMS
Wireless RMS
Total minutes on network carried in Qtr, net
of
Eliminations
Assets
Net Debt
Net Debt to EBITDA

Composition
21.4%
31.0%
284 bn

Rs. 1709 bn
Rs. 643 bn
2.55 times

F. Growth strategies and plans

1. Identifying new revenue streams Changing face of growth through M-Com, Mentertainment & 3G.
2. Maximizing Usage Increasing the usage through urban & rural drive and by wallet
share.

3. Expanding customer base- This will be driven by rural strategy.

2.
Rationale for choosing Telecom
industry:
Telecom industry in India is the most competitive market in the world which has led to tariff wars
among the present 8 operators. As a result of intense competition, revenue growth of operators has
been impacted significantly. Highly fragmented industry as shown in below graph has made new
customer acquisitions difficult and has increased the cost of acquiring new customers.
Thus, if telecom operators plan to roll out their services in new geography, time-to-market will be
a critical success factor. One of the ways in which operators can expand their tower portfolio faster
is to acquire smaller tower companies that have a small presence in new geographic areas. Even
though some form of consolidation has already taken place (see below table) but ICRA expects the
trend of consolidation to continue keeping in mind the market conditions.

3.

Rationale for choosing the company

Bharti Airtel Limited is one of the leading global telecommunications companies. It is the
largest company in India according to its subscribers. The number of subscribers that Bharti
Airtel has is only slightly greater than the number of subscribers that its competitors like
Reliance and Vodafone each has. This poses a threat for Bharti Airtel to lose its number one
position in the country.
Also, Bharti Airtel is in number of services, it provides a large range of services. To
continuously improve its services and maintain its position in India as well as worldwide, it
has recently acquired Zain Africa.
According, there is a lot of space for Bharti Airtel to bring in financial as well as operational
synergies into its company by either merging or acquiring the companies and maintain its top
position.

4.

Acquisition Strategy

Main goal of Bharti Airtel is to expand their business by introducing new revenue streams,
expanding customer base by penetrating into rural areas and increasing the productivity of the
capex. Since the revenue of the company has become stable and its is a mature market, the
company should now aim for the inorganic growth by going for mergers and acquisitions.

Nature of Resources: In telecom industry, in order to cater to new markets, you

bound to have proper infrastructure in that market. Hence, such acquisition will
involve hard resources. So acquisition of the target firm will be the right strategy.
Market conditions: In this case, the potential partners will be rivals. The acquirer
already has a widespread infrastructure network and the target will also have its own
infrastructure. There are high chances that there will be redundancy of hard resources.
Level of Competition: Telecom is a highly competitive industry. From the above
observation, the right strategy will be to go for acquisition.

5.

SWOT Analysis

Bharti Airtel
Strengths

Biggest mobile service provider in

worlds second largest telecom market
Airtel has 22.2% market share.
Has well-established nationwide
infrastructure.
Has towers and backhaul all over the
country.
High brand equity, most visible brand.
Superior network quality and
reliability.

Weakness

Opportunities

Untapped voice market

3G and data revenue Airtels 3G
subscribers constitute less than 5%
of its total subscriber base and
hence there is immense room for
growth within its existing
customers.
The whole wireless world is moving
towards LTE. LTE for mobile
broadband can be a good solution
for India where fixed broadband
penetration is otherwise low.
Immense scope for M&A by
companies with less than 50%
market share.

High competition in the telecom

market- extreme price competition.
ARPU had been decreasing.
Very high financing cost, Airtel is
burdened by $9.7 billion in net debt.
Failure of Airtels acquisition of Zain
Africa business.
Late adoption of 3G and advanced
wireless technologies. 3G services were
launched by Airtel only in early 2011.
The company lacks nationwide 3G
license with spectrum in 13 out of 22
telecom service areas.
Airtels LTE network for mobile
broadband is still confined to only 4
cities in India

Threats

Hostile and unstable regulatory

scenario. This has adversely affected the
industry sentiment and the wireless
service providers.

Spectrum Auctions and Refarming

Government of India and TRAI kept a
high reserve price for 3G, BWA and the
recent 1800 MHz auction.

Low tariffs

The larger incumbent operators are

losing millions of customers to the newer
players who attract these customers with
their freebies and innovative offers,
Mobile number portability.

Idea Cellular
Strengths
Strong mgmt team
Worldwide service
Big image
Good network and customer
support
Latest Technology
Cost advantage

Weakness
High roaming charges for other
network
Lack of integrated operations

Opportunities
Mergers and Acquisitions
Product and Services expansion
Untrapped market
Cloud computing

Threats
Competition with other cellular
network providers
New small players
External chages like Govt. policies,
politices, taxes etc
Entry of foreign players
Mature categories of products

6.
Rationale behind choosing Idea
Cellular

(Source: Airtel website)

As evident from the above charts, we can see that Airtel was facing a severe competition
from the other players in the market in terms of number of subscribers and customer market
share.
For sustain growth and existence in the market, Idea cellular was chosen as the target
company to get acquired by Airtel.
Idea Cellular has across India wireless operator providing GSM based mobile services. The
company had won 3G spectrum in 11 services areas and currently provides 3G services in 20
service areas. The company holds licenses for ILD, ISP and NLD services. Its fibre cable
transmission network expanded to 74,000 kms. The company is in the planning stage to
implement wireless network and data centres in order to have global presence and make India
a new technological arena.
Product Offerings:
1. High-speed mobile broadbrand devices like Android 3G smartphones
2. Data services like Idea TV, games, social networking
3. Voice Based Services
Idea Conferencing Solutions
Hosted IVR
Toll Free Solutions
4. Connectivity Based Services
Field Force Automation Solution
I-Safe
5. Location Based Services

7.
Synergies expected out of this
acquisition
Airtel wanted to boost its efficiency throughout its operations to stay competitive. Its gowth
strategies included introducing new revenue streams, penetration in rural market and
maximizing its capex productivity. The combined firm will be able to attain certain
operational synergies. These are listed below:
1. New revenue streams:

a. Airtel 3G smartphones: As Idea was into making Android 3G smartphones,

this new revenue source will help Airtel boost its revenue.
b. Connectivity Based Services: Field force Automation Solution and I-Safe
would act as a new revenue stream.
2. Economies of scale: The combined firm will be able to attain economies of scale in
the field of networking, games and business services.
3. Large customer base and market share: The two companies together would share a
high market share and a huge customer base if combined together.

8.

Synopsis of the Deal

Acquirer:
Acquirer Group:
Target:
Target Group:
Type of Acquisition:
Min Offer Price:
Max Offer Price:
Exchange Ratio:
Post-Merger EPS:

9.

Bharti Airtel Ltd.

Bharti Group
Idea Cellular Ltd.
Aditya Birla Group
Acquisition of Idea Cellular Ltd. which is a subsidiary
of
Aditya Birla Group on a Stock for Stock Basis
Rs. 27.13
Rs. 74.30
0.43

Structuring the Deal

Postclosing Organisation
Acquisition Vehicle

Key Deal structural

Questions

Form, Amount and

Timing of payment

Legal Form of selling

entity
Accounting
Considerations

Form of Acquisition
Tax Considerations

A. Objective of the Acquirer:

Bharti Airtel Ltd. has its growth strategies and plans in place which includes introducing new
revenue streams, expanding the customer base by penetrating into rural areas and increasing the
productivity of its capex.

B. Objective of the Target:

Idea cellular Ltd. has a very little market share in the telecom industry. It wants to increase its
market share. Also, the network and infrastructure of Idea cellular is not well spread. The
sector offers growth opportunities in both voice and data. Its main goal is to attain first
position in Indian market in terms of number of subscribers and customer base.

C. Sharing of risks
Risks to Acquirer: Acquirer wants to penetrate into a new market. By combining with the
potential partner, the risk of failure will be shared by the partner and acquirer.
Risk to the Target: Targets risk will get mitigated by getting combined with the acquirer as
there is a great possibility of threat to it from its competitors due to its low market share and
limited presence.

D. Acquisition Vehicle:
It is the legal entity which is required to acquire the target. The various options available are to
form a corporate shell, Holding company, Joint Venture, Partnership, LLP, ESOP etc.
On the basis of the our strategy which is to maximise the control and facilitate the postclosing
integration, we will form a corporate or divisional structure.

E. Post-Closing organisations:
Organization or legal framework used to manage the combined businesses following the
consummation of the transaction (e.g., corporation in our case)
It depends on our strategy:
Since we intend to integrate with target immediately, following closing implies a corporate or
divisional structure.

F. Purchase considerations (Form, Amount &Timing of

payment):

Cash
Non cash forms of payment

Cash or marketable securities

Common equity
--Preferred equity
--Convertible preferred stock

Closing the gap on price

--Debt
--Real property
--Balance sheet adjustments
--Earn-outs or contingent payments
--Rights, royalties, and fees

For our acquisition deal, I would like to go for stock payment (stock for stock acquisition) in
order to purchase the stock of the target. The advantage of using stock or common equity to
purchase is that it will eliminate the need for the target shareholders vote, tax attributes, licenses
and may insulate the company from the subsidiary creditors.

G. Form of Acquisition:
Form of acquisition means the way by which the ownership will be transferred. This can take the
form of Assets purchase, Stock purchase or compulsory Merger & Acquisition.
We would like to go for Stock purchase as in this the acquirer buys from the Targets
stockholders all of the outstanding shares of the Targets stock in exchange of its own shares
resulting in the Target becoming a subsidiary of the Buyer. Unlike an asset purchase, the stock
purchase structure leaves the existing target and its assets in place, so it is considered to be a
change of control rather than an assignment.
For this we will use, B TYPE REORGANISATION
Advantages of choosing Stock for Stock purchase are:

Tax free to the seller

Buyer shielded from acquiring targets liabilities
No addition of debt on buyers balance sheet
No decline in credit rating due to addition of debt

H. Legal form of selling the entity

Legal form of selling the entity will affect the form of the payment and the tax structure. Whether
the seller will care about the form of the transaction (i.e., whether stock or assets are sold) may
depend on whether the seller is a limited liability company, or a corporation. Since we are
acquiring a Corporation and the purchase is the stock purchase so corporations shareholders will
be happy as they will be able to get benefit of double tax avoidance.

I. Tax Considerations

Tax impact in M&A transactions is often a zero sum game, where a deal structure that will
be tax-beneficial to the Buyer will be tax-adverse to the Targets stockholders.

It determines whether transaction will be taxable to target firms shareholders and how the owners
of the combined businesses will be taxed subsequent to closing.
Form of acquisition used for acquiring the target is Stock purchase, it will help the seller to
avoid the transactions tax applicable.
Since there is no tax applicable to seller in our case, there will be no increase in the purchase price
offered to them as there will be no need for any compensation.

J. Accounting Considerations
The various accounting considerations to be kept in mind during the deal process are:
1. The earnings impact of updated contingent pay-out.
2. Valuation based on closing date rather than on announcement date
3. Goodwill impairment reissues

K. Representations & Warranties

The purchase agreement will usually include ten to twenty pages of detailed statements about the
targets business i.e. Idea Cellulers business that will cover all the areas that could potentially
create liability for the acquirer Airtel or otherwise reduce the value of targets business. These
statements are called representations and warranties and are phrased to require the potential
target to describe on disclosure schedules that it prepares and supplies to the Buyer any
instances in which the Ideas business deviates from fulfilling its commitments.
Representations and warranties serve the following important functions:

Due Diligence
Certainty of closing
De Facto Purchase Price adjustment
Qualifiers and Carve Outs.

L. Closing Conditions
Most merger and acquisition transactions involve a series of events in which two parties
negotiate and sign the purchase agreement which contains pre-closing time period in which

the parties gather all of the third party consents and other item necessary to close and once
those items are obtained, the money changes hands and the transaction closes.
Closing conditions that Airtel should include obtaining employee retention and noncompete
agreements. Sellers, who also are publicly traded companies, commonly are driven to
maximize purchase price. However, their desire to maximize price may be tempered by other
considerations, such as the perceived ease of doing the deal or a desire to obtain a tax-free
transaction. Private or family-owned firms may be less motivated by price than by other
factors, such as protecting the firms future reputation and current employees, as well as
obtaining rights to license patents or utilize other valuable assets.
Additional closing conditions subject to negotiation by the parties sometimes include:
(1) The occurrence of a Material Adverse Effect to the Target business,
(2) The Buyer having received the financing necessary to be able to pay the purchase price (a
financing contingency),
(3) The Target having received all consents triggered by the deal under its contracts with
customers, suppliers and other third parties, and
(4) Receipt by the parties of all governmental approvals triggered by the deal.

10.

Key Challenges post acquisitions

1. Synergies are not attained: As from the Microsoft and Nokia case, it might happen
that the synergies that were expected were not attained and then the two companies
get compelled to de-merge.
2. Cultural Differences: The different culture of the two companies may pose
hindrance.
3. Loss of clients and stakeholders: Due to lack of trust and disbelief, the combined
firm might lose its clients and stakeholders hence leading to the decline in its growth.
4. Clashes between employees: It might happen that clashes between the employees of
two firms crop up, employees of one firm refuse to work with the others, get reluctant
to work under the manager who is from the other organisation.
5. Organisation Structure: After the acquisition, there will be only one CEO, one
Chairman, one manager for a project, it will be difficult to decide who will assume the
positions.
6. Decline in stakeholders value: It might happen that there the shareholders values
get declined after the acquisition.

11.

References

http://www.airtel.in/about-bharti/about-bharti-airtel
http://wirelesstelecom.wordpress.com/2013/11/11/swot-analysis-of-indias-largestmobile-telecom-operator-bharti-airtel/
www.ideacellular.com