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Student/s Name: SWETA SURANA Batch: B Module Name: Corporate Finance Marks Allocation: 25 Assignment No: MBAFM/CF/001 Assignment

Scope: Individual

Roll No/s:11130

Assignment Duration (in hrs): 8

Assignment Description & prospect:


Mr. Sunil Bharti Mittal had a cherished dream that of transforming itself into an emerging- market multinational. On 8, June 2010, Bharti Airtel, in the largest ever telecom takeover by an Indian firm completed a deal to buy Kuwait-based Zain Telecom's businesses in 15 African countries for $10.7 billion. However Zain will continue to hold its operation in Morocco and Sudan. In his meeting with media Sunil Mittal said, "We are delighted at the closure of this transformational deal for India and Bharti Airtel. The transaction is the largest ever cross-border deal in an emerging market and will result in combined revenues of about $13 billion. Zains business in Africa has lined a path for Bharti Airtel to enter into African markets. With this acquisition, it makes Bharti Airtel to take fifth position in the world for its operating system in mobile industry. The total cost of the deal is 10.7 billion dollars, where 8.3 billion dollars will be paid in cash towards equity right after takeover, 1.7 billion dollars is the debt takeover from Zain Africa & 700 million dollars will be paid one year after the deal closure. The deal ran into hurdles after the government of the central African nation of Gabon had come out against the deal, but later approved the sale. The government of Congo Republic had also said Bharti-Zain deal broke law. There was also a dispute about minority ownership of Zain's operations in Nigeria, the biggest market in the deal. Minority shareholder Econet was seeking to overturn a 2006 deal by Zain - then called Celtel - in which it bought a majority stake in Nigerian mobile operator Vee Networks Ltd, now Zain Nigeria. The Nigeria ownership dispute has since then been settled. After the deal, Bharti now has combined sales of 13 billion dollars and clients in 15 African

Acquirer Seller Target Acquisition Mode of acquisition Consideration Mode of Payment

Bharti Airtel Limited Mobile Telecommunications Company KSC Zain Africa International BV Bharti Airtel Limited indirectly acquired 100% of Zain Africa International BV and its business operations in Africa from Zain under a privately negotiated agreement. Security (Share) Sale USD 10.7 billion All cash deal Bharti Airtel to pay: a) USD 8.3 billion within three months from the date of closing;

Funding

b) USD 700 million after one year from the date of closing; and Leveraged Buy-out a) Bharti Airtel to borrow USD 7.5 billion from a consortium of banks led by Standard Chartered Bank and Barclays Bank. b) Bharti Airtel to avail of a rupee loan of USD 1 billion equivalent

Report & Analysis:


1

1. Bharti Airtel Indias first private telecom services provider with a footprint in all the 23 telecom circles. Widely regarded as Indias largest telecom service provider in terms of annual revenues, Bharti Airtel provides mobile & fixed wireless services using GSM technology across all the telecom circles along with broadband & telephone services in 94 cities. All these services are provided under the Airtel brand. Bharti Airtel, as we understand, also has licenses to operate telecom operations in Sri Lanka and Seychelles. In January 2010, it acquired Warid Telecom, a 3-million-subscriber company based in Dhaka, Bangladesh for USD 300million. 2. Zain Zain was established in 1983 in Kuwait as the region's first mobile operator. It is a public company engaged, together with its subsidiaries, in the provision of mobile telecommunication and data services, including operation, purchase, delivery, installation, management and maintenance of mobile telephones and paging systems in Kuwait and 21 other countries in the Middle East and North Africa. Its wholly owned subsidiaries include; Mobile Telecommunications Company Lebanon (MTC) SARL, Lebanon, and Sudanese Mobile Telephone (Zain) Company Limited, Sudan. 3. ZainAfrica Wholly owned subsidiary of Zain, incorporated in Netherlands and held the African operations of Zain. The company was originally named Celtel which was acquired by Zain in 2005 and renamed as ZainInternational BV. The same has been acquired by Bharti Airtel now through Bharti Airtel Netherlands BV.

DATE
May 5, 2008 May 24, 2008

CHRONOLOGY OF KEY EVENTS

Event
Bharti Airtel announces that it has entered into exploratory discussions with the MTN Group. Bharti Airtel withdraws from the talks, following the MTN board presenting a structure completely unacceptable to Bharti Airtel. Bharti Airtel sees this new proposal as a convoluted way of getting indirect control of the proposed combined entity, which would have made Bharti Airtel a subsidiary of MTN. Reliance Communications (RCom) enters into exclusive merger discussions with MTN. Financial Express reports that Bharti Airtel is in talks with Zain for acquisition of its African assets. News denied by Bharti Airtel spokesperson. RCom and MTN formally end talks. Bharti Airtel makes a media statement announcing that it has entered into talks with MTN for a strategic merger with exclusivity period till July 31, 2009. The proposed transaction between Bharti Airtel and MTN called off for the second time in two years on the expiry of the exclusivity period. Bharti Airtel and Zain agree to enter into exclusive discussions till March 25, 2010 for the acquisition of Zain Africa for an enterprise value of USD 10.7 billion. Media Statement from Bharti Airtel, regarding the proposed commercials of the deal. The total agreed enterprise value of USD 10.7 billion proposed to be met as payout of around USD 9 billion and for the remaining USD 1.7 billion, Bharti Airtel will assume debt on the books of Zain.

May 26, 2008 July 2, 2008 July 19, 2008 May 25, 2009 September 30, 2009 February 15, 2010 February 16, 2010

USD 700 million out of the payable of USD 9 billion will be paid by Bharti Airtel after one year from closing. Also, parties agreed to a break-fee of USD 150 million payable by either party. March 21, 2010 Bharti Airtel announces that the entire financing requirement of USD 8.3 billion for the proposed acquisition of Zain Africa has been successfully tied-up. The financing was oversubscribed, with major international banks committing to underwrite the total amount. Dollar loan: USD 7.5 billion by a consortium of banks led by Standard Chartered Bank and Barclays Bank. Rupee loan: Upto USD 1 billion equivalent INR by SBI Group. March 25, 2010 Bharti Airtel announces that the due diligence for acquisition of Zain Africa was completed and the definitive agreements were to be finalized soon. Upon signing the

definitive agreements, the parties would move towards obtaining required approvals.

March 30, 2010

Parties sign the definitive agreements in Netherlands.

Key Positives about the deal 6 out of 15 countries covered under the deal have penetration levels of less than 25%. Competition levels are lower than that in India with average 4.5 Bharti Airtel per country. Average per capita income USD 1075 for 15 countries, slightly higher than USD 1070 for India.
Countries in which Zain operates have average mobile penetration of 31% (excluding two countries with penetration levels of 75% and more) vs. close to 48% in India. Bharti could replicate its successful network outsourcing strategy in Africa and cut costs vigorously. EBITDA of Zain at 32% could inch up to Bhartis levels of 40% once Bharti gets involved in network and other costs management. Zain's subscriber base grew 13% year on year at the end of Sept 2009. Bharti has the potential to cut down call charges and expand the African subscriber base by introducing its Indian model. Call rates in the continent are nearly double the rates in India. Africa is characterised by low minutes of usage currently; Bharti is likely to transport its low-cost model to Africa which has the potential to improve usage significantly. There is room for improvement in Zains processes which could make it a turnaround candidate subject to improvement in efficiencies and potential management change

Key Concerns Zain Africa is emerging out of a series of challenges, including depreciating African
currencies (impacting its revenues and PAT for year 09) and poor management. Operating expenses could be higher for Zain as Bharti Airtel has to cover an entire continent, ten times the size of India, to cover as many people under its network as in India. Managing African assets is a very challenging job, due to corruption, bureaucracy, and crime. Notably, Zain acquired Celtel, Netherlands in April 2005 for US$3.4bn, giving it presence in 13 African countries. Later, Zain made several more acquisitions in Africa, including Nigeria. In August 2008, the Group rebranded all its 14 African country operations to Zain and also launched Ghana operation in late 2008. Bharti may need to make additional investments to upgrade/expand networks, and license renewals are due in five countries by 2013, thus increasing the acquisition cost. At least seven countries in which Zain operates are geo-politically sensitive. Congo (Democratic Republic), Chad, Kenya, Niger and Zambia are classified as very high risk on the Economist Intelligence Units (EIU) Political Instability Index. For year 09, reported revenues declined 12% y-o-y. However, on constant currencies, revenues from the African business grew 9%. Post September2009, most currencies have continued to depreciate albeit at slower pace. We believe currency risks and issues on repatriation of money from African markets may aggravate investor concerns. Significant management effort and capital will need to be devoted to turn Africa PAT- positive when India itself is under pressure.

Financial Performance of Bharti Airtel

FINANCIAL PERFORMANCE

2009

2010

2011
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EPS LONG TERM DEBT EQUITY RATIO PBDIT INTEREST Reported Net Profit

42.38 0.41 21,693.5 0 631.49 8044

24.66 0.24 18,171.5 6 769.70 9366

18.89 1.16 21,693.5 0 2,534.90 7173

In 2010 and 2011 the stock of Bharti Airtel was performing good showing an upward trend as we have seen below but the earning per share was reduced by 40% in 2010 and 24% in 2011 also the net profit of the company decreased in 2011 as the company has borrowed large sum of money from several banks to acquire Zain in 2010 therefore in 2011 it has to pay very large sum as interest to this banks which in turn reduces the net profit of the company. As soon as the acquisition deal was announced in 8 June 2010, the share prices of Bharti Airtel shoot up from 263 and thereafter it was continuously showing an upward trend. In July 2011 after one year of the deal the share price was as high as 437 Rs. In august 2011 the share price was 441which was 52 week high.

Inference
The company have taken huge debt of 8.3$ billion from banks like Standard Charted Bank, Barclays Bank and SBI group. This has increased its Long Term Debt Equity Ratio from 0.24 to 1.16.