Bharti-Zain Deal Analysis

The Bharti Zain deal is old news now. A quick look at the Zain September 2009 data nine months of the year only gives us a view of what Bharti is buying.

As you might notice, Nigeria is the bull in the room. Its still not profitable with a loss of $88m on revenues of $986m, and accounts for 1/3rd of Zain Africas revenues. (Zain does not classify Sudan or Morocco as Africa, and is not selling those to Bharti) Yet, Nigeria has hope; Zain has only 25% market share, and the market penetration is just 45% scope to grow. Average Revenue Per User (ARPU) in Africa ranges from $3 to $10, with Nigeria at $7. This compares favourably with India where Airtels ARPU is $5 (Rs. 230).
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The story from Mint is that Bharti is looking to finance the Zain deal from a $7 billion USD loan remaining $2bn will be from Indian rupee loans - at a rate of 300 bps (3.00%) over LIBOR. This is suspect they were offering to pay 320 points for the smaller $3 bn loan for MTN last year; still, LIBOR is at an all time low of about 0.88%.

The 10 year average of LIBOR is 3.75% and we shouldnt expect these low LIBOR rates to last too long. At even 2% of LIBOR and a 300 bps premium and 8% for the Indian bit , Bharti will pay $500m per year in interest. That means they have to improve EBIDTA by $500m just to pay for the deal; currently EBIDTA is $1.3bn, so its got to scale by 40% for Bharti to get a chunk. They can definitely improve some bits tower costs in Africa have been 4x more than India, which can be lowered and internal efficiencies can be improved. The local mafia in Africa will be tougher to handle (they take the lucrative deals and back-peddle commissions) where in India Mittals political connections would have helped in the early stages. Im not taking a short term call on this stock. If anything each person is supposed to make his own decisions; and Ill see what the market price has to say. If this deal is immensely profitable, Bharti should hit new highs; if its not and Africa is a laggard the prices wont move. It isnt a short right now, but it isnt a buy either; Theyre overpaying for the deal but money is cheap nowadays and expensive is more affordable than you think. Its a definite sign of desperation, but I wouldnt write off a juggernaut like Bharti just yet.

About Bharti:Founded in 1976, by Sunil Bharti Mittal, Bharti has grown from being a manufacturer of bicycle parts to one of the largest and most respected business groups in India. With its entrepreneurial spirit and passion to undertake business projects that are transformational in nature, Bharti has created world-class businesses in telecom, financial services, retail, and foods. Bharti started its telecom services business by launching mobile services in Delhi (India) in 1995. Since then there has been no looking back and Bharti Airtel, the groups flagship company, has emerged as one of top telecom companies in the world and is amongst the top five wireless operators in the world. Through its global telecom operations Bharti group operates under the Airtel brand in 19 countries across Asia and Africa India, Sri Lanka, Bangladesh, Seychelles, Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda, and Zambia. In addition, the group also has mobile operations in Jersey, Guernsey. Over the past few years, the group has diversified into emerging business areas in the fast expanding Indian economy. With a vision to build Indias finest conglomerate by 2020 the group has forayed into the retail sector by opening retail stores in multiple formats small and medium - as well establishing large scale cash & carry stores to serve institutional customers and other retailers. The group offers a complete portfolio of financial services life insurance, general insurance and asset management to customers across India. Bharti also serves customers through its fresh and processed foods business. The group has growing interests in other areas such as telecom software, real estate, training and capacity building, and distribution of telecom/IT products. What sets Bharti apart from the rest is its ability to forge strong partnerships. Over the years some of biggest names in international business have partnered Bharti. Currently, Singtel, IBM, Ericsson, Nokia Siemens and Alcatel-Lucent are key partners in telecom. Walmart is Bhartis partner for its cash & carry venture. Axa Group is the partner for the financial service business and Del Monte Pacific for the processed foods division. Bharti strongly believes in giving back to the society and through its philanthropic arm the Bharti Foundation it is reaching out to over 30,000 underprivileged children and youth in India.

Milestone:1976-79

Bharti Enterprises founded by Sunil Bharti Mittal. Starts as a small scale manufacturing unit for bicycle components. Diversifies into production of yarn, stainless steel sheets for surgical utensils.

1980-84

Bharti Overseas Trading Corporation set up. Bharti imports and markets stainless steel products, brass and plastic products, and zip fastners etc. Bharti ties up with Suzuki, Japan to import and distribute portable gensets. By 1984 Bharti is the largest importer of portable gensets in India.

1985-88

Bharti makes it entry into the telecom sector with Bharti Telecom. Enters into a technical tie-up with Siemens AG of Germany and becomes the first company in India to manufacture electronic push button telephones in Gurgaon. Bharti Telecoms Ludhiana factory commences operations for manufacturing push button phones. Bharti also makes an entry into Indias pharma sector with Bharti Healthcare, which manufactures empty hard gelatin capsules.

1989

Bharti ties-up with Takacom Corporation, Japan to become the first company in India to manufacture telephone answering machines.

1990

Bharti ties-up with Lucky Gold Star, South Korea to become the first company in India to manufacture cordless telephones.

1992

Bharti Cellular Ltd. is born. Bharti forms a consortium with SFR-France, Emtel-Mauritius and MSI-UK, to bid for mobile service provider licenses in Indian metros.

1993

Bharti Telecoms Gurgaon factory becomes the first manufacturer of push button phones to be awarded ISO 9002 accreditation. Bharti provides technical assistance to Uganda for manufacture of push button phones.

1994

Bharti wins GSM mobile service provider licence for Delhi NCR. Bharti Telecoms Ludhiana factory gets ISO 9002 accreditation.

1995

Bharti launches Delhis first GSM mobile services under the Airtel brand. Forms consortium with Telecom Italia to bid for cellular and fixed-line services under Bharti Telenet. Bharti joins forces with Siemens to market telephone terminals under SIEMENS and BEETEL brand names. Bharti Tele-Ventures is incorporated.

1996

Airtel launched mobile services in the state of Himachal Pradesh, the first by any private telco. Telecom Italia acquires 20% equity interest in Bharti Tele-Ventures. Bharti Telenet bids for fixed line licence in the state of Madhya Pradesh. Bharti forays into manufacture of HDPE Silicore ducts. Forms a joint venture with Dura-Line Corp, USA.

2002

Bharti goes public, completes Indias first 100% book building issue and gets listed on the National stock Exchange, Bombay Stock Exchange and the Delhi Stock Exchange on February 18, 2002. Bharti launches mobile services in Gujarat, Haryana, Kerala, Madhya Pradesh circle, Maharashtra, Mumbai, Punjab, Tamil Nadu, Uttar Pradesh (West). Bharti enters into a license agreement with the DoT to provide International Long Distance services in India. Becomes Indias first private telecommunications services provider to launch International Long Distance services. Bharti launched fixed-line services in the Delhi, Haryana, Karnataka and Tamil Nadu.

2010

Bharti Airtel acquires 70% stake in Warid Telecom, Bangladesh.

Bharti Airtel enters into a legally binding definitive agreement with Zain Group to acquire Zain Africa.
Bharti Airtel acquires the mobile operations of Zain in 15 African countries. Becomes the fifth largest mobile operator in the world.