Bharti Airtel-Zain Merger

presented by: -

Deepika Jandial(1)Disha Gupta(17)Robin Singh(11)Vikas Dhar (12)Aakashdeep Singh(36)

BHARTI ZAIN

INTRODUCTION TO BHARTIAirtel is India’s biggest telecom company.39,412 cr. Rs revenues per annum.Bharti reach the 100 million subscriber mark first.The first India's home-grown telcos to go global.Currently working in 5 countries.Last month Bharti bought 70% stakes in Bangladesh's

Warid telecom.

INTRODUCTION TO ZAINKuwait- based telecom company.Market leader in 12 country out of 15.2923 mn. $ revenues per annum.Currently working in 24 nations.Zain’s overall revenues rose 14% in last quarter.

STATISTICAL COMPARISONBharti Zain

Total revenues 6.32 billion $ 6.17 billion $

Net income 1.67 million $ - 37million $

Customer base 125.30 million 71.80 million

Global presence 5 countries 24 countries

Structure of Acquisition

* The fifteen jurisdictions are: 1) Burkina Faso, 2) Chad, 3) Republic of the Congo, 4) Democratic Republic of the Congo, 5) Gabon, 6) Ghana, 7) Kenya, 8) Malawi, 9) Madagascar, 10) Niger, 11) Nigeria, 12) Sierra Leone, 13) Tanzania, 14) Uganda and 15) Zambia.

Transaction Details of Bharti Airtel-ZainAcquirer Bharti Airtel Limited

Seller Mobile Telecommunications Company KSC

Target Zain Africa International BV

Acquisition Bharti Airtel Limited indirectly acquired 100% of Zain Africa International BV and its business operations in Africa from Zain under a privately negotiated agreement.

Mode of acquisition

Security (Share) Sale

Consideration USD 10.7 billion

Mode of Payment All cash deal Bharti Airtel to pay: a) USD 8.3 billion within three months from the date of closing; b) USD 700 million after one year from the date of closing; and c) USD 1.7 billion assumed as debt on the books of Zain.

Funding 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 from SBI Group.

Overseas Direct Investment

Any Indian company if wants to acquire or invest in foreign company , it must

comply with the FEMA ((Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”).

It means under ODI rgulations,an Indian company is permitted to invest in a

joint venture/wholly owned subsidiary up to 400% of the net worth of the Indian company in the form of equity/loan or guarantee without seeking prior approval of RBI. Regulation 13 of the ODI Regulations permits a wholly owned

subsidiary set up by an Indian company to set up a step down subsidiary

In case of Bharti-Zain deal, Bharti created two SPV`s, one in Netherlands & one in Singapore

Guarantees Regulations

In means , a company in India promoting or setting up joint venture or subsidiary company has to give guarantee on behalf of the subsidiary company to the bankers for the loan.

In this case, Bharti has to provide corporate guarantee on behalf of its SPV`s i.e. both Singapore & Netherlands SPV`s to bank for the loans for financing the transactions.

Hence it attracts the regulation 5 (b) ) of Foreign Exchange Management (Guarantees) Regulations, 2000 (“Guarantees Regulations”)

Competition Commission of India/Anti Trust Laws

Competition Act 2002 enacted to replace Monopolies & Restrictive Trade Practices Act, 1969

It was enacted to provide institutional support to healthy and fair competition.

The Competition Act seeks to: -Prohibit anti-competitive agreements including cartels; -Prohibit abuse of dominant position; and -Regulate combinations (mergers and amalgamations, and acquisitions). In the current case: - Bharti-Zain has to give details of the acquisition to CCI. - Upon receipt of such notifications,CCI will conduct investigation on the basis of criterion mentioned above. -CCI shall give its ruling within a maximum period of 210 days.

Nigerian Hurdle

Econet Wireless International: A major telecom player in Nigeria, wanted to use its pre-emption rights of “right of first refusal” in respect of shares had been breached when Econet"s predominantly Nigerian partners decided to sell their shares in Vee Networks (or V-Mobile) to Zain in 2006.

Econet has also applied for interim measures to prevent Zain from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until the matter is resolved.

Till the time the ownership issue over Zain Nigeria is resolved, Zain faces a hurdle in transferring its Nigerian assets to Bharti Airtel.

  

Congo Controversy

The Government of Republic of Congo said that they had not been informed of Bharti Airtel’s deal with Zain and that the deal was a “clear violation of the law in our country”.

The Government also claimed that the deal is in contravention to

Zain`s local mobile license .

Until it would be difficult for the Bharti to get all regulatory

approval.

Gabon Glitch

In this case, the Government of Gabon raised a regulatory objection to the deal alleging that Zain had not complied with certain telecom regulations in Gabon.

The Gabonese Government has disapproved the sale of Zain`s Gabonese assets & reserves the right to take all necessary measures.

But off late, Government of Gabon gave its approval to the sale of Zain’s assets in Gabon to Bharti.

THE DEALAirtel has bid for zain telecom for 10.7 billion

$.Pure cash deal.No stack or share deal or exchange.

Reasons for that dealCompetition in India. (13 operator each of 22 circles)Cut call rates from Rs 16.80 pm to .50 pm.Huge decrease in Av. Revenue per user. From 500 Rs to

145 Rs today. In last five years.Telecom density in India is almost 47.89 %Expected 80% in 2015.

ADVANTAGE POINTA) ZAIN from BHARTI Bharti may bring in tariff schemes for a low ARPU but

high volume market. Zain can also benefit from Bharti ‘s efficiency in

managing network operations.

B) BHARTI from ZAIN Bharti can understand African market better. It can learn a lot from zain expertise in data service such

as 3G and 3.5G

Banks to earn $100 million from Bharti-Zain deal

Banks will earn $75-100 million in fees from the Bharti-Zain deal, which could be 10-15% of the total fees they expect to rake in this year. The deal, involving an enterprise value of $10.7 billion, is the second-largest takeover by an Indian corporate, post the Tata-Corus transaction. 

Bharti is paying around 80 basis points, or 0.8%, for the dollar funding of $7.5 billion, which will generate $60 million for banks, according to bankers who did not want to be quoted. The dollar loan has been finely priced at 174-176 bps above Libor, with the total cost for the company, including fees to banks, coming at a spread of 195 basis points — better than the all in cost of 200 bps, which bankers were expecting.  Though Bharti got one of the best rates possible, some banks may lose money in the transaction. But the deal would help Standard Chartered Bank and Barclays to maintain their second and first ranking in the Bloom

These banks, mostly international, will earn fees through a mix of financing, advisory and forex deals. berg league table.

SWOT Analysis Strength:

Post acquisition, Bharti Airtel will become fifth largest service provider in terms of the number of subscribers.

The deal would give Bharti 42 million subscribers in 15 African countries, which have a combined estimated annual revenue of $3.6 billion

Bharti, largest telecom player in India, can replicate the success of India in Africa

Strategic Alliance with other stake holders, including Nokia, SingTel & Sony Ericson  

Weakness Bharti has paid a heavy price for the deal

Zain Africa has made a net loss of USD 112 million in the nine months to September 2009. Seven of Zain’s African units are loss-making, including its highest revenue earner, the Nigerian arm, Zain Nigeria.

The deal is highly volatile and carries huge commercial risk for Bharti Airtel

The loan would be a drag on Bharti Airtel's earnings with no immediate returns expected from the loss-making target.

Opportunity

Telecom penetration in African countries varies from 37 per cent to 65 per cent. There are few markets with penetration less than 40 percent

The African market is homologous to Indian market in term of its structural similarities.

Monthly ARPU on the Continent averages USD 7.5, which is higher than India’s ARPU of USD 5

Africa is too good an opportunity for Bharti Airtel to experiment the model that it has mastered in India, particularly its rural strategy.

Threat

Zain Africa is in trouble and financial paralysis is looming over its head

Bharti Airtel will have to put in a lot of effort to align the varied cultures; with 15 countries to tackle it definitely will be a nightmare.

Bharti-Zain will be getting a tough fight with rival like MTN and China Mobile

There are greater political and economics risks in Africa .

Most of the countries are political unstable and operation are still loss making.

CONCLUSION Bharti Airtel cross border acquisition of Zain Africa operations has made it one of

the top global players in the telecom industry.

There is huge potential in Africa and if Bharti is able to leverage it with its management team capability and experience, to replicate its successful business model in Africa, the deal will be able to create tremendous shareholder value in the long run. Bharti has already declared to outsource core customer service operation such as call centres and back office functions related to its mobile networks across Africa to the three firms IBM, Tech Mahindra and . This is in accordance with its Outsourcing model it practices in India.

Cross-border acquisition was also the best strategy for Bharti to counter the hyper competition India. It also provides it the much needed diversification in revenues.

The funding of the deal is strategically done through an LBO providing Bharti Airtel the levy to consolidate its operations in rural India and in the 3G space.

Though the potential is huge the road ahead is not easy, Bharti will have to turn around Zain s current loss making operations and grow at the rate of 22 to 25% to justify the valuation behind the deal. Given the cultural differences, challenging macro and business environment the turnaround this will not be easy for the Bharti Airtel management.

Questions???