Problems in the Indian telecom sector

• Slow reform process.

• Low penetration.

• Service providers bears huge initial cost to make inroads and achieving break-even is difficult.

• Lack of infrastructure in semi-rural and rural areas, which makes it difficult to make inroads into this market segment as service providers have to incur a huge initial fixed cost.

• Huge initial investments.

• Limited spectrum availability and interconnection charges between the private and state operators.

All about Bharti-Airtel

Founder, Chairman and Group CEO : Sunil Bharti Mittal

Established : July 07, 1995, as a Public Limited Company

Business description:• Provides GSM mobile services in all the 22 telecom circles in India, Srilanka,

Bangladesh and now in 15 Countries of Africa.• Provides telemedia services (fixed line and broadband services through DSL) in 88

cities in India.• Also offer suite of Enterprise solutions, DTH and IPTV Services

Subscriber base & Market share

2004 2005 2006 2007 2008 20090

20000

40000

60000

80000

100000

120000

714711842

20926

39013

64268

96649

Total Customer base(000's)

Financial performance

2004-05 2005-06 2006-07 2007-08 2008-090

50000100000150000200000250000300000350000400000 373521

Revenues(Rs.mn)

2004-05 2005-06 2006-07 2007-08 2008-0932.00%

34.00%

36.00%

38.00%

40.00%

42.00%

44.00%40.90%

EBIDTA margin(%)

2004-05 2005-06 2006-07 2007-08 2008-090.00%

5.00%

10.00%

15.00%

20.00%

25.00%21.00%

PAT margin(%)

2004-05 2005-06 2006-07 2007-08 2008-090.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00% 30.70%

ROCE (%)

SWOT analysis

Strengths: Weakness:

Opportunities:Threats:

• Presence of Close and strong competitors•Increasing competition from GSM & CDMA•Potential entry of Global players.

•Till Recently did not own mobile tower.•Failure of MTN deal will Signal no real market investment.•Data services not delivering on its high expectation

•Over 141 mn. subscribers in India in Aug.2010•Over 180 mn. subscribers globally.•Presence in 18 countries.

• Strategic partnership with Black Berry•Focus on expanding business in rural areas.•Tie up with other companies.

BHARTI ZAIN

INTRODUCTION TO ZAIN

• Kuwait- 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

Arpu.** 3.14 $ 3.00 $

BRIEF DETAILS OF THE DEALAcquirer Bharti Airtel Limited

Seller Mobile Telecommunications Company KSC

Target Zain Africa International BV

Acquisition 100% Indirect Acquisition in Zain International BV from Zain

Mode of Acquisition

Stake Sale

Date of Closure 8th June 2010

Consideration USD 10.7 billion

Mode of Payment

1. USD 7.9 billion2. USD 400 million upon achievements of certain milestones3. USD 700 million after one year from the date of closing the deal4. USD 1.7 billion assumed as debt on the books of Zain as on

31.12.2010

Funding Leveraged Buy-out1. USD 7.5 billion from a consortium of banks led by Standard

Chartered Bank and Barclays Bank. 2. Rupee loan of USD 1 billion equivalent from SBI Group.

Reasons for that deal

• Competition 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.

STRATEGIC REASONS FOR THE DEAL-BHARTI AIRTEL DEMISTIFIED ON COMPARISON

INDIA-BHARTI AIRTEL AFRICA-ZAIN

MOBILE PENETRATION

HIGH-53% LOW- 32%

AVERAGE REVENUE PER USER (ARPU)

1. All India ARPU is 4.5 USD 2. Falling Average per user (ARPU) 3. Per second biling + rural customers = Reduced Tariffs

1. All Africa ARPU is 7.5 USD2. Market in Africa similar to what Indian

telecom market was 5 years back

MINUTES OF USAGE (MOU)

Average Minutes of usage is 450minutes, Scope only in few rural areas

Scope across 15 countries, minutes of usage is 110 minutes

COMPETITION-NO OF PLAYERS

13 players on an average 3-4 players on an average

OTHER REASONS

1. Market leader in 11 out of 15 nations2. Possible of more industry entrants low- balance spectrum available is low

NEED FOR THE DEAL

Saturation in the Indian Market Untapped African Market against this Heated Competition at home All time low tariff rates driving subscriber growth thus low income

earning subscribers Cost of Setting up Network is high in India Pressure on the margins with costs going up Long time ambitions for the African market-MTN acquisition talks failed

twice Bharti Airtel to become 5th largest telecom company in the world 180 million customers and 18 countries

ROADBLOCK AHEAD FOR BHARTI

• Zain’s caltel Nigeria unit is muddled in an ownership dispute with Econet wireless holdings.

• Bharti would need clearance from telecom regulators in each of 15 nations.

• Bharti has to raise twice the debt it was to raise from MTN. It also needs to convince the lender about the viability of the zain deal

ADVANTAGE POINT

A) 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

WHY ZAIN SOLD AFRICAN OPERATIONS TO BHARTI AIRTEL

Focus on Kuwait Operations

Company is making losses in many countries net profit including all the countries is in negative.

Unlocking the value in the Zain African Assets and improve the groups Revenues

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.

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.

Purchase consideration for the deal

USD 10.7 billion

USD 8.3 biilion USD 700 million after a year

USD 1.7 billion of Zain Debt as on

31.12.2009

FUNDING OF THE DEAL

USD 7.9 billion

USD 400 million

TRANSACTION FUNDING

Bharti Airtel has availed a loan up to USD 8.5 billions from various bankers

the break up of that is given below

USD 8.5 Billions

Consortium of 11 banks led by Standard Chartered and

BarclaysSBI rupee loan of 1$ billion

USD 7.5 billion Tenure is 6 years First payment 2.5 years

after rollout of operations

CREATION OF SPECIAL PURPOSE VEHICLE FOR BALANCE SHEET FENCING

BHARTI AIRTEL

Singapore SPVBharti Airtel

Netherland SPV

Zain Africa International BV

USD 2.8

billion

USD 5.5

billion

15 AFRICAN COUNTRIES

PROBLEMS AND ISSUES

NIGERIAN TROUBLE

CONGO CONTROVERSY

1. Republic of Congo refused to give the approvals 2. Allegations of Zain had not informed it about the deal

GABON GLITCH

1. Allegations that Zain had not compiled with certain telecom regulations in Gabon

2. Disapproval of sale of Zain Assets to Bharti Airtel

3. Later it approved the deal

1. Broad Communications Ltd the single largest shareholder in Zain Nigeria also objected

2. Econet Wireless Pvt ltd raised the issue of ownership of Zain Nigeria

International reports note that Bharti has already secured indemnities and warrants to prevent it from any potential legal ownership disputes.

BHARTI AIRTEL BEFORE AND AFTER THE DEAL

Parameters Bharti Airtel Zain (Africa) Combined Estimated FY11E

Revenues 8.03 billion USD

3.667 billion USD

11.697 billion USD

12.01 billion USD

PAT 1.84 billion USD

-0.1 billion USD 1.83 billion USD

1.77 billion USD

EBITDA 3.4 billion USD

1.1 billion USD 4.5 billion USD

5.5 billion USD

EBITDA Margins % 40.5 % 29.6% N.A 38.1%

Source: Prabhudas Lilladher Pvt Ltd

Why was the acquisition routed through Netherlands?

• Netherlands, with its efficient tax regime coupled with an investor friendly business environment, has emerged as a preferred offshore jurisdiction in the world for setting up of holding companies. Netherlands also provides various incentives under its tax regime including tax exemption on dividend payments and capital gains through the participation exemption regime. Netherlands being a part of the European Union (“EU”) may also act as a passport for future investments in other European (and non-European) jurisdictions and has access to the EU directives with respect to free movement of people, goods, services, and capital. Netherlands has also entered into double tax avoidance treaties with many of the African nations wherein Zain has subsidiaries and assets and to that extent it would provide for an efficient repatriation of profits from the businesses setup in such jurisdictions.

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• Netherlands also boasts one of the widest networks of bilateral investment treaties76 and has entered into close to 100 such treaties with various jurisdictions.77 Since most African nations are evolving economies and to that extent may face certain political uncertainties, bilateral investment treaties provide much required safety to a foreign investor with respect to its investments. It would be interesting to note that more than half the jurisdictions in which Zain Africa has subsidiaries have entered into a bilateral investment treaty with Netherlands.