bharti acquires zain

7/21/2019 Bharti Acquires Zain

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AV GhoshGarg Rihana

Group 1SIX SAMURAI

Merger and Acquisition Analysis

ZAIN BHARTI


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Group company of Bharti Enterprises Indias largest telecom service provider

137 million customers across India, Sri

and Bangladesh Valued at US $8.15 billion

Premerger Analysis: Bharti Airt


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Subsidiary of Zain Group (MTN) Valued at US $4.14 billion

Lowest net profit margins in Africa of 5

7/15 loss making units in Africa Lower than 50% penetration rate

Customer base of about 41.9 Million

Premerger Analysis: Zain Afric


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Competitive

Rivalry

Buyer Power

Supplier

Power

Threat ofSubstitution

Threat of

New Entry

Porters Five Forces in the Indian Teleco


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Competitive

Rivalry

Buyer Power

Supplier

Power


Threat of

New Entry


High market concentrationmore thaplayers

ARPU around Rs. 115

Expanding marketing networksemi-

rural High future prospects for all the p Easy regulations on inter and intra circ

High


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Competitive

Rivalry

Buyer Power

Supplier

Power


Threat of

New Entry


Buyers price sensitivity high

Product differentiationhigh Size and concentration of buyers relative to p

Buyers switching cost low

Buyers information high Buyers ability to integrate backward -

High High


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Competitive

Rivalry

Buyer Power

Supplier

Power


Threat of

New Entry


Mobile Tower Companies SIM Card Manufacturers Mobile Ph

Product differentiationlow

Competition between suppliershigh

Size and concentration of buyers relativproductslow

Buyers switching cost low

Buyers ability to integrate forward - low

High High Low


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Competitive

Rivalry

Buyer Power

Supplier

Power


Threat of

New Entry


Emerging substitutes

IP TelephonySkype, Hangout

Instant MessagingGtalk, Yahoo, Facebook

o Buyers Propensity to substituteModerate

o Relative PricesHigh

o Performance of substitutemoderate to hi

High High Low Mod


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Competitive

Rivalry

Buyer Power

Supplier

Power

Threat of

Substitution

Threat of

New Entry


Leasing of towershigh

Declining ARPUlow

Access to Optical Fibre Networklow

Government barriersmoderate

High High Low Mod


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Competitive

Rivalry

Buyer Power

Supplier

Power

Threat of

Substitution

Threat of

New Entry


High Low Mod High

Moderately unattractive Industry quickly reaching its

maturity stage


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Growth Strategies

Intensive Growth Integrative Growth Diversifica

Session 3


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Growth Strategies


Session 3

MarketPenetration

ProductDevelopment

MarketDevelopment

Diversification

Current Products New Products

Current Markets

New Markets


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Growth Strategies


Session 3

MarketPenetration

ProductDevelopment

MarketDevelopment

Diversification

Current Products New Products

Current Markets

New Markets

Af d


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African Opportunities: Expected Sy

Low mobile phone penetration in Africa 8 of 15 countri

operating at sub-35% teledensity

Zain Africasrelatively lower EBITDA margins*

Zainspresence: 15 African countries, overall subscriber base o

Scope to become world's fifth largest wireless company with a

base of around 180 million (131+49)

Zains50% higher average ARPU than BhartisIndia ARPU

*S&Ps credit analyst Mehul Sukkawala

Af O E d S


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High growth African market and Economies of Scale

Lower competitive intensity in Africa

Scope for OpEx rationalisation for Zain

To emulate BhartisIndian minutes factory model by lowering

spur usage and improve market share and profitability

Material synergies arising via OpEx/CapEx efficiencies post inteZain

Global brand image

African Opportunities: Expected Sy

F Aff i h A i i i


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Factors Affecting the Acquisitiession 7

Synergy Modular Sequential Reciprocal

Nature of Resources Hard Soft

Redundant Resources

* Reserves and SurplusRs. 256, 295, 074 (2009)Rs. 346, 523, 215 (2010),

Annual Report

Market Uncertainty Low Medium High

Competition Low Medium High

Low Medium High

A i i i S


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The possible reason why the Bharti man

considered this acquisition can be explainedDifferential Efficiency Theory:

Create Operating synergieseconomies of scalpricing power, higher growth in new markets

Gain Management efficiencies - take over of managed firm

Sunil MittalsEmpire Building Strategy

Acquisition Strategy

Ti li f A i iti


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Timeline of AcquisitionMay 5,

2008

Bhartiannounces its earlydiscussio

ns withMTN

May 24, 2008

Bharti withdraws

from the talksdue to

unacceptabledemands of MTN

May 26, 2008

Rcom entersinto merger

discussionswith MTN

July 2, 2008

Bharti Airtel

again startstalks with

Zain toacquire its

Africanassets

July 19,

2008

RCom andMTN

formallyend talks

Sep 30, 2009

The proposed

transactionbetween Bhartiand MTN called

off again

February 15,

2010

Bharti Airteland Zain

agree to enterinto exclusive

discussionsagain

V l ti


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The paid sum of $10.7Bn was 10 timesthe Enterprise Value to EBITDA

Bharti paid a premium of 40% to Zain even though RoE and RoCE o

Prior acquisition Zain Africa posted a net loss of US$112 million in

September 2009

The deal proved to be expensive because at that time Bharti itself wa

times EV to EBITDA

The deal carried a huge commercial risk because in order to acq

incurred loans worth US$8.3 billion at an interest rate of 195 basis poi

The analysis of this deal from an EV per subscriber basis point of viewto be as expensive. The enterprise value per subscriber worked out t

is comparable to the prices at which most deals have taken place

taken in Spice telecom by Telecom Malaysia worked out to be US$330

Valuations

Structure of De l nd Fin ncin


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This acquisition deal was an all-cash deal, amounting to $10.7

billion:

$7.9Bn was immediately paid by Bharti

Over the next 6 months, $400Mn was paid

$700Mn was paid one year after the acquisition

Debt obligations of $1.7Bn were assumed

For this Leveraged Buyout: Bharti borrowed $7.5Bn from a consortium of banks led by

Standard Chartered Bank and Barclays Bank.

Bharti availed of $1Bn equivalent from SBI Group

Structure of Deal and Financin

Bharti as an Emerging Giant


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Session 11 Bharti as an Emerging Giant

Product Market

*Based on countries of op

Glocal

Local

Bottom

Global

The Change


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The Change

Stock Market Reactions


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On the day of announcement, Bhartisstock fel

3.77 per cent to Rs 257.80 due to: High price of the deal*

Future profitability doubts

Difficult to implement Bhartisvolume based low

model in Africa*

Small individual markets in Africa

*Telecom industry expert Mahesh Uppal

Stock Market Reactions

Control Mechanism of Bhart


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Session 8 Control Mechanism of Bhart

Organization form to control

cross-border operations

Centralized Hub a Global Fram

Implementing parent company strategies

To obtain global scale efficienciesWith knowledge developed and retained

Post Merger Analysis


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Slowdown in the African economy

Fluctuations of exchange rates

Post Merger Analysis

ExternalFirm-

specific

Bharti had to pay taxes on its profit-making

entities and wasnt able to offset the taxes

on its loss-making entities

Higher advertisements led to higher SG&Aexpenses

Forex losses in a few countries and a sharp

mainly caused

Strong growth in 3G and Airtel Mo

Bhartisnet profits declined by 27% from 2009- Declined bottom line at a 5.1% CAGR over


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bharti acquires zain

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