bharti-zain deal ppt


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II IIII V VIIV VIIParties

involved in

transaction

Strategically

Managed

financing

Introduction Case

Facts:

Arguments

In the case

Present

Status

Tax

implications

Why

Netherlands

?

Disadvantag

es

Tax issues in

Uganda

Annual

Financial

Statement

Executive Summary

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Introduction

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1

On February 15, 2010, Bharti Airtel announced that it had entered into

exclusive discussions with Mobile Telecommunications Company KSC

(Zain) for the acquisition of Zain Africa International BV (Zain

Africa) and thereby the entire African operations of Zain, excluding

the operations in Sudan and Morocco.

2

On March 30, 2010, both the companies executed the definitive

agreements at Netherlands marking the transformation of Bharti Airtel

into an emerging-market multinational.

KSC: Kuwaiti Shareholding Company

BV: Besloten Vennootschap (BV) or limited liability private company


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Parties involved in transaction

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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, as we understand, also has licenses to operate telecom

operations in Sri Lanka and Seychelles.

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 in Kuwait and 21 other countries in the Middle East

and North Africa

3

Zain AfricaWholly 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 Zain International BV. The same has been acquired by Bharti

Airtel now through Bharti Airtel Netherlands BV.


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Premium Paid

1 Livemintcited 3 analysts as saying that the deal had a premium of 40%.

2 Fair Value of Deal = $10.7bn/1.4 = $7.64bn

3 Premium = $10.7bn - $7.64bn = $3.06bn


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Strategically Managed Financing

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1

Bharti Airtel has structured this acquisition as an LBO and the loan for financing the

transaction has been availed by the two SPVs created in Netherlands and Singapore

for the purposes of this acquisition. The SPVs will take the borrowings, aggregating to

USD 8.3 billion, on its balance sheet.

2

Bharti Airtel Netherlands BV will avail loan to the tune of USD 5.5 billion and the

Singapore SPV will borrow the rest of the amount.

3

Bharti Airtelsdecision to opt for the SPV route makes a lot of sense since it will not

impact the parents balance sheet in the near term. At the end of the quarter to

December 2009, Bharti Airtelsdebt-equity ratio was 0.4 and this would have shot up

to 1.2, had Bharti Airtel taken the loan on its books.

4 However, that does not absolve Bharti Airtel from overall responsibility of a borrower

since it has provided a guarantee to bankers for the loan that will be in the SPVs

books.


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Name of Bank Amount of Loan (in $bn) [approx. figures.]

Standard Chartered 1.3

SBI 1

Barclays .9ANZ .6

BNP .6

Bank of America - Merrill Lynch .6

Credit Agricole CIB .6

DBS .6

HSBC .6

Bank of TokyoMitsubishi UFJ .6

Sumitomo Mitsui Banking Corp. .6

Total 8

Source: Times of India

Consortium of Banks


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Tax implications : Why Netherlands?

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1Tax exemption on dividend payments and capital gains through the participation

exemption regime.

2Netherlands being a part of the European Union (EU)may also act as a passport for

future investments there.

3Netherlands has also entered into double tax avoidance treaties with many of the

African nations. It is required for developing economies due to political uncertainty.

4 Efficient repatriation of profits from the businesses setup in such jurisdictions.

5No dividend distribution between domestic Netherlands entity (tax free transfer of

profits from Zain Africa to Bharti Airtel )

6

Under the Netherlands-Singapore tax treaty dividends paid by Bharti Airtel. Netherlands

BV to Singapore SPV would not be subject to any taxes in Netherlands since theSingapore SPV holds at least 25% of the share capital of the company declaring the

dividends.

7The dividends received by Singapore SPV would be exempted from corporate taxes in

Singapore.


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Disadvantages

1 Subject to further litigation

2 Transaction cost and currency exposure, though minor anddiversifiable through hedging.

3Lack of profit would limit offset of interest expense as deductions.

India does not provide for group consolidation.


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Impact of Deal on financialstatements of Bharti Airtel


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In Rs Million (Unless mentioned otherwise) 2009 2010


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LITIGATIONS ARISING OUT OFTHE DEAL


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Zain sAfrica Stint

1 Zain entered Africa in 2005 by buying-out Celtel International for $3.4bn.

2 Celtel had presence in 13 African countries with 5mn subscribers.

3The number of subscribers of ZainsAfrica unit increased to 40mn by 2010 through

aggressive network upgrades.

4This African unit (except Morocco and Sudan) was again sold out by Zain to Bharti Airtel

for $10.7bn in 2010.

5 Capital gains made by Zain was to the tune of $7.4bn approx.

(Source: Telecoms.com)


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Econet Wireless v/s Airtel Nigeria

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1 In 2006, Celtel bought a 65% stake in Nigeria telco Vmobile.

2 Econet Wireless held a 5% stake in V mobile.

3Vmobile was indirectly acquired by Zain through its Celtel buy-out (it became Zain

Nigeria).

4 Zain Africa (including Zain Nigeria) was in turn sold to Bharti Airtel in 2010.

5Econet had claimed a first right of refusal on its shares in V mobile (Zain Nigeria, now

Airtel Nigeria) in the Celtel deal.


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Econet v/s BhartiArbitration

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1 A Nigeria court ruled in Feb 2014 that Econet is a bona fide shareholder in Airtel Nigeria.

2 Econet sought $3bn in damages and compensation.

3 Bharti plans to appeal the ruling.

4 Bharti stated that the ruling did not deal with the quantum of damages.

5 The case is sub-judice in the Supreme Court of Nigeria.

(Source: Financial Express)


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ShareholdersRight of First Refusal

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1 Usually, there is no restriction on shareholders transferring their shares.

2However, existing shareholders may want the power to decide who becomes a

shareholder.

3

To ensure that, a provision may be included in the Articles of Association stating that

shareholders who want to transfer shares must first offer the shares to the othershareholders at a fair value.

4 This gives existing shareholders a safeguard against takeovers.

(Source: Translegal.com)


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Econet Saga: Chronology of Events

Econet Wireless Nigeria (EWN) was founded in 2001 and successfullybid for a mobile telecoms license in Nigeria.

EWN was owned by many Nigerian players along with the company inquestion hereEconet Wireless Limited (EWL).

EWL held a 5% stake in EWN and had also won the managementcontract for the company.

Management Contract: Outsourcing of operational control of acompany in return for a fee.

In 2003, South African company Vodacom (major shareholdersVodafone and Telkom), sought to buy majority stake in EWN for $150equity and $100mn loan.


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Econet Saga: Chronology of Events (Cont.)

EWL opposed the move citing that they had a right to first refusal to asale of shares, following which their shares were reportedly cancelledfrom EWN by a majority of shareholders.

Subsequently, Vodacom dropped the bid, but signed a managementcontract with EWN. EWNs name was changed to Vmobile.

EWL filed a case against both Vodacom and Vmobile.

Two months later, Vodacom ended the management contract due toa corruption scandal. They exited Nigeria.

A few top executives from Vodacom Nigeria switched to Vmobile, andcontinued to run it under the same name.

In 2006, Celtel acquired a 65% controlling stake in Vmobile for $1bn.


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Courts Ruling


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Tax dispute in Uganda

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1 Uganda Revenue Authority slapped a $85mn capital gains tax on Zain

2 The High Court ruled in favour of the telecom company. URA has appealed.

3 Zain argued that a company registered in Ned will not attract CG tax in Uganda.

4URA claims that sale of a company whose subsidiary does business in Uganda will attract

CG tax.


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Case Facts

Zain Uganda has 1,687,961 subscribers out of 41 million Zain Africa

subscribers

In percentage terms: 1,687,961/ 41mn= 4.117%

Total capital gain: 7.339 billion

Capital gain pertaining to Uganda unit: (4.117/100)* 7.339bn= $302 mn

(Note 1: The amounts are approximations)

(Note 2: It is unclear why indexation was not applied while calculating CG)

(Note 3: CG has been charged on proportion of subscribers basis instead of

ARPU or actual financials of the Uganda unit.)

Ownership maze: Zain International BV > Zain Africa BV (sold to Airtel) > Celtel

Uganda Holding BV > Celtel Uganda Ltd (99.99% ownership).

Calculation of Capital Gains Tax:

Ownership Structure:


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Zain International BV

Zain Africa BV

Celtel Uganda Holding BV

Celtel Uganda Ltd.

Netherlands-

registered

Uganda-

registered

Bharti Airtel

Netherlands

BV


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PepsiCo USA

PepsiCo Netherlands

India

Coca Cola

USA

UK200+

Countries

An Illustration

Should PepsiCo pay proportional capital gains tax in all the

countries where it indirectly owns businesses?


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Arguments in the case: URAs fumble

1

Court ruled that Celtel Ugandasshares were not transferred, or any of

its property disposed. (It was the parent company by two degrees

which was sold.)

2

URA modified its case from assessment of tax on sale of shares to

disposal of interest in immovable property. (By interest, we mean partyinterested in Celtel Uganda changed.)

3Court pointed out URAsinability to specify the head of tax which was

under discussion.

4 URA replied by asking the Court to look at substanceover form.


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Arguments: Double Taxation Treaty

1URA said that a deal in which total constituted more than 50%

immovable assets, it would trigger local tax laws.

2

Zain is expected to invoke the double-taxation agreement in force

between Uganda and Ned.

3Under the treaty, at least half of individuals who own shares must be

residents in either countries.

4Owners of Zain International BV do not meet the residency test and

may not benefit from the treaty.


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Present Status

1

A favourable ruling for URA may trigger similar cases in the other 14

African countriesnone of whom have been able to collect capital

gains tax.

2

Interestingly, in another related case, URA is in negotiations with Airtel

Uganda over its purchase of Warid Telecoms unit in Uganda.

3 The case is still sub-judice and is in its appeal stage.


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Thank you !!!

8/30/2014

bharti-zain deal ppt

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