India's Bharti Airtel confirmed over the weekend that it is in exclusive discussions until March 25 to acquire Kuwait-based Zain's African unit based on a firm value of $10.7 billion. The deal currently being discussed does not include Zain's operations in Morocco and Sudan and is still subject to due diligence, regulatory approvals and the signing of final transaction documentation.
Bharti will pay $10 billion to Zain on closing and the remaining $700 million one year after closing. There is a break fee of $150 million applicable to both Bharti and Zain.
Bharti has already made two attempts to establish itself in Africa through an acquisition. In May 2008 it made an offer for South African mobile operator MTN Group. The deal was to be effected through a merger, which had a preliminary valuation of up to $60 billion. However, a deal between Bharti and Johannesburg-based MTN could not be concluded at the time. A year later, Bharti and MTN reopened negotiations, this time discussing a shareholding swap. The 2009 deal reached the stage of Bharti securing commitments for $5 billion of financing before it was aborted, reportedly due to concerns raised by South African regulators.
Bharti is keen to diversify internationally as markets in India become saturated and cut-throat competition puts pressure on margins. In January, Bharti bought a 70% stake in Bangladesh's Warid Telecom for $300 million. Warid gave Bharti a presence in all 64 districts of Bangladesh and access to almost 3 million customers. Bharti had already launched mobile services in Sri Lanka last year.
But the scale of the Zain acquisition, which would make Bharti a top 10 global telecom player, is much larger than the steps the Indian firm has taken in its neighbouring countries. If completed, the acquisition will give Bharti a foothold in Zain's key markets of Nigeria, Tanzania, Congo, Kenya and Zambia.
Media has reported that Zain's main Kuwaiti shareholders as well as Singapore Telecom, which has a strategic investment in Bharti, are supportive of the deal.
However, some shareholders are not convinced that Bharti is making the right move and are perhaps concerned about the debt burden the Indian telecom major will have to take on to finance a large acquisition. Bharti's share price lost more than 10% in trading on the National Stock Exchange on Monday and Tuesday. In October last year the share price gained significantly after the MTN deal was aborted, as investors expressed relief that Bharti would not be making a mega-takeover.
The $10.7 billion valuation for Zain represents a firm value-to-Ebitda multiple of 8 times forward earnings, analysts reckon. Analysts were mostly bearish on the deal, with some even downgrading Bharti to a "sell". Among the concerns cited were: the fact that the $10.7 billion valuation, which has been indicated on a preliminary basis, seems stretched; that Africa may not yield the growth that Bharti is seeking -- and indeed which it is currently achieving in India; and that Bharti's balance sheet will be under pressure should the acquisition progress.
Standard Chartered and Barclays Capital, which earlier worked with Bharti on MTN, are advising the Indian company on the Zain deal, including arranging financing. Zain is advised by BNP and UBS.
