 "Bharti Airtel's plot veers off script in Africa")
On July 21, in a late night statement, France's Orange and Bharti Airtel International (Netherlands) BV announced that they have entered into an exclusive agreement for a possible acquisition by Orange of Airtel's subsidiaries in Burkina Faso, Chad, Congo Brazzaville and Sierra Leone. However, there is no certainty of any binding agreement as a result of these discussions.
According to people in the know, the company is expecting $1-1.2 billion for the four markets. Analysts have welcomed the development but said that this might just be a precursor for more asset sale in Africa.
Airtel has operations in 17 countries in Africa and the four which are up for sale contributed 15 per cent to its revenue from the continent in 2014-15. These four countries are among the better performing countries in Africa in terms of revenue, and Airtel is among the top two operators in each of these four Francophone markets.
Airtel, which recently became the world's third largest telecom player in terms of subscribers, had bought Kuwait-headquartered Zain Telecom' assets in Africa in 2010 for $10.7 billion, for which it took on debt of around $8.5 billion. The proposed sale to Orange suggests that the plot may have deviated from the script Mittal had in mind when he inked the deal.
While entering Africa, Airtel had targeted revenue of $5 billion (from $3.6 billion at the time of the acquisition in 2010), EBIDTA (earnings before interest, depreciation, taxation, and amortisation) of $2 billion ($ 228 million at the end of December 2010 before the rebranding) and a subscriber base of 100 million (42 million in 2010) by 2013. But these numbers look distant. At the end of March 2015, Airtel had a net loss of $585 million on revenue of $4.4 billion from its African operations, and its subscriber base was 76 million. Airtel has incurred capital expenditure of over $5 billion in Africa but the investment is yet to bear fruit.
This clearly shows how difficult the African market is for Airtel, and the company's management has conceded many times in the past that Africa has turned out to be a bigger challenge than it expected.
A report by UBS says the latest asset-sale proposal (for the four subsidiaries) is positive as Airtel's African business has proven to be a drag operationally. "Its African adventure is not working out, and a likely sale will boost sentiment. It has had a tough time in Africa with performance lagging both on revenue as well as on EBITDA basis. The sale is likely to boost investor sentiment as it provides some clues on the management's intent going forward."
Other analysts too see signals of what could come next in the proposed deal with Orange. "Given that Airtel is planning to exit from some of its relatively better-performing markets, we cannot rule out the possibility of disposing some of weaker operations too," according to a report by BNP Paribas.
Though Airtel insists it is not exiting Africa, its decision to divest tower assets in Africa points towards a different business strategy. Earlier this month, Airtel completed the sale of mobile towers in five countries in Africa for $1.3 billion to cut its huge debt. It is in the process of selling tower assets in six other countries in Africa. All told, it wants to divest 15,000 towers in 13 countries there.
"Airtel is well positioned in the remaining 13 countries (apart from the four that are proposed to be sold) and there is significant upside available. We remain fully committed to our Africa operations and will continue to invest in its growth and to build a profitable business and accordingly have no plan to exit," the company said in a statement.
"These four countries represent a relatively small percentage of our overall Africa business. The proposed transaction along with our recent strategic divestment of towers will help us establish a sharper focus on the remaining countries, significantly reduce the debt, giving a boost to our aim of achieving net profit and free cash flow in Africa at the earliest," it added.
Another report by Bank of America Merill Lynch suggests that operational weakness may reduce Airtel's bargaining power in future deals. "In fact, the operations have deteriorated due to adverse macro conditions in Africa," it adds. "And potential buyers may be interested in cherry picking the more profitable assets, and their preference would be skewed towards Franco markets, rather than Anglo markets or Nigeria."
What went wrong?
Where did Airtel, which has done so well in India, go wrong in Africa? The number of its subscribers, at 76 million, is not small, but the quality of the subscribers is suspect.
Average revenue per user (ARPU) stood at $4.4 for March 2015, against $5.5 at the end of March 2014, a decline of 20 per cent. The voice realisation per minute stood at $2.41 for March 2015, against $3.23 in March 2014, a decline of 25 per cent. The only silver lining is data usage per customer which grew 34 per cent and stood at 130MBs. (Airtel has over 30 million data users.) However, data ARPU declined 5 per cent and stood at $1.3 for the year ended March 2015.
Airtel followed a low tariff strategy in Africa, similar to India, but it met with little success. Some even feel that Airtel overpaid Zain, and is now finding it difficult to sustain operations. Airtel paid Zain $252 per subscriber when the average minutes of use per subscriber in a month was just 100 compared to 350-400 in India.
Back home, the company is gearing up for a 4G battle with the forthcoming launch of Reliance Jio by December this year. Experts say that Airtel will have to invest aggressively as the Reliance Jio launch could be disruptive. Could that mean Airtel will sell assets elsewhere so that it can guard its home turf?