Three years ago, when Bharti Airtel decided to pursue growth opportunities in Africa but did not want to adopt a country-by-country approach, Standard Chartered was roped in. Prahlad Shantigram, global head (mergers & acquisitions), Standard Chartered, worked on the twice aborted MTN deal and the Bharti-Zain transaction. In an interview with Sidhartha, he says Bharti has still got to do some work on setting things right. Excerpts:
The Bharti-Zain deal is now done across African markets…
At this point, the definitive agreements between the buyer and seller have been signed. But, there are still external parties, such as regulators, who have to give their stamp of approval. The business is spread over 15 jurisdictions, as you know.
The upside will come from transforming the business from what exists at present to what Bharti wants it to be and driving up the profitability of that business. But, the Zain operations could be the nucleus for Bharti to expand in other African markets.
Is the funding all tied up? How much does Bharti need to invest into the networks to scale them up?
Funding for the deal is tied up. But, Bharti is wary of keeping this level of debt, so I would not be surprised if this debt is replaced by equity. The networks are in a fairly decent shape. It will not require much additional capital expenditure and there is capacity to borrow and fund the capex.
Having worked on the Bharti-MTN deal twice, was there a sense, at any point during the course of the Zain transaction, that you might face similar roadblocks and the deal might be undone?
Roadblocks are part and parcel of any deal. Every deal has roadblocks and every deal has issues that you work through. Every deal can come unstuck at any point of time. In other words, no deal is done until it’s done.
Will the Bharti-Zain deal change the focus and bring Africa more into the picture?
It all depends on what your strategy is, but a lot of companies are looking at Africa. Thematically, for companies that have a dominant Indian market presence and are seeking growth opportunities overseas, it makes more sense to target an overseas market that is relatively underpenetrated compared to, say, Europe. That’s the case with Bharti. There are other Indian companies that are in a similar position, and for them, it makes sense to go to Africa. A lot of other companies are going to Africa for commodities. But, there might be other themes that come into play, such as consolidation or backward or forward integration. If I was a software company, then perhaps, I would not go to Africa
What we were seeing was smaller deals, especially on the outbound front. Now, will we see more Indian companies go out after a brief lull and will the size of outbound deals go up?
There are a bunch of people who had a largish meal about a year ago and they are still digesting it. The guys who did miss that round have an appetite and are on the lookout. But, there are not too many companies that have the appetite and the capability to do multi-billion dollar deals. You will see a lot more activity in the $200 million to $1 billion range.
As a bank, does that mean that you will focus more on the inbound side?
Inbound to some extent, but we do want to do smaller outbound deals. Our strategy is client-led and not just focused on the size of the deal.
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With the developed countries also seeing a revival in the economy, valuations are only going to rise from here. So, isn’t it a good time for Indian companies that do not have the baggage of the past to look at overseas acquisitions now?
Things are looking a bit rosier in the West, but there are enough people who are talking about a chance of a double dip. So, you need to look at it carefully. This is not the time to overpay, assuming a secular three- or five-year growth prospect. You still have to be a bit circumspect. I will be more cautious for higher multiples for the US and European companies relative to something in Asia. It also depends on sectors.
Is there still a bias against Indian companies in a developed market?
There is some nationalism. Since Lehman died, nationalistic tendencies seem to have risen. But, a seller for cash does not necessarily care who the buyer is. There could be issues with perception among employees of the target company. People may not necessarily understand how Indian managements may operate. Overall, I do not believe there is an obvious bias.
On the inbound side, people are talking about valuations being high. Does that deter your foreign clients looking at acquisitions in India?
Valuations could be high because growth prospects are high. Whether or not someone is willing to pay those multiples depends on two things. One, their view on the growth prospects and, second, can they afford to pay? By and large, the argument used to be restricted to the first one. Of late, even the second one has come into play because a lot of these (foreign) companies may not be able to pay high prices because of their home market problems.
What are the sectors that are going to see more activity?
Telecom and pharma are the two sectors. On the industrial front, you might see a lot of multinationals increase their stake in their Indian ventures.
Will telecom remain attractive despite the falling average revenue per user?
My definition of telecom includes not just the operators, it’s also the towers and handsets. What people are betting on is that the next phase will see consolidation.