Bharti’s pride or pain?
The Zain buy is not coming cheap, believe most analysts. This is because Bharti is paying $255 per subscriber for Zain’s 42 million subscribers while a bigger, more profitable African telecom brand such as MTN with 116 million subscribers is available at similar valuations. Even for Bharti which has 124 million subscribers and is itself available at $183 a subscriber. Even on parameters such as EV/Ebidta, Zain Africa was valued at 11 times whereas, MTN and Bharti are available for under 6 times and 7.7 times, respectively. Why did Bharti pay a premium for the deal and is it justified?
Grabbing the opportunity
Bharti has been scouting for telecom assets for the last couple of years but has not been too successful, managing to bag only Bangladesh so far. Its other global assets include Sri Lanka, Seychelles, Jersey and Guernsey (Channel Islands), and are not much to write home about. With developed countries being saturated, emerging markets were the only geographies Bharti could look at and this meant South America, West Asia, South East Asia and Africa. While valuations in West Asian markets are expensive, parts of South East Asia saturated and not many options in South America, Africa became a logical choice. Within the geography, after the failure of talks with MTN, Zain was the only large asset available for Bharti.
With Zain, Bharti Airtel gets 100 per cent ownership, for 15 countries from Sierra Leone in the West to Kenya in East. With penetration levels in the higher 30s, average revenues per user 60 per cent higher than in India, minutes of use at 110 minutes per subscriber per month as compared to India’s 440 minutes, Zain’s leadership in 10 of the 15 markets and much lesser competition than most other markets, attractiveness of the Zain’s African assets was obvious. While the deal looks expensive, it probably fits into Bharti’s strategic, long-term goal of creating diversified, cash generating telecom assets across the world.
| PAYING A PREMIUM FOR OPPORTUNITY | ||
| in $ billion | Bharti Airtel | Zain Africa |
| Sales* | 6.21 | 2.70 |
| Ebdita* | 2.56 | 0.90 |
| Net profit* | 1.48 | -0.11 |
| Subscribers (mn) | 124.60 | 42.00 |
| P/E (x) | 11.90 | ---- |
| EV/Ebidta (x) | 7.70 | 11.00 |
| EV/Sales (x) | 3.20 | 3.60 |
| EV/subscriber (x) | 183.00 | 255.00 |
| 9MFY10 figures for Bharti, 9MCY09 figures for Zain Valuations are based on FY10 estimated numbers Source: Company, analysts estimates | ||
Tackling new markets
For Bharti, which is the leader at home controlling just under a quarter of the Indian market, there are no major triggers in the short term. With urban markets saturated, price war likely to turn worse with the launch of mobile telephony services by new players recently and 3G growth likely to happen at a slow pace, there are few near-term upsides. Says Romal Shetty, national head, Telecommunication Advisory Services, KPMG India, “Unlike 2G which has seen runaway growth, 3G will take 3-5 years to catch up and will be limited to the metros.
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Considering the competition, Indian telcos will make a lot more money once consolidation takes place, but that scenario is two-three years away.” With 12-13 players, most of them with deep pockets, expect this hyper competition to result in revenue fall for most players. In this context, Africa becomes an important market for Bharti, as the growth story there is starting to look up on the back of massive Chinese investments in the continent. Adds Shetty, “With a third of revenues coming from Zain, Africa will become a key market for Bharti helping it diversify its risk across two major telecom markets.”
Hurdles ahead
While the Zain buyout is expected to be completed soon, Bharti will have to cross a number of hurdles before it can breathe easy. Says Girish Trivedi, deputy director, Information & Communication Technologies Practice, Frost & Sullivan, South Asia & Middle East, “Bharti is not well versed with consumer behaviour in Africa and will take a while to figure that out. Further it does not have experience of integrating a large entity such as Zain.” Moreover, unlike its centralised model in India (a single geography), where it outsourced all activities to service providers, it might not be easy to replicate the same in Africa as there are 15 regulatory bodies (and issues such as the Nigerian legal tangle) to contend with.
In India for example, Bharti has a single billing system which may prove to be a difficult task to replicate in Africa, as countries there might object to transfer of data. Further, in addition to the lack of political stability, poor infrastructure might also be a hurdle as there are lot of power cuts which will increase the fuel bill on diesel and gensets. With power accounting for 30 per cent of costs an ability to control and keep them down will be critical. Moreover, unlike India there is no tower sharing which will keep costs high. With cultural differences (West Africa is French, the eastern part is English speaking), the challenge for Bharti will be to understand and integrate local talent/operations into a common entity and explore synergies on areas such as sourcing of equipment.
On the positive side, Bharti’s experience in India, one of the most competitive mobile telephony markets globally, should hold it in good stead.
| ZAIN AFRIC: SCOPE FOR GROWTH | |||||||||||||||
| Geography | Customers (in mln) | % growth (y-o-y) | Penetration (%) | Position | Market share (%) | No. of competitors | Sales ($ mln) | % chg (y-o-y) | Ebidta (%) | chg (bps) (y-o-y) | PAT ($ mln) | % chg (y-o-y) | ARPU ($) | % chg (y-o-y) | Capex ($ mln) |
| Burkina Faso | 1.4 | 17 | 23 | 1 | 51 | 2 | 91.0 | -8 | 42 | - | 13.4 | 23 | 7 | -30.0 | 2.9 |
| Chad | 1.2 | 36 | 19 | 1 | 70 | 1 | 101.0 | 10 | 43 | 300 | 10.5 | 12 | 10 | -28.5 | 35.1 |
| Congo Brazzaville | 1.4 | 14 | 75 | 1 | 53 | 2 | 153.0 | -12 | 28 | -1100 | 8.6 | -79 | 12 | 29.4 | 38.0 |
| DRC | 3.6 | 18 | 14 | 1 | 45 | 4 | 244.0 | -13 | 21 | - | -19.5 | - | |||