bharti airtel crma

7/29/2019 Bharti Airtel CRMA

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Group Members:Samridhi Madaan

Yogesh Luthra

Priya Vatsalam

Vishal Gupta

Shefali Gupta

Arpit Tandon


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The rise of globalization has exponentially increased thenecessity for cross-border M&A.

Companies have followed their customers who are goingglobal themselves as they respond to the pressures ofobtaining scale in a rapidly consolidating global economy.

In 1997 alone, there were over 2333 cross-bordertransactions, worth a total of approximately $298 billion.

Due to the complicated nature of cross-border M&A, thevast majority of cross-border actions have unsuccessfulresults

Majorly companies seek to expand their global footprintand become more agile at creating high-performingbusinesses and cultures across national boundaries.


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Legal problems The regulatory regime to befollowed, the index and domicile to be considered

Flow back - unwillingness of target-companyshareholders to hold foreign-domiciled equity of theacquirer

Politics & Anti-trust

Differing valuing criteria Acquisition currency

Multi-jurisdictional tax constraints affectingconsideration, dividends and intercompany transfers

Weak understanding of the fundamentals of the

acquired business Divergent accounting rules

Multiple security, governance & anti-trust laws


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Melding country cultures,

Communicating across long distances,

Fundamental differences in the way business is

conducted


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Telecom Industry


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Facts India is 3rd largest market in world after China and

USA.

Telecom industry has recorded a growth of 45% whichhas the highest growth rate in the telecom sector inthe world.


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WHY MTN??

Is a leading provider of communication services, offering cellular

network access and business solutions

Is a multinational telecommunications provider

Core operations in 24 countries in Africa and the Middle East

Presence in key markets such as Nigeria, Ghana, Cameroon, Ugandaetc.

Regardless of recession at the end of December 2008, growth

expanded by 48% to 90,7 million recorded subscribers

Group subscribers up 14% to 103,2 million from December 2008

Listed in South Africa on the Johannesburg Securities Exchange (JSE)

under the Industrial

Telecommunications sector


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BENEFITS FROM THE DEAL

Create the world's3rd largest telecom company with combined revenues of over $20 billion annuallyand a subscriber base of over 200 million

Emerging markets such as Africa, Latin America and West Asia are at the point where India was in2003

Telephone penetration levels where low which means huge potential in terms of higher subscriberaddition

The African telecommunication market is estimated to grow at roughly40%

The average revenue per user(ARPU) is much higher at Rs 600 in these emerging markets compared toRs 250 in India.

The deal will give Bharti access to nearly100 million subscribers across 21 countries.

99%of MTNs subscribers are prepaid customers, which means there is very limited possibility of baddebts.

Leveraging the Economies of Scale, developing a joint strategy to expand its global footprint andcreating an integrated management structure.


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FIRST ROUND OF NEGOTIATION

The modified deal structure was unacceptable to Bharti.

MTN proposed an alternate structure which contemplated the acquisition ofthe majority of Bharti's shares, thereby making Bharti a subsidiary of MTN.

Companies reached an in-principle agreement

In 2008, Bharti proposed to acquire an approximate 40% stake in MTN.


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SECOND ROUND OF NEGOTIATION

DEALSTRUCTURE

STEP1:

Bharti would acquire around36% of the current sharecapital of MTN

1 share of MTN = ZAR 86 +0.5 newly issued Bhartishares

Total Cash Value = $6.8bn

STEP2:MTN will acquire 25% post-transaction economic interest inBharti AirtelBharti will receive 25% of thecurrent share capital of MTN inpart settlement of aboveacquisition

Balance consideration will bepaid out in cash of US $2.9bn byMTN to Bharti


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FINAL STAKE

Bharti would have 49%stake in MTN

MTN and its shareholders will have 36% stake in Bharti

Net Cash Paid = $3.9bn by Bharti to MTN

Total Deal worth = $23-26 bn


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SOME MORE POINTS ABOUT About Structure

National Treasury of South African Governmentproposed a Dual Listed Structure to retain the identitiesof both the companies.

It was proposed that Bharti Airtel would continue itslisting in India while MTN would remain listed onJohannesburg Stock Exchange.

Post DLC, the shareholders of MTN would hold sharesof MTN and Bharti Airtel and shareholders of BhartiAirtel would hold shares of Bharti Airtel and MTN.


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Valuation

The valuation of the transaction was USD 24 billion.

The value of 36% economic interest acquired in Bharti Airtel byMTN and its shareholders had to be deducted from this value.

Each consumer valued at USD 349.


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hy the deal failed to happen?

Both the companies wanted to retain their independent identities.

Economic nationalism South African Government insisted on MTNremaining a South African Company and clarified that the necessaryapprovals would be granted only if DLC structure was adopted.

Regulatory restrictions - DLC Structure was not viable without amending the

corporate and exchange control laws of India.

Shareholders of MTN including Public Investment Corporation - the largestshareholder - was not happy with the deal.


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Founder,Chairman andGroup CEO

Sunil Bharti Mittal

Established July 07, 1995, as a Public Limited Company

Businessdescription:

Provides GSM mobile services in all the 23 telecom circles inIndia, Sri lanka, Bangladesh and now in 15 Countries of Africa.

Provides telemedia services (fixed line and broadband servicesthrough DSL) in 88 cities in India.

Other Enterprise solutions: DTH and IPTV Services


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Zain Africa

Wholly owned subsidiary of Zain, incorporated in

Netherlands and held the African operations of Zain. 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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Place ofOrigin

Kuwait- based telecom company

Ownership It is a public company

Bussiness In the provision of mobile telecommunication and data services,including operation, purchase, delivery, installation,management and maintenance of mobile telephones and pagingsystems in Kuwait and 21 other countries in the Middle East andNorth Africa.


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Total Revenue

Net Income

Customer Base

Global Presence

ARPU

6.32 billion $

1.67 million $

125.30 million

5 Countries

3.14 $

6.17 billion $

- 37million $

71.80 Million

24 countries

3 $


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WHY BHARTI WANTS TO ACQUIREZAIN ?


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NEED FOR BHARTI TO GO GLOBAL?

Saturation in the Indian Market

Risk Diversification

Ongoing Price war cutting down of margins


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AFRICAN TELECOM INDUSTRY

Aggregate population of 470m .The Africanpopulation is expected to double to 2 billionpeople outpacing India and China.

The median age is 17-18 compared to the Indian

median age of around 25-26. It is forecasted that25% of the world youth will reside in Africa

FavorableDemographics

Consumer spending potential is estimated to bearound $1.4 trillion. The GDP is growing at rateof more than 5% in 27 of the top 30 economies in

Africa.

SpendingPower


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STRATEGIC REASONS FOR THE DEAL

Mobile Penetration

Average Revenue PerUser

No. of competitors

Minutes of Usage

53% (High)

12 players on an average

1. All India ARPU is 4.5USD

2. Falling ARPU3. Low Per second billing

+ rural customers =Reduced Tariffs

Average Minutes ofusage is 450minutes, Scope only in

few rural areas

3-4 players on an

average

20%(Low)

Scope across 15countries, minutes ofusage is 110 minutes

1. All Africa ARPU is7.5 USD

2. Market in Africasimilar to whatIndian telecommarket was 5 yearsback


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AVERAGE REVENUE PER USER

7.27.2

4.59.6

23.8

12.75.67.7

9.99

3.88.1

4.56.75.97.5

0 10 20 30

Nigeria

Tanzania

Gabon

Kenya

Niger

Uganda

Madagascar

Ghana

ARPU (IN USD)

ZAIN AFRICA

9.9 9.4 8.96 4.9

0

5

10

15

2006 2007 2008 2009 2010

Average Revenue per user (in US $)

BHARTI AIRTEL


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Long-term benefits Zain Africa is a strategic investment for Bharti Airtel from a

long-term perspective.

Post acquisition, Bharti Airtel will become fifth largestservice provider in terms of the number of subscribers


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OTHER REASONS

Cost of Setting up Network is high in India

Pressure on the margins with costs going up

Long time ambitions for the Africanmarket-MTN acquisition talks failed twice.

Bharti Airtel to become 5th largest telecomcompany in the world

180 million customers and 18 countries


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STRUCTURE OF THE ACQUISITION


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Netherlands, with its efficient tax regime coupled with aninvestor friendly business environment, provides variousincentives under its tax regime including tax exemption

on dividend payments and capital gains through theparticipation exemption regime.

The structure adopted by Bharti Airtel for acquisition of

Zain Africa is conducive from a tax perspective specificallywith respect to repatriation of profits from Zain Africa toBharti Airtel.

WHY WAS THE ACQUISITION ROUTED

THROUGH NETHERLANDS?


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Under the domestic tax laws of Netherlands, no taxes are levied on

dividends distributed between two Netherlands resident companies,subject to compliance with the applicable participation exemptionconditions.

Thus, it should provide for a tax free transfer of profits from ZainAfrica to Bharti- Airtel Netherlands BV.

Under the Netherlands-Singapore tax treaty, dividends paid by

Bharti Airtel Netherlands BV to Singapore SPV would not be subjectto any taxes in Netherlands since the Singapore SPV holds at least25% of the share capital of the company declaring the dividends.


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Purchase consideration for the deal

USD 10.7 billion

USD 8.3 billion

within three monthsfrom the date ofclosing;

USD 700 million after

a year from the dateof closing;

USD 1.7 billion

assumed as debt onthe books of Zain

FUNDING OF THE DEAL


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TRANSACTION FUNDING-Leveraged Buy-out

Bharti Airtel has availed a loan up to USD 8.5 billions from various bankers

the break up of that is given below

USD 8.5 Billions

Consortium of 11 banks

led by Standard Charteredand Barclays

SBI rupee loan of 1$ billion

USD 7.5 billion(dollar loan)

Tenure is 6 years

First payment 2.5 years after

rollout of operations


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WHY ZAIN SOLD AFRICAN OPERATIONS TO BHARTI

AIRTEL

Focus on Kuwait Operations

Company is making losses in many countries net profit

including all the countries is in negative

Unlocking the value in the Zain African Assets and improve the

groups Revenues


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PROFIT OF ZAIN FROM DIFFERENTCOUNTRIES


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Econet Wireless Pvt ltd raised the issue of ownership ofZain Nigeria Objection from Broad Communications Ltd - single

largest shareholder in Zain Nigeria

Nigeria

Approvals refused from the Republic of Congo

Allegation - Zain had not informed it about the dealCongo

Allegation - Zain didnt comply with certain telecomregulations in Gabon

Disapproval of sale of Zain Assets to Bharti- Airtelinitially

Gaboneserepublic


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International reports note that Bharti has already

secured indemnities and warrants to prevent it from

any potential legal ownership disputes.

Bharti needed clearance from telecom regulators ineach of 15 nations.

Bharti had to raise twice the debt it was to raise fromMTN.

It also needed to convince the lender about theviability of the Zain deal


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I th t ti i f


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Is the transaction expensive for

Bharti Airtel?

Bharti Airtel paid Zain an enterprise value of USD 10.7billion

10 times of EBIDTA

USD 8.3 billion will be paid in cash within threemonths from the date of closing

USD 700 million will be paid after one year

Bharti Airtel will assume debt to the tune of USD 1.7billion on the books of Zain Africa.


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At that point of time

Zain Africa has made a net loss of USD 112 million inthe nine months to September 2009

Seven of Zains African units were loss-making,including its highest revenue earner, the Nigerian arm,Zain Nigeria.

The deal was highly volatile and carried huge

commercial risk for Bharti Airtel. Bharti Airtel has incurred exceedingly expensive loan

worth USD 8.3 billion at an interest rate of 195 basispoints over LIBOR


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ContAnother risk was foreign exchange exposure as the

equipments were purchased in dollars but the revenuewas to be generated in local currencies.

Thus extremely high cost of acquisition, interestpayable on loans availed and meagre revenues madethis deal as a costly investment.


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From EV to EBITDA basis

Zain-11-12 times EV to EBITDA which is 30-70%premium versus Bharti current valuation

Bharti - available at 7.2 times EV to EBITDA

EPS dilutive

Deal seems to be expensive


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EV per subscriber basis

26% stake which DoCoMo took in Tata Tele- EVper subscriber of close to USD 350.

Stake taken in Spice Telecom my TelecomMalaysia- EV per subscriber USD 330.

68% stake by Vodafone in Hutch Essar-USD 730

Bharti zain- USD 270

So on this basis the deal doesnt seem to beexpensive keeping in view the geographicalsynergy, the growth and turnaround potential.


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Current scenario..

Bharti Airtel's Africa operations have recorded net loss of USD 95million for the quarter ended September 30.

Over the past one month Bharti shares fell 15 per cent due to fear of

losses in Africa.

The African operation has a higher cost structure.

Bharti had operating margins of 24 percent in its African comparedwith 36.8 percent from its India and other south Asian operations

Six of Bharti's 16 African markets are currently making losses, while thedebt cost for the acquisition has also weighed on the company'searnings.


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Strategy

Acquisition to counter slowing growth in India

Price war, limited spectrum availability

Lack of experience in non-telecom related industries

Zain-Africa offers a strategic fit to capture untappeddemand for telecom services in Africa

Low penetration, local markets similar to India

Leverage Zains strong presence in local markets Reputed brand in most local markets

Established telecom infrastructure to build upon


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Key challenges

Geographical and regulatory

Creating infrastructure across 15 countries

Managing varied regulatory regimes

Structural, cultural and operationalissues

Overcome language barrier to connect to masses

Corruption, theft and political instability Limited overseas experience


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Lack of commercial synergies:

Nullify the disparities between the two companies toleverage the worth of the enterprises to the maximum and

reap profits in the times to come. Combination of Zain Africa's local talent right across

Africa and Bharti Airtel's experienced management cadrewill prove to be a competent mix to deal with all the ground

level issues


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Strategies

Replicate Minutes Factory Model Average usage is low in Africa (vs other countries)

Push for low-cost high-volume would help inincreasing monthly usage/ consumer

Need to invest massively in building infrastructure tosupport increase in expected call volume

Try to capture untapped rural markets Need to strengthen distribution network to increase

penetration of dealer network Can try to implement Matchbox Strategy in African

markets as well


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Investors reaction

Negative due to concern over high valuation paid for lossmaking business (almost 2x of market leader MTN)

African markets are structural difficult & even macrofactors are also not good in many countries

Negative impact on Bhartis earning due to high interestoutflow to service debt

Debt level to further increase due to upcoming 3Gauction

Returns from this investment are expected to come onlyafter 6-8 years

F t l di t f C


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Factors leading to success of Cross-

Border M&A

Cultural differences the lesser they are, the moresuccessful a merger would be

Integration Team & Speed Assures the employees of

the new structure HR, Communication & Trust

Leadership capabilities and previous experience

Strategic fit & Classic finance parameters horizontally related companies will have more

opportunities to create competitive business strategies

Financial health, price & size of the target company

bharti airtel crma

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