BHARTI

ITM Business School Warangal
Indian Telecom Sector Introduction
PGDM Batch 2010-12
The telecom services have been recognized the world-over as an important tool for socio-economic development for a nation. It is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Indian telecommunication sector has undergone a major process of transformation through significant policy reforms, particularly beginning with the announcement of NTP 1994 and was subsequently re-emphasized and carried forward under NTP 1999. Driven by various policy initiatives, the Indian telecom sector witnessed a complete transformation in the last decade. It has achieved a phenomenal growth during the last few years and is poised to take a big leap in the future also. Status of Telecom Sector The Indian Telecommunications network with 621 million connections (as on March 2010) is the third largest in the world. The sector is growing at a speed of 45% during the recent years. This rapid growth is possible due to various proactive and positive decisions of the Government and contribution of both by the public and the private sectors. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provides easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. Presently, all the telecom services have been opened for private participation. The Government has taken following main initiatives for the growth of the Telecom Sector: Tariff Changes The Indian Telecom Sector has witnessed major changes in the tariff structure. The Telecommunication Tariff Order (TTO) 1999, issued by regulator (TRAI), had begun the process of tariff balancing with a view to bring them closer to the costs. This supplemented by Calling Party Pay (CPP), reduction in ADC and the increased competition, has resulted in a dramatic fall in the tariffs. ADC has been abolished for all calls w.e.f. 1st October 2008. The peak National Long Distance tariff for above 1000 Kms. in 2000 has come down from US$ 0.67 per minute to US$
0.02 per minute in 2009. & UK. 2009. The Average Revenue Per User of mobile is between US$ 5.06 - US$ 7.82 per month The mobile tariff for local calls has reduced from US$0.36 per minute in 1999 to US$ 0.009 - US$ 0.04 per minute in The International Long Distance tariff from US$ 1.36 per minute in 2000 to US$ 0.16 per minute in 2009 for USA, Canada
Foreign Direct Investment (FDI) In Basic, Cellular Mobile, Paging and Value Added Service, and Global Mobile Personal Communications by Satellite, Composite FDI permitted is 74% (49% under automatic route) subject to grant of license from Department of
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Telecommunications subject to security and license conditions. (para 5.38.1 to 5.38.4 of consolidate FDI Policy circular 1/2010 of DIPP) FDI upto 74% (49% under automatic route) is also permitted for the following: . Radio Paging Service Internet Service Providers (ISP's)
FDI upto 100% permitted in respect of the following telecom services: Infrastructure Providers providing dark fibre (IP Category I); Electronic Mail; and Voice Mail
Subject to the conditions that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies were listed in other parts of the world. In telecom manufacturing sector 100% FDI is permitted under automatic route. The Government has modified method of calculation of Direct and Indirect Foreign Investment in sector with caps (para 4.1 of consolidate FDI Policy circular 1/2010 of DIPP) and have also issued guidelines on downstream investment by Indian Companies. (para 4.6 of consolidate FDI Policy circular 1/2010 of DIPP)
Guidelines for transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities have been issued (para 4.2.3 of consolidate FDI Policy circular 1/2010 of DIPP)
Investment Opportunities and Incentives An attractive trade and investment policy and lucrative incentives for foreign collaborations have made India one of the worlds most attractive markets for the telecom equipment suppliers and service providers. No industrial license required for setting up manufacturing units for telecom equipment. 100% Foreign Direct Investment (FDI) is allowed through automatic route for manufacturing of telecom equipments. Payments for royalty, lumpsum fee for transfer of technology and payments for use of trademark/brand name on the automatic route.
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PGDM Batch 2010-12
Foreign equity of 74% (49 % under automatic route) permitted for telecom services - basic, cellular mobile, paging, value added services, NLD, ILD, ISPs - and global mobile personal communications by satellite.
Full repatriability of dividend income and capital invested in the telecom sector.
Opportunities India offers an unprecedented opportunity for telecom service operators, infrastructure vendors, manufacturers and associated services companies. A host of factors are contributing to enlarged opportunities for growth and investment in telecom sector: An expanding Indian economy with increased focus on the services sector Population mix moving favorably towards a younger age profile Urbanization with increasing incomes
Investors can look to capture the gains of the Indian telecom boom and diversify their operations outside developed economies that are marked by saturated telecom markets and lower GDP growth rates. Inflow of FDI into Indias telecom sector during April 2000 to Feb. 2010 was about Rs 405,460 million. Also, more than 8 per cent of the approved FDI in the country is related to the telecom sector. Targets Set By the Government 1. Network expansion
800 million connections by the year 2012.
2. Rural telephony

3. Broadband
200 million rural subscribers by 2012 Reduce urban-rural digital divide from present 25:1 to 5:1 by 2010.
20 million Broadband connections by 2010 Broadband with minimum speed of 1 mbps. Broadband coverage for all secondary & higher secondary schools and public health care centres by the end of year 2010. Broadband coverage for all Grampanchayats by the year 2010 Broadband on demand is every village by 2012
4. Manufacturing
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Making India a hub for telecom manufacturing by facilitating more and more telecom specific SEZs. Quadrupling production in 2010. Achieving exports of 10 billion during 11th Five year plan.
5. Research & Development
Pre-eminence of India as a technology solution provider. Comprehensive security infrastructure for telecom network. Tested infrastructure for enabling interoperability in Next Generation Network.
8. International Bandwidth
Facilitating availability of adequate international bandwidth at competitive prices to drive ITES sector at faster growth.
Indian Telecommunications at a glance
Exhibit-1
Rank in world in network size Teledensity (per hundred populations)
(As on 31st March 2010) 3rd 52.74 36.95 548.32 621.28 5,69,385 4070
Telephone connection (In million) Fixed Mobile Total Village Public Telephones inhabited (Out of 5,93,601 uncovered villages) Foreign Direct Investment (in million) (from April 2000 till March 2010) Licenses issued Basic CMTS UAS Infrastructure Provider I ISP (Internet) National Long distance International Long Distance 2 38 241 219 371 29 24
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ITM Business School Warangal Exhibit-2
PGDM Batch 2010-12
Growth of the industry: The growth witnessed by the Indian telecom sector has been nothing short of extraordinary performance and remains as it still remains the fastest growing telecom sectors across the globe. The success story and the potential have attracted newer players due to which the intensity of competition has paced up between domestic and foreign players, forcing the telecom operators (telcos) to look for cost-cut, thereby benefitting the end user. Increasing network coverage and competitive tariffs - are the two most prominent catalysts that are contributing to the growth of the Indian Telecommunication sector. Besides the contribution of the private sector, the rapid growth of the industry has been possible due to various proactive and positive decisions of the Government. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provide easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. The competitive scenario in the telecom industry in India has made new customer acquisition difficult and increased the cost of the same. This, in addition to the high capital expenditure
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involved in rolling out services in a new geography, has made time-to-market a critical success factor for telecom players. There is thus a need for faster rollout of towers in new geographies and for new services like 3G/BWA. In this context, the preference of telcos to deal with larger tower companies, as discussed earlier, is likely to exert greater pressure on these companies to roll out towers faster. The telecom industry now eagerly awaits the release of National Telecom Policy 2011. The policy would specify the regulation with respect to spectrum sharing and trading, also the treatment of spectrum in case of mergers and acquisitions. It would be difficult to offer more than 16 companies a profitable sustenance in India. The drafting of the NTP 2011 would determine the manner in which consolidation would take place. Thus, with the initiation of enhanced technology (3G, BWA) and consumer services (MNP); introduction of utility MVAS to the end-consumers, and various regulatory and policy reforms (National Broadband Plan, Telecom Equipment Manufacturing Policy, and NTP-2011), India seems to be well poised to witness the one-billion subscriber mark and beyond 2011-12.
Exhibit-3
Though the subscriber numbers grew sharply for the first quarter of the FY12, the actual growth rate slope has receded. This is because the growth rate is being computed on higher base. The growth rate which was at 44.50% in March 2011 fell sharply to 29.49% in May and has dropped to 25.43% in June 2010, reflecting that the industry is reaching a mature stage.The telecom tower industry over the last two years too has exhibited a trend of consolidation. Quippo Telecom Infrastructure Limited (QTIL) has acquired an equity stake in Wireless TT info Services Limited (WTTIL; renamed Viom Networks Limited) and merged the tower portfolios of the two companies; while GTL and ATC have grown their tower portfolios through acquisition.
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Scorecard of Telecom Industry for the month of June 2011

Exhibit-4
Amidst intensifying competition and newcomers starting operations, the subscriber addition has only accelerated. The number of telephone subscribers in India increased to 885.99 million at the end of June 2011 from 874.68 million at the end of May 2011, registering a growth rate of 1.29%. The share of Urban Subscriber marginally declined to 66.36% from 66.38% where as share of Rural Subscribers increased from 33.62% to 33.64%. Also the total broadband subscriber base increased to 12.32 million in June 2011 from 12.12 million in April 2011, showing a growth of 1.64%. Out of the total number of telephone subscribers, the wireless segments (GSM, CDMA, FWP) total subscriber base increased to 851.70 million at the end of June 2011 from 840.28 million in May 2011, registering a growth of 1.36%. Wireless subscription in rural areas grew 1.42% while the urban subscription grew 1.33%.With no Surprise, private operators dominated the wireless market with 88.35% market share. Bharti Airtel continued as the top player during the month of June 2011 with more than 16.9 crore subscribers (19.86% of the total wireless market share); Reliance came second (16.82 %) followed closely by Vodafone (16.62 %). Idea, Tata and Aircel and state owned firm BSNL were the other big players while MTNL was the only prominent operator that saw a decline in its subscriber base (which could be due to MNP) in the month of June 2011. Unlike the wireless segment, the wire-line segments subscriber base witnessed a decline from 34.40 million in May 2011 to 34.29 million at the end of June 2011, showing a shift from wireline to the wireless. The share of urban subscribers increased while the share of rural subscribers declined. The wire-line segment was completely dominated by PSU operators in the month of
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PGDM Batch 2010-12
June, 2011 with 82.14 % market share. BSNL dominated the market with more than 2.47 crore subscribers (72.10 %) while MTNL came second followed closely by Bharti. Tata and Reliance were the other big players. Also, in terms of market share, as at end-June 2011, Bharti Airtel continued to lead the pack with a market share of little over 19% compared with over 21% a year ago. It lost market share marginally, as could be expected in such a fast growing market. Reliance Communications (RCom) and Vodafone respectively retained the second and third spot in the market with market shares of 16.8% and 16.59% respectively. Market Share of Telecom operators (June 2011)
Exhibit-5
Interestingly out of the total 851.70 million subscribers, only 594.77 million subscribers were active subscribers on the date of peak visitor location register (VLR) for the month of June 2011 (although the data excludes the CDMA VLR figure of BSNL). The proportion of VLR subscribers was approximately 69.83 % of the total wireless subscriber base reported by the service providers (a drop from 69.99 % recorded in May 2011). Telecom operator Idea lead the tally with 92.48 % of VLR subscribers as opposed to total number of subscribers, followed by
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Bharti Airtel with 88.77 %; Etisalat was at the bottom (replacing MTNL) with just 34.84 % which means just around one in three subscribers to Etisalat are active. Meanwhile, as per the data reported by the service providers, by the end of June 2011 about 129.85 lakh subscribers submitted their requests to different service providers for porting their mobile number. Out of these requests around 7.63 lakh pertained to Haryana wherein MNP was implemented from 25th Nov. 2010. In rest of the country, in MNP Zone-I (Northern & Western India) maximum number of requests have been received in Gujarat (12.98 lakh) followed by Maharashtra (10.32 lakh) whereas in MNP Zone-II (Southern & Eastern India) maximum number of requests have been received in Karnataka (9.83 lakh) followed by Andhra Pradesh Service area (9.55 lakh). Telecom Sector Financial Performance: ARPU on declining trajectory The industry has continued to add subscribers at an increasing pace, but these additions are not transforming equally into revenue. Even as the user base increases rapidly, the hyper-competition scenario has resulted in consistently declining tariffs that has led to continued drop in average revenue per user (ARPU). Although tariffs should decline when volume increases, the pace of decline has been too sharp in some of the segments and has hit the profitability of operators.
Exhibit-6
Indian Telecommunication Sector: An Attractive Investment Destination Potential to achieve 700 million telecom subscribers by 2012 from 374 million currently Mobile subscribers at 350 million, second only to China
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High on M&As - NTT DoCoMo acquires 26% stake in Tata Teleservices for $2.7 billion; Telenor buys 60% of Unitech Wireless for $1.07 billion Launch of New Platforms : Auction for 3G services soon
At a time when the economies globally are witnessing recessionary trends and mobile handset manufacturing companies are cutting their projections of handset sales in 2009, the Indian telecom industry continues to ring aloud with multi-billion dollar deals. Mega investment plans for India are being drafted by overseas telecom service providers, as they seek to participate in the worlds fastest growing mobile telecom market.
M&A or the Consolidation- Deal Buzz Continues

The Indian telecommunication sector with total deal value of $5.8 billion garnered the maximum share of 19% in the overall merger and acquisitions (M&A) in 2008. The sector started the year 2009 on a high note with the countrys first mega deal announced. Quippo Telecom Infrastructure Ltd., the telecommunication infrastructure arm of Indias largest the infrastructure equipment rental company, Quippo Infrastructure Equipment Limited has announced signing a deal with Indias sixth largest mobile telecom service operator Tata Teleservices Ltd to buy 49% stake in its subsidiary Wireless-TT Info-Services Ltd. (WTTIL) for about $500 million (Rs.24 billion). Quippo Telecom is a part of SREI Group having diversified interests in areas such as infrastructure, capital market services and financial services. Under the arrangement, Quippo and WTTIL will merge their operations comprising about 5,000 and 13,000 telecom towers respectively. Tata Teleservices will have the 51% majority stake in the merged entity. Earlier, NTT DoCoMo Inc., the largest mobile service operator of Japan, bought 26% stake in Tata Teleservices Limited (TTSL), a part of Indias largest industrial conglomerate Tata Group. The $2.7 billion deal is the largest in the Indian telecom market since early 2007,when Vodafone Group Plc, the U.K. based worlds largest mobile telecommunications network company had acquired 67% stake in Hutchison Essar Ltd (now Vodafone Essar) for $11.1 billion. TTSL stake provides NTT DoCoMo an instant presence across India along with a well-established nationwide mobile network and a subscriber base of more than 30 million. The NTT DoCoMo - TTSL deal, values the company at more than three times of what it commanded three years ago. Temasek Holdings, the investment arm of the government of Singapore, had picked up a 9.9% stake in TTSL at a valuation of about $3 billion in early 2006. So much is the attraction of this market that even the new entrants, which are yet to role out their network and win their first subscriber, are commanding billion dollar-plus valuations. Telenor ASA, the biggest Nordic telephone company, has signed a deal with Indias second largest real estate company Unitech Ltd to buy 60% of its wireless arm Unitech Wireless (UW) for $1.07b billion (including $400 million debt) on October 29, 2008. UW has the licenses for all 23 telecom circles of India, enabling it to have a nation-wide footprint. UAE-based Emirates Telecommunications Corporation (Etisalat) has acquired a 45% stake in Swan Telecom for $900 million, valuing the company at $2 billion in September 2008. Swan, a part of Mumbai-based real estate and hospitality business house Dynamix Balwas (DB) Group, has secured licenses for 13 circles (two more licenses in process) out of the total 23 circles. 10 | P a g e
ITM Business School Warangal More to Follow:
PGDM Batch 2010-12
Telecom has been an active sector in India in terms of M&A deals in the last six-seven years. Yet, we can expect many more equity deals to take place sooner or later. The rush of overseas telecom companies will continue, as they are facing saturated markets at home, while the Indian market has a huge potential for further growth. The prominent overseas telecom companies that are seeking an entry in to the lucrative Indian market include a number of Middle-East and European service providers such as Qatar Telecom, Kuwait-based Zain Group, Bahrain Telecom, Italy-based Telecom Italia SpA, a leading Turkish telecom company Turkcell etc. South Africas MTN Group has also been interested in acquiring, or being acquired by, or merge with an Indian company. Acquiring a stake in an existing Indian company is the only certain way of entry in the Indian market, as the only other option available right now is to participate in the auction for 3G services, which are expected to happen very soon. The Government of India has set a target of 45% tele-density compared with the current level of 31.50%. The government has estimated that the telecom sector will need $73 billion during the next five years to achieve the target of 45% tele-density, and a major chunk of the required investment is expected to come through Foreign Direct Investment (FDI) inflow, which has gone up to $1261 million in 2007-08 from $478 million in 2006-07. What Makes Indian Telecom Sector Attractive? Despite the gloomy outlook owing to the global recession/slowdown in the economy, the telecom sector of India continues to attract record number of new subscribers. The Indian mobile phone operators have been adding about 8-10 million subscribers every month throughout this year, and the figure has regularly topped the 10 million mark during the last three-four months. Considering the current pace of fresh additions per month, India has the potential of taking the total tally of subscribers to 700 million in the next five years from the current level of about 350 million, second only to China. About 10.35 million wireless subscribers were added during the month of November 2008, taking the total number to 336.08 million and a similar number was expected during the month of December 2008. The total number of both wireless and wireline subscribers reached at 374.13 million at the end of November 2008, according to the Indian telecom industry regulator, Telecom Regulatory Authority of India (TRAI). In terms of projected revenues, such a huge subscriber base is expected to generate more than $37 billion by 2012 growing at a CAGR (compounded annual growth rate) of 18%. This growth potential offers enough incentive to overseas telecom companies to vie for their share of the pie. Investorfriendly regulations by the government, allowing up to 74% holding in a domestic entity by a foreign company, is an icing on the cake.
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Road ahead: The Indian mobile subscriber base is expected to sustain the rapid growth recorded in the past few years. Enhanced service introductions like the launch of various utility MVAS offerings, equipment manufacture blooming, skilled labour pool, disposable incomes of consumers, declining tariffs, increasing demand, growing improving telecom infrastructure, favorable demographics, rising attraction for mobiles with new features and greater availability of handsets at lower prices are the dominant factors that are expected to continue driving the growth of the telecom sector, going forward. Meanwhile, even though the sector has reflected promising growth, the tele-density in India still remains at a very low level compared with international standards thereby providing tremendous opportunity for future growth. In the medium-term, the industry is expected to continue to record good subscriber growth as a result of low penetration levels, heightened competition; a sustained fall in minimum subscription cost and tariff that increase affordability for lower-income rural users, expansion of coverage area by mobile operators, and government support through schemes such as the rural infrastructure roll out funded by subsidies from the Universal Service Obligation (USO) Fund. However, the companies going forward are likely to encounter a more challenging business environment, given the sustained fall in ARPUs, rapidly increasing competition and consequent pressure on margins and regulatory risks. Companies with good rural coverage, better operational efficiency, and superior quality of service are only likely to stay ahead in the competition. Besides, this the trend of consolidation is expected to continue, with the smaller players either getting acquired by the larger ones or merging with one another to remain competitive though, the pace of consolidation would depend on the prevailing market conditions; pace of infrastructure rollout by the telcos, especially for 3G and BWA; and the financial flexibility of the larger tower companies.
Outlook The Indian telecom industry has grown at a dream pace in the new millennium. Private companies have taken a lead in a big way as declining tariffs and increasing disposable incomes help in making telephones more affordable. The unprecedented growth witnessed in the wireless segment has all the potential to continue for many more years as Indian companies shift their focus from saturating urban areas to still relatively untapped vast rural areas. However, there have also been some bottom-line pressures as the recent strong growth seen in the industry has been accompanied by declining ARPU that slowed down the industrys profit growth. Amidst these difficult times, most of the operators raised heavy debt to fund their purchase of 3G spectrum which has put a strain on their capital structure. Competition will further intensify with the entry of the RIL.
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However, having said that, the road to greater profitability is not so difficult for the incumbent operators. The 2G capex of established telecom firms has already bottomed out. While capex as a percentage of revenue would remain higher in near term owing to start of 3G services, the new high-end services will also generate fresh revenue stream going forward. As such, even though initial implementation of 3G services as well as the wireless broadband through the BWA spectrum would mean increased outlays and lower returns on investment, in the medium term the operators are likely to benefit through increased revenues from value added services which currently contribute just 8-9% to the revenues of the operators. In addition, the 3G spectrum will also help the operators to manage their 2G spectrum more efficiently. Another issue being faced by the operators is the 2G recommendations of the TRAI. Major GSM players like Bharti and Idea face significant outgo in terms of onetime charge. However, it should be noted that the TRAI has also recommended progressive decline in the license fee over the next four years from 10/8/6% to uniform rate of 6%. This will be substantially beneficial to the major operators including the Bharti and Vodafone. Also, we understand that the TRAI has not recommended onetime spectrum fee to be paid in one installment. If the spectrum fee is divided over say a period of four years, coupled with the decline in license fee, net impact on players will be much lower. Finally, we believe the government is unlikely to implement the recommendations without taking majority of the operators on board. As such, on account of 2G recommendations we do not expect any significant causes of worry for operators. Overall, Indias telecom industry has matured in a very good way over last few years. However, there are a lot of more avenues to be tapped yet. Subscriber numbers are likely to continue growing at good pace and the start of 3G services and wireless broadband going forward will add greater value added services in operators offerings, even as competition increases further in short run. There is a broadband revolution still to be seen on the scale of mobile revolution. We believe that even as the short term outlook of telecom operators is certainly weak on account of heavy outgo and pressure on margins, medium to long term prospects, of especially the established players, are still very strong. Once the much needed consolidation happens, larger players will come out even stronger.
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PGDM Batch 2010-12
BHARTI AIRTEL - ZAIN Deal Dissection
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PGDM Batch 2010-12
PREFACE
Finally, Bharti Airtel Limited (Bharti Airtel) bags the big ticket to begin its much awaited African Safari. The highly ambitious, Indian entrepreneur, Mr. Sunil Bharti Mittal had always looked at Africa as the venue for the next round of technology and telecom revolution and had never concealed his intent to be a part of African business history. Bharti Airtel was determined to find its way into Africa, but the crucial question was who would be the indigenous partner? The two rounds of extremely arduous negotiations with MTN Group Limited (MTN) could not bring any success for Bharti Airtel. However, the failure to woo MTN did not dampen the spirits of Bharti Airtel or dilute its ambitions. The writing on the wall was clear; choosing another African partner was only a matter of time. .
TRANSACTION DETAILS
BRIEF SNAPSHOT Acquirer Seller Target Acquisition Bharti Airtel Limited Mobile Telecommunications Company KSC Zain Africa International BV Bharti Airtel Limited indirectly acquired 100% of Zain Africa International BV and its business operations in Africa from Zain under a privately negotiated agreement. Security (Share) Sale USD 10.7 billion All cash deal Bharti Airtel to pay: a) USD 8.3 billion within three months from the date of closing; b) USD 700 million after one year from the date of closing; and c) USD 1.7 billion assumed as debt on the books of Zain.
Mode of acquisition Consideration Mode of Payment
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Funding
Leveraged Buy-out a) Bharti Airtel to borrow USD 7.5 billion from a consortium of banks led by Standard Chartered Bank and Barclays Bank. b) Bharti Airtel to avail of a rupee loan of USD 1 billion equivalent from SBI Group.
Parties involved in the Transaction: 1. Bharti Airtel Indias first private telecom services provider with a footprint in all the 23 telecom circles. Widely regarded as Indias largest telecom service provider in terms of annual revenues, Bharti Airtel provides mobile & fixed wireless services using GSM technology across all the telecom circles along with broadband & telephone services in 94 cities. All these services are provided under the Airtel brand. Bharti Airtel, as we understand, also has licenses to operate telecom operations in Sri Lanka and Seychelles. In January 2010, it acquired Warid Telecom, a 3-million-subscriber company based in Dhaka, Bangladesh for USD 300 million. 2. Zain Zain was established in 1983 in Kuwait as the region's first mobile operator. It is a public company engaged, together with its subsidiaries, in the provision of mobile telecommunication and data services, including operation, purchase, delivery, installation, management and maintenance of mobile telephones and paging systems in Kuwait and 21 other countries in the Middle East and North Africa. Its wholly owned subsidiaries include; Mobile Telecommunications Company Lebanon (MTC) SARL, Lebanon, and Sudanese Mobile Telephone (Zain) Company Limited, Sudan.2 3. Zain Africa Wholly owned subsidiary of Zain, incorporated in Netherlands and held the African operations of Zain. The company was 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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ITM Business School Warangal Financial Statement of the Amalgamating and amalgamated company Bharti Airtel- Consolidate Balance sheet
PGDM Batch 2010-12
Exhibit-7
17 | P a g e http://www.moneycontrol.com/financials/bhartiairtel/balance-sheet/BA08
ITM Business School Warangal Zain Africa (KSC) Consolidate Balance sheet Exhibit-8
PGDM Batch 2010-12
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http://www.zain.com/muse/obj/lang.default/portal.view/content/Investor%20relations/Financial%20Reports/Consolidated %20Financial%20Statements
ITM Business School Warangal Bharti Airtel- Income Statement
PGDM Batch 2010-12
Exhibit-9
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http://www.moneycontrol.com/financials/bhartiairtel/balance-sheet/BA08
ITM Business School Warangal Zain Africas consolidated Income Statement
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Exhibit-10
20 | P a g e http://www.zain.com/muse/obj/lang.default/portal.view/content/Investor%20relations/Financial%20Reports/Consolidated%2
0Financial%20Statements
ITM Business School Warangal CHRONOLOGY OF KEY EVENTS
PGDM Batch 2010-12
Following table encapsulates the timeline of the key events that have occurred in the Bharti Airtel - Zain saga including the initial round of negotiations that began with MTN:
Date
May 5, 2008 May 24, 2008
Event Bharti Airtel announces that it has entered into exploratory discussions with the MTN Group. Bharti Airtel withdraws from the talks, following the MTN board presenting a structure completely unacceptable to Bharti Airtel. Bharti Airtel sees this new proposal as a convoluted way of getting indirect control of the proposed combined entity, which would have made Bharti Airtel a subsidiary of MTN. Reliance Communications (RCom) enters into exclusive merger discussions with MTN. Financial Express reports that Bharti Airtel is in talks with Zain for acquisition ofits African assets.3 News denied by Bharti Airtels spokesperson. RCom and MTN formally end talks.
May 26, 2008 July 2, 2008
July 19, 2008 May 25, 2009 Bharti Airtel makes a media statement announcing that it has entered into talks with MTN for a strategic merger with exclusivity period till July 31, 2009. The proposed transaction between Bharti Airtel and MTN called off for the second time in two years on the expiry of the exclusivity period Event Bharti Airtel and Zain agree to enter into exclusive discussions till March 25, 2010 for the acquisition of Zain Africa for an enterprise value of USD 10.7 billion.4 Media Statement from Bharti Airtel, regarding the proposed commercials of the deal. The total agreed enterprise value of USD 10.7 billion proposed to be met as payout of around USD 9 billion and for the remaining USD 1.7 billion, Bharti Airtel will assume debt on the books of Zain.5 USD 700 million out of the payable of USD 9 billion will be paid by Bharti Airtel after one year from closing. Also, parties agreed to a break-fee of USD 150 million payable by either party. March 21, 2010 Bharti Airtel announces that the entire financing requirement of USD 8.3 billion for the proposed acquisition of Zain Africa has been successfully tied-up. Financing was oversubscribed,with major international banks to underwrite the total amount.6 Dollar loan: USD 7.5 billion by a consortium of banks led by Standard Chartered Bank and Barclays Bank. Rupee loan: upto USD 1 billion equivalent INR by SBI Group. March 25, 2010 Bharti Airtel announces that the due diligence for acquisition of Zain Africa was completed and the definitive agreements were to be finalized soon. Upon signing the definitive agreements, the parties would move towards obtaining required approvals.7 Parties sign the definitive agreements in Netherlands.8
September 30, 2009
Date
February 15, 2010
February 16, 2010
March 30, 2010
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ITM Business School Warangal STRUCTURE OF THE ACQUISITION9
PGDM Batch 2010-12
* The fifteen jurisdictions are: 1) Burkina Faso, 2) Chad, 3) Republic of the Congo,
13) Tanzania, 14) Uganda and 15) Zambia.
4) Democratic Republic of
the Congo, 5) Gabon, 6) Ghana, 7) Kenya, 8) Malawi, 9) Madagascar, 10) Niger, 11) Nigeria, 12) Sierra Leone,
COMMERCIAL CONSIDERATIONS
Expensiveness of Transaction for Bharti Airtel Bharti Airtel is paying Zain an enterprise value of USD 10.7 billion10 which is 10 times the enterprise value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization (EBIDTA) multiple for Zain.11 Out of the total acquisition price, USD 8.3 billion will be paid in cash within three months from the date of closing and USD 700 million will be paid after one year from the date of closing.12 Further, Bharti Airtel will assume debt to the tune of USD 1.7 billion on the books of Zain Africa.13 A deeper probe into the deal and Zain Africa reveals many skeletons in the closet which may make the acquisition price extremely burdensome for Bharti Airtel. Zain Africa has made a net loss of USD 112 million in the nine months to September 2009.14 Seven of Zains African units are loss-making, including its highest revenue earner, the Nigerian arm, Zain Nigeria. 15 In the nine months ended September 2009, losses in these markets added up to $248 million, much more than the profits earned by the remaining eight regions.16 It will be a major challenge for the Indian telecom giant to turn around Zain Africas operations in these seven African regions, which are currently reeling under losses. The turnaround
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would be tougher in loss-making regions including Nigeria, Kenya, and Ghana where Zain plays second fiddle to market leaders MTN, and Safaricom. The valuation multiple that Bharti Airtel is shelling out to buy Zain Africa is upwards of ten times on EV/ EBITDA multiple based on current EBITDA of Zain Africa. This valuation is glaringly high given that Bharti Airtel itself is available at 7.2 times EV to EBITDA.17 Even if significant EBITDA growth of 20-22% for the next two years is factored in, the deal would still be upwards of 6 times to 6.5 times on EV/EBITDA multiples.18 This would make it amongst the most expensive emerging market telecom players on figures after two years. The deal is highly volatile and carries huge commercial risk for Bharti Airtel. To acquire a financially sinking company, Bharti Airtel has incurred exceedingly expensive loan worth USD 8.3 billion at an interest rate of 195 basis points over LIBOR.19 The loan would be a drag on Bharti Airtel's earnings with no immediate returns expected from the loss-making target. Adding to Bharti Airtels woes is the risk on foreign exchange exposure as the equipments will be purchased in dollars but the revenue will be generated in local currencies.20 The extremely high cost of acquisition, interest payable on loans availed and meager revenues for next few years make this deal a very costly investment for Bharti Airtel.
What attracted Bharti Airtel to takeover Zain Africa? Bharti Airtel, clearly motivated by its African dreams, paid a glaring opportunity cost to take over Zain Africa. Experts comment that the deal is overpriced and Zain Africa is not a worthy investment. Did Bharti Airtel make a mistake by choosing Zain Africa? Did Bharti Airtel act in haste and made a wrong decision? Will Bharti Airtel be able to repeat its Indian success in Africa? Questions are aplenty and we attempt to find few answers. Expansion was necessary Bharti Airtel left the world gasping in horror with its out of the box decision to hand over every core function from IT to networks, to IBM in 2004. 21 The idea was to remain and grow as a core telecom company which it did and did with elegance. In the telecom space, Bharti Airtel notched up its 100 millionth customer last May and also overtook BSNL to become Indias largest telco by revenues that year22 but there was continuous drop in the margin of profit over the years. The visionaries who lead the company could easily notice the mounting competition in the Indian telecom market with 13 service providers battling out for a chunk of the revenue. Bharti Airtel identified various speed breakers to its growth in India. The Indian telecom market has almost reached its saturation point with scope of expansion left only in the inner part of rural India. Being a core telecom company it could not diversify its portfolio into other business and geographic expansion into new markets was the only strategic alternative to escape slowing profit growth in India. Mittal wants to diversify and find new markets for future growth, and most of the growth is in the developing world, Africa is a place India understands, says Kurt Hellstrom, former World Chief Executive
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for Ericsson AB and a Bharti Airtel board member during 2004-2009.23 The next round of telecom revolution is expected to happen in Africa and this emerging market will be ideal for Bharti Airtels business aspirations in the days to come. Also, it was indispensable for Bharti Airtel to reduce its dependence on the fast-saturating Indian wireless market. 24 This realization is what compelled Bharti Airtel to establish its presence in Africa. Hence, this investment, despite being on the costlier side was a business necessity for Bharti Airtel. Long-term benefits are alluring Even with all the financial drawbacks, Zain Africa is a strategic investment for Bharti Airtel from a longterm perspective. Post acquisition, Bharti Airtel will become fifth largest service provider in terms of the number of subscribers.25
Exhibit-11
Largest mobile operators by the number of subscribers26
Company Total subscribers in millions (approx.)
China Mobile Vodafone Group Telefonica America Movil Group Bharti Airtel-Zain Africa China Unicom
525 309 202 186 179 147
Deutsche Telekom Group Telenor Group Sistema Group Reliance Communications
102 101 97 94
Acquisition of so many assets and access to so many markets through one single transaction happen very rarely. The size of Zain Africa's business diversifies Bharti Airtel's risk portfolio away from its concentration in South Asia.27 The combined businesses will be able to withstand global business shocks much better and will give it additional leverage in capital investments and with key vendors.28 Africa is where the next round of telecom growth is due. With the aim to enter into the continent and to widen their risk portfolio from India, it made sense for Bharti Airtel to invest into Africa. Zain's African
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business was considered a natural target for Bharti Airtel, which has thrived in an Indian market with low incomes and tariffs and a heavily rural population - characteristics shared by African nations.29 The multigeography strategy will be a blessing in the long run. For Bharti Airtel, this is the start of being a truly global player. The African market has high growth potential for Bharti Airtel as the region is currently underpenetrated.30 The average revenue per user of Zain Africa is quite high and that justifies its current valuation by Bharti Airtel. If Bharti Airtel can attain operational synergies with Zain Africa, it can go for more such acquisitions in the coming days as the Indian market is gradually getting saturated. 31 Valuation - Should it be as per EV to EBITDA or EV per subscriber basis? It cannot be concluded that Bharti Airtel is paying too much for Zain Africa. When the deal in question is of this size and stature, the best way to weigh the deal is from an EV per subscriber point of view and not EV to EBITDA.32 No doubt, the deal is expensive from an EV to EBITDA perspective because the deal comes in at 10 times EV to EBITDA. However, on an EV per subscriber basis, the deal may not be that expensive especially in light of the precedents with similar valuation. The acquisition of 26% stake in Tata Tele by DoCoMo, acquisition of stake in Spice Telecom by Telecom Malaysia and the mega acquisition of 68% stake taken by Vodafone in Hutch Essar were all valued on an EV per subscriber basis and the valuation is comparable to the one in hand.33
Financing is strategically managed Bharti Airtel has structured this acquisition as a leveraged buyout 34 and the loan for financing the transaction has been availed by the two SPVs created in Netherlands and Singapore for the purposes of this acquisition.35 The SPVs will take the borrowings, aggregating to USD 8.3 billion, on its balance sheet.36 Bharti Airtel Netherlands BV will avail loan to the tune of USD 5.5 billion and the Singapore SPV will borrow the rest of the amount.37 Once Bharti Airtel is able to transplant its Indian model to Africa, the negative earnings per share of the African assets on Bharti Airtels financials would diminish. Bharti Airtels decision to opt for the SPV route makes a lot of sense since it will not impact the parents balance sheet in the near term. At the end of the quarter to December 2009, Bharti Airtels debt -equity ratio was 0.4 and this would have shot up to 1.2, had Bharti Airtel taken the loan on its books. 38 That would have limited Bharti Airtels ability to raise funds in the future for expansion into new third generation technologies through participation in the 3G spectrum allocation. Hence, Bharti Airtel has structured the acquisition strategically and routed it through the SPVs keeping Bharti Airtels standalone financials intact. However, that does not absolve Bharti Airtel from overall responsibility of a borrower since it has provided a guarantee to bankers for the loan that will be in the SPVs books.39
Bharti Airtels strategy for Zain Africa and the African continent Zain Africa is in trouble and financial paralysis is looming over its head which makes Bharti Airtels task to turn around the business of Zain Africa all the more difficult. Further, it will be a nightmare for Bharti Airtel
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to achieve this task in a totally foreign environment. Negating the misfits
PGDM Batch 2010-12
It is believed that the deal lacks geographical, cultural and commercial synergies. Therefore the first step to progress would be negating the misfits between the two giant enterprises. It may be argued that deal has immense geographical synergy as Bharti Airtel is getting access into 15 African markets through one single transaction. However, the geographical disparity between India and Africa goes without saying. The terrain and the climate, though consequential only to a lesser extent, can pose critical problems for Bharti Airtel especially when it comes to infrastructure development. Further, tackling 15 regulatory regimes single handedly may not be easy at all. Culture misfit is all the more striking. The experience with MTN in the past exposes the gravity of culture misfit which can destroy the deal - if left unattended. This aspect of a cross border deal involving two parties from two different jurisdictions is normally undermined but the abandoned Alcatel Lucent deal in
the past sends across a very strong message. 40 The Franco-American deal was called off because the French and Americans never found the synergy in the deal. It was touted as being one of the most profitable deals which never happened.41 Bharti Airtel will have to put in a lot of effort to align the varied cultures; with 15 countries to tackle it definitely will be a nightmare. A major barrier for Bharti Airtel would be language which will be crucial to take the business and services to the masses. Further, the political instability in the continent and the lack of political support like in India will aggravate the situation for Bharti Airtel. It will be truly inspiring to see how Bharti Airtel will emerge a winner, overcoming the operational challenges varying from corruption and political instability to inadequate electricity and theft of equipment. The deal lacks commercial synergies also. Bharti Airtel had revenues of USD 8 billion last year and profit of USD 2 billion. For nine months of this fiscal year, it has had profits of USD 1.5 billion. Zain Africa has actually made a marginal loss of USD 112 million and the revenues are also just about USD 100 million or give or take a little more. Hence, the first and foremost task for Bharti Airtel will be nullifying the disparities between the two companies to leverage 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 cadre will prove to be a competent mix to deal with all the ground level issues.43
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Exploiting the untapped market The key to revive the business of Zain Africa and restore profitability is replicating Bharti Airtels low-cost, outsourced model of operations in Africa.44 To make the investment in Zain lucrative for Bharti Airtel, Zain needs to grow at 20-21% EBITDA in the next two-three years. The growth of Zain would largely depend on how well Bharti Airtel would be able to exploit the largely untapped telecom market in Africa. Bharti Airtel has vast growth possibilities in the African market. Only one in two Africans owns a mobile phone and Zain has a strong presence in most countries. 45 It has a 50-75% market share in seven countries and a 25-50% share in six, providing a strong platform for Bharti Airtel to build upon. 46 Even though the company is running on losses now, Bharti Airtel can utilize the infrastructure and the facilities of Zain Africa to harness the potential of African markets. Monthly average revenue per user (ARPU) on the Continent averages USD 7.5, which is higher than Indias ARPU of USD 5.47 African customers use 100 minutes per month, versus 450 minutes per month in India.48 The figures clearly evidence that fact that Zain Africas profitability is lower than Bharti Airtels, despite average higher spending by its users.
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Minutes factory model Bharti Airtels attempt will be to try and replicate their minute factory model which is the low-cost, high volume model in Africa.49 Bharti Airtel has already mastered the minute factory model and is an expert at it. The trick is to make its customers talk more by making the call rates cheap and concentrate on the rural population.50 Africa is too good an opportunity for Bharti Airtel to experiment the model that it has mastered in India, particularly its rural strategy. With a population of a billion spread out in 56 countries, Africas cell phone penetration is comparable to that of India 10 years back. 51 The demand for mobile services is growing at a rate of 25% across these countries.52 The minutes factory made Bharti Airtel, the market leader in India, the same should work in Africa as well but it is difficult to ascertain how elastic the African market would be to drops in tariff. Historically, the Indian market has shown high elasticity to drops in tariffs but if similar elasticity is not witnessed in Africa it would be difficult for Bharti Airtel to attain its projected goals. Also, Bharti Airtel will have to significantly expand the coverage and capacity to accommodate the burgeoning volume of minutes that Bharti Airtel is aiming at.53 Massive investments might be required to elevate the standard of infrastructure, equipments and employees of Zain Africa to suit Bharti Airtel. It is evident that Bharti Airtel has to invest not just money but a lot of time and efforts also to turn around the business of Zain Africa. Matchbox strategy Indian mobile service providers including Bharti Airtel have adopted a matchbox strategy of distribution, which essentially means any shop that sells matches should also sell mobile SIM cards and top-up vouchers, helping build a vast dealer network.54 Such a vast distribution and advertising patterns is completely alien to Africa and if Bharti Airtel can recreate the strategy in Africa then it will add huge
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impetus to Bharti Airtels pursuit for success. Further, marketing the brand Bharti Airtel in Africa to establish it as a reliable, customer friendly brand is crucial. How have the investors reacted to the deal? Despite Bharti Airtels optimism, 8.2 million shares of the company have changed hands since the deal was announced till March 25, 2010.55 The value of the shares has fallen to 16-month low of Rs 272.45.56 Investors are apprehensive of the deal being largely debt-funded. Though, Bharti Airtel has the history of keeping its debts low (it is just 0.4 times the 2010 EBITDA), the deal could stretch its balance sheet a tad too much.57 The upcoming 3G auction adds to the worry. Investors consider Bharti Airtels present valuation of USD 2 billion debt ridden company at ten times its EBITDA is not worthwhile. Credit rating agencies Crisil and S&P have placed Bharti Airtels long-term banking facilities and debt programmes on rating watch with negative implications. The macroeconomic set-up of the continent is also not suitable. Also, investors are wary as to how Bharti Airtel will fare in African market, with 15 different regulatory bodies
LEGAL AND REGULATORY CONSIDERATIONS

ODI Regulations Any Indian company that wishes to acquire or invest in a foreign company outside India must comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (ODI Regulations). Under the ODI Regulations, an Indian company is permitted to invest in a joint venture or a wholly owned subsidiary upto 400%68 of the net worth of the Indian company, in the form of equity, loan or guarantee, as on the date of the last audited balance sheet without seeking the prior approval of the Reserve Bank of India (RBI) inter alia if the Indian company: a) is not on the RBIs caution list or under investigation by the Enforcement Directorate; b) routes all the transactions relating to the investment in the joint venture or the wholly owned subsidiary through only one branch of an authorized dealer; and c) files the prescribed forms with the RBI. Regulation 13 of the ODI Regulations permits a wholly owned subsidiary set up by an Indian company to set up a step down subsidiary. Extant ODI Regulations are ambiguous on whether setting up further down line subsidiaries will require prior approval of the RBI. In the instant case In the current structure, Bharti Airtel has two SPVs, one in Netherlands and the other in Singapore to execute the deal. The SPVs will in turn be used to acquire Zain Africa International BV located in Netherlands to acquire the African assets of Zain. Considering that Zain Africa International BV would be a further down line subsidiary of the Netherlands SPV, there is an ambiguity in the ODI Regulations as regards whether this would require prior approval of the RBI. There is a debate on whether an Indian company can set up vertical wholly owned subsidiaries beyond
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two step down subsidiaries since Regulation 13 can be interpreted to cover multiple layers of step down subsidiaries. While the RBIs approach on such ambiguity is unclear, we understand based on the earlier precedents that RBI has recently been liberal and has permitted Indian entities from setting up multiple layers of step down wholly owned subsidiaries vertically. Guarantees Regulations Considering that Bharti Airtel would extend a corporate guarantee to the bankers for the loan that has been taken by the Netherlands and Singapore SPVs for financing the transaction 69, Regulation 5 (b) of Foreign Exchange Management (Guarantees) Regulations, 2000 (Guarantees Regulations) would be attracted. According to Regulation 5 (b) of the Guarantees Regulations, a company in India promoting or setting up outside India, a joint venture company or a wholly-owned subsidiary, may give a guarantee to or on behalf of the latter in connection with its business; provided that, the terms and conditions stipulated in the ODI Regulations for promoting or setting up such company or subsidiary are complied with. Accordingly, in the instant case, Bharti Airtel would have been required to adhere to the ODI Regulations while providing the corporate guarantee on behalf of its SPVs and hence the guarantee provided by Bharti-Airtel in favour of its SPVs together with any equity or any debt investment made in the SPVs shall not exceed 400% of net-worth of Bharti-Airtel. Anti Trust Laws Competition Act, 2002 (Competition Act) was enacted to replace the erstwhile Monopolies & Restrictive Trade Practices Act, 1969 and provide institutional support to healthy and fair competition. The Competition Act seeks to: prohibit anti-competitive agreements including cartels; prohibit abuse of dominant position; and regulate combinations (mergers and amalgamations, and acquisitions). The provisions relating to (i) anti-competitive agreements; and (ii) abuse of dominance were made effective from May 20, 2009. However, the provisions relating to regulation of the combinations are yet to be notified. If substantive provisions relating to Combinations are notified, would it have a bearing on the current acquisition? In terms of the Competition Act, parties to the proposed combination must determine whether the proposed transaction triggers the applicable threshold limits viz. with respect to the size of the assets of the parties or the turnover as prescribed under Section 5 (c) of the Competition Act. Since the provisions for regulating combinations (mergers and amalgamations, and acquisitions) have not yet been notified, there is currently no requirement for any mandatory notification to Competition Commission of India (CCI) about the Bharti-Zain transaction. However, if such regulations were notified, given the magnitude of the assets and/or turnover of the parties involved, it may have triggered the threshold limits, thereby, mandating Bharti Airtel and Zain Africa to notify to the Competition Commission of India (CCI) providing
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Right of First Refusal for shares
PGDM Batch 2010-12
A Right of First Refusal (RoFR) is a contractual right that gives the holder a right to entitlement to shares, according to the specific terms, before the shares are made available to a third party or the public at large by the seller. However, if the holder turns down the option to takeover, then the underlying shares may be made available to any such third party or the public at large, as the case may be. A RoFR differs from a Right of First Offer (RoFO). A RoFO requires the seller to enter into a good faith negotiation with the holder of the RoFO and should they fail to negotiate the terms of purchase, the seller may offer the underlying shares to sell to a third party or public at large, as the case may be.
the details of the proposed acquisition. Once such notification has been made to CCI, CCI shall do its due investigation on the basis of the criterion laid down under the Competition Act (inter alia level of combination of the market, market shares) to determine whether the acquisition causes or is likely to cause an adverse appreciable effect on competition within the relevant market in India and the CCI shall give its ruling within a maximum period of 210 days. Further, the Competition Act provides for extra territorial jurisdiction of the CCI to probe into an overseas acquisition if it causes or is likely to cause an adverse effect on competition in relevant market in India. The Nigerian Hurdle The dispute in respect of ownership of Zains Nigerian unit (Zain Nigeria) may create concerns for Bharti Airtel. As a matter of brief background, Econet Wireless International (Econet), a major telecom player in Nigeria, claimed that its pre-emption rights in the form of right of first refusal 70 in respect of shares had been breached when Econets predominantly Nigerian partners decided to sell their shares in Vee Networks (or V-Mobile) to Zain in 2006. Consequently, Econet tried to prevent the sale of the shares to Zain through the UK courts, but the judge ruled that the UK was not the appropriate place for such legal proceedings as the matter was more closely connected with Nigeria. Since then, Econet has commenced ongoing legal proceedings in the Nigerian courts. The dispute is, at present, before a court appointed tribunal and would be resolved through arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL). Econet has also applied for interim measures to prevent Zain from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until the matter is resolved. It is pertinent to note that in 2008, Zain generated about a fifth of its EBITDA in Nigeria and about 22% its total sales. Considering that till the time the ownership issue over Zain Nigeria is resolved, Zain faces a hurdle in transferring its Nigerian assets to Bharti Airtel
The Congo Controversy Delay in getting regulatory approvals from the Republic of Congo for the Bharti Airtel - Zain deal is another major problem that Bharti Airtel has been facing in closing this transaction. Recent news reports state that the Government of Republic of Congo said that they had not been informed of Bharti Airtels deal with Zain and that the deal was a clear violation of the law in our country 71. Further, the Congolese
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government has claimed that the deal is in contravention of Zains local mobile license. Apparently, Congos telecom minister has been quoted by local newspapers stating that the parties have been accorded 30 days to remedy the situation or face sanctions / penalties. Consequently, Bharti Airtel is currently in the process of getting regulatory approvals for the accord. According to Congolese government officials, fines / penalties could run to one percentage point of local turnover with other sanctions being a reduction in the duration of the operating licence, a suspension or outright withdrawal of the Zains telecom licence. Zain made USD 154 million in revenues from its Congolese subsidiary, formerly Celtel, in the nine months ending September 2009. It has a 53% market share in the nation which has a population of 4 million.72 The Gabon Glitch Resolved While the last steps towards the finalization of the Bharti-Zain deal were being taken by the parties, the Government of Gabon raised a regulatory objection to the deal alleging that Zain had not complied with certain telecom regulations in Gabon. The government of Gabon, in their statement to the press 73, had said that it "disapproves" of the sale of Zain's Gabonese assets to Bharti and reserves the right to take "all necessary measures". The government of Gabon further indicated that Gabons telecom regulator shall review the sale process before its finalization. Apparently, Zain holds more than 60 percent of the mobile market in Gabon74.
TAX PERSPECTIVE
Cause of the acquisition routed through Netherlands? Netherlands, with its efficient tax regime coupled with an investor friendly business environment, has emerged as a preferred offshore jurisdiction in the world for setting up of holding companies. Netherlands also provides various incentives under its tax regime including tax exemption on dividend payments and capital gains through the participation exemption regime. Netherlands being a part of the European Union (EU) may also act as a passport for future investments in other European (and non-European) jurisdictions and has access to the EU directives with respect to free movement of people, goods, services, and capital. Netherlands has also entered into double tax avoidance treaties with many of the African nations wherein Zain has subsidiaries and assets and to that extent it would provide for an efficient repatriation of profits from the businesses setup in such jurisdictions. Netherlands also boasts one of the widest networks of bilateral investment treaties 76 and has entered into close to 100 such treaties with various jurisdictions. 77 Since most African nations are evolving economies and to that extent may face certain political uncertainties, bilateral investment treaties provide much required safety to a foreign investor with respect to its investments. It would be interesting to note that more than half the jurisdictions in which Zain Africa has subsidiaries have entered into a bilateral investment treaty with Netherlands. Repatriation of profits from Zain Africa
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The structure adopted by Bharti Airtel for acquisition of Zain Africa is conducive from a tax perspective specifically with respect to repatriation of profits from Zain Africa to Bharti Airtel. 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 exemption conditions. Thus, it should provide for a tax free transfer of profits from Zain Africa to Bharti Airtel Netherlands BV. Further under the Netherlands-Singapore tax treaty, dividends paid by Bharti Airtel Netherlands BV to Singapore SPV would not be subject to any taxes in Netherlands since the Singapore SPV holds at least 25% of the share capital of the company declaring the dividends. Under the domestic tax laws of Singapore, foreign sourced dividends are exempt from Singapore corporate taxes, provided the foreign sourced dividends have been subjected to tax in the foreign jurisdiction and the headline tax rate of the foreign jurisdiction is at least 15%. The headline tax rate in Netherlands is at the rate of 25.5% and further the condition of the income being subjected to tax would also be met since the income would be considered taxable (albeit exempt); thus the dividends received by Singapore SPV would be exempted from corporate taxes in Singapore.
It should be noted that Singapore does not levy any withholding taxes on distribution of dividends; therefore dividends distributed by Singapore SPV to Bharti Airtel would only be taxable in India (when distributed) at the rate of 33.22%78 as per the provisions of the Income Tax Act, 1961. It is interesting to note that majority of the leverage has been taken at the Singapore SPV and Bharti Airtel Netherlands BV level; however, since they may not have operating profits it may not be possible to claim the deductions for interest expenses. Further, India does not provide for group consolidation. Therefore, it would not be possible for Bharti Airtel to offset the interest expenses of Singapore SPV and Bharti Airtel Netherlands BV against its profits.
EPILOGUE
After Bharti Airtels grueling encounters with MTN, even this deal comes with its own set of problems, including the high acquisition price paid by Bharti Airtel to acquire a loss making entity, objections raised by the minority shareholder of Zain Nigeria, Governments of Congo and Gabon and an alarming culture misfit. According to Forbes, investors know that its easier for Sania Mirza to win the Wimbledon than for Bharti to make money in Africa.79 After two missed calls with MTN, this time Bharti Airtel may have successfully connected with Zain which has resulted in it becoming the seventh largest mobile groups in the world by subscriber connections and the second-largest African operator group behind MTN. Considering the out of the ordinary efforts that Bharti Airtel has put in order to fulfill its goal of entering the untapped African telecom market, the position seems to be well deserved.
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Bharti Airtel has a tough task ahead to convert the business of Zain, neck deep in losses, to a profitable venture. Alien culture, terrain and political set up will make matters worse for Bharti Airtel. However, the exceptional performance of Bharti Airtel over the years is a standing testimony to its business acumen, expertise and strategic advantages with which Bharti Airtel may author an African episode to its success story.
1
http://economictimes.indiatimes.com/news/news-by-industry/telecom/Zain-board-approves-sale-of-African-assets-to2 Bharti/articleshow/5720720.cms http://in.reuters.com/money/quotes/companyProfile?symbol=ZAIN.KW 3 http://www.financialexpress.com/news/Bharti-seen-in-talks-with-Kuwaiti-telco-Zain/330626/ 4 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_150210.pdf 5 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_170210.pdf 6 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_220310.pdf 7 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_260310.pdf 8 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_310310.pdf 9 This structure is purely on the basis of newspaper reports and other similar sources in the public domain and we cannot vouch for the accuracy of the same. Please refer to the following source for information on the structure of acquisition - http://www.moneycontrol.com/news/business/exclusive-sunil-mittal-defendszain-deal_449339-2.html
10 11
http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_150210.pdf Shubham Majumder, Regional Head of Telecoms Research - Asia, Macquarie Capital Securities, as reported at http://www.moneycontrol.com/news/business/bharti-paying-10-times-evebidta-for-zain-macquarie_448382.html 12 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Bharti_Airtel_Ltd_170210.pdf 13 Ibid 14 http://economictimes.indiatimes.com/news/news-by-industry/telecom/Zain-board-approves-sale-of-African-assetsto-Bharti/articleshow/5720720.cms 15 Ibid 16 http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/SPV-strategy-long-term-effect-bode-well-forBharti-stock/articleshow/5720921.cms 17 http://www.moneycontrol.com/news/business/tele-talk-is-bharti-overpaying-for-zains-assets_442296-1.html 18 Supra No.11 19 http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/Banks-to-earn-100-millionfrom-Bharti-Zain-deal/articleshow/5725360.cms
20 21
http://www.moneycontrol.com/news/business/execution-risk-looms-large-for-bhartiafrica_448705.html http://economictimes.indiatimes.com/news/news-by-industry/telecom/Sunil-Mittal--Akhil-Gupta-Onedares-to-dreamother-makes-it-real/articleshow/5720950.cms 22 Ibid 23 http://www.compassnewspaper.com/NG/index.php?option=com_content&view=article&id=445 34:from-zain-tobharti-airtel-the-coming-of-the-indians&catid=37:info-tech&Itemid=709 24 Supra No.16 25 http://bseindia.com/stockinfo/anndet.aspx?newsid=760d3aa9-e175-4697-b0ce-46606b76a127&param1=1 26 The latest global rankings are based on fourth-quarter 2009 connections data and are calculated on a proforma basis. Data source: http://business.rediff.com/slide-show/2010/apr/20/slide-show-1-tech-bharti-among-top-10telcos.htm#contentTop 27 http://www.financialexpress.com/news/columnbhartiszainchallenge/596671/ 28 Ibid 29 http://www.reuters.com/article/idUSTRE62N2OP20100324 30 http://economictimes.indiatimes.com/opinion/interviews/Under-developed-sub-Saharan-region-offers-hugeopportunities-for-growth/articleshow/5601009.cms 31 http://economictimes.indiatimes.com/news/news-by-industry/telecom/Zain-deal-to-enhance-Bharti-share-on-longterm-Experts/articleshow/5723696.cms 32 http://www.moneycontrol.com/news/business/tele-talk-is-bharti-overpaying-for-zains-assets_442296-1.html
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35
Ibid http://www.moneycontrol.com/news/business/bharti-airtel-forms-2-special-vehicles-for-zain-deal-paper_448685.html http://www.livemint.com/2010/03/25234952/Due-diligence-on-Zain-assets-o.html
38 39
http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/SPV-strategy-long-term-effect-bode-well-forBharti-stock/articleshow/5720921.cms
40 41
http://www.moneycontrol.com/news/business/tele-talk-is-bharti-overpaying-for-zains-assets_442296-1.html http://www.moneycontrol.com/news/business/tele-talk-is-bharti-overpaying-for-zains-assets_442296-1.html 42 Ibid 43 http://www.financialexpress.com/news/columnbhartiszainchallenge/596671/

44
http://economictimes.indiatimes.com/news/news-by-industry/telecom/Zain-board-approves-sale-of-African-assetsto-Bharti/articleshow/5720720.cms 45 http://business.in.com/article/big-bet/africas-seduction-of-sunil-mittal/10652/1 46 http://economictimes.indiatimes.com/news/news-by-industry/telecom/Zain-board-approves-sale-of-African-assetsto-Bharti/articleshow/5720720.cms 47 http://www.moneycontrol.com/news/market-edge/analysts-differbharti-zain-valuations-rating_441969.html 48 http://infotech.indiatimes.com/articleshow/msid-5725997,flstry-1.cms

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http://www.compassnewspaper.com/NG/index.php?option=com_content&view=article&id=44534:from-zain-tobharti-airtel-the-coming-of-the-indians&catid=37:info-tech&Itemid=709 68 This ceiling is not applicable where the investment is funded out of balances held by the Indian party in its Exchange Earners Foreign Currency (EEFC) account.
69
http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/SPV-strategy-long-term-effect-bode-well-forBharti-stock/articleshow/5720921.cms
71 72
http://www.telegraphindia.com/1100414/jsp/business/story_12337285.jsp http://www.globaltelecomsbusiness.com/Article/2463625/Congoobjects-to-Bharti-ZainDeal.html?ArticleID=2463625&POS=1174484 73 http://economictimes.indiatimes.com/news/news-by-industry/telecom/Government-of-Gabon-disapproves-of-Zainsale-to-Bharti-/articleshow/5739541.cms 74 http://business.maktoob.com/20090000452942/Gabon_govt_objects_Bharti-Zain_deal/Article.htm 75 http://economictimes.indiatimes.com/news/international-business/Kuwaits-Zain-says-Gabon-approves-sale-toBharti/articleshow/5875744.cms

76
A bilateral investment treaty is an agreement intended to promote and protect foreign direct investment and establish the terms and conditions for private investment by nationals and companies of one state in another state. 77 http://www.unctad.org
78
Tax rate mentioned herein are inclusive of surcharge of 7.5% and education cess of 3%. http://business.in.com/printcontent/10652
79
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Telenor Unitech Deal
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PREFACE
On 28 October 2008, Telenor executed an agreement to acquire a controlling interest in Unitech Wireless, through subscription for new shares. Telenor and its Indian partner, Unitech Ltd, agreed to proceed with the transaction subject to certain adjustments to the initial agreement. While Telenors initial investment under the agreement will continue to be the previously agreed INR 61.2 billion it has been agreed that Telenor, following this investment, will hold 67.25% of Unitech Wireless (subject to regulatory approval, which has now been obtained). The subscription for new shares in Unitech Wireless has been completed in four phases. On 20 March 2009, Telenor made the first capital injection of INR 12.5 billion (NOK 1.7 billion), thereby completing the transaction. Following this investment, Telenors ownership share in Unitech Wireless was 33.5%. Upon closing of the transaction Telenor had management and board control in Unitech Wireless and has consequently been consolidating Unitech Wireless from 20 March 2009. On 19 May 2009, Telenor made the second capital injection of INR 13.7 billion (NOK 1.8 billion), thereby increasing the ownership interest to 49.0%. On 19 October 2009, The Cabinet Committee on Economic Affairs in India approved the recommendation by the Foreign Investment Promotion Board for Telenor to obtain a shareholding of 67.25% in Unitech Wireless. Uninor sought clarifications on certain elements to the approval, to which atisfactory responses were provided on 17 December 2009. On 7 January 2010, Telenor made the third capital injection of INR 14.9 billion (NOK 1.8 billion), increasing the ownership to 60.0%. On 3 December 2009, Telenor Groups Indian mobile operation, Unitech Wireless Ltd (hereinafter referred to as Uninor, the brand name of the Indian operation), announced the launch of its mobile services in seven Indian telecom circles. On 22 December 2009, Uninor further announced the launch of its mobile services in Orissa, taking its footprint to eight telecom circles: Orissa, Uttar Pradesh West, Uttar Pradesh East, Bihar (including Jharkhand), Tamil Nadu, Kerala, Karnataka and Andhra Pradesh. By the end of 2009, Uninor had registered 1.2 million subscriptions in the eight telecom circles in which its mobile services were available. On 10 February 2010, the Telenor Group announced that it had placed its fourth round of investment of INR 20.22 billion (NOK 2.6 billion) into Uninor, taking its ownership up to 67.25% and completing its equity investments in Uninor totaling INR 61.2 billion.
Background Note Telenor

Telenor Group is one of the worlds major mobile operators with 127 million mobile subscriptions*. We have mobile operations in 11 markets and in additionally 20 markets through our 31.67 per cent ownership in VimpelCom Ltd. Telenor Group: Strong footprint in Central and Eastern Europe and Asia Leading Nordic position in mobile, broadband and TV services
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ITM Business School Warangal Substantial activities in subsidiaries and joint venture operations One of the top 500 global companies by market value * Among the top performers on Dow Jones Sustainability Indexes 31,000 employees worldwide Revenues 2010: NOK 95 billion
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Telenor started out as a public company in 1855 and builds on more than 155 years of telecom experience. 127 million customers in consolidated operations; 301 million including VimpelCom Ltd (associated company)
Unitech Wireless
The company Unitech Wireless was until 2009 a subsidiary of Unitech Group, holding a wireless services license for all 22 Indian telecom circles since2008. In early 2009, Unitech Group and Telenor agreed on a majority take-over by Telenor of Unitech's wireless business, including Unitech Wireless' national-wide mobile license. By March, May and November, Telenor acquired a 33%, 49% and 60% stake in Unitech Wireless, respectively. In September, the mobile operation changed its name to Uninor. On October 19 the Indian Cabinet Committee of Economic Affairs (CCEA) announced that it has approved Telenor's acquisition of up to 74% in Unitech Wireless, and the shareholder's agreement sets a 67.25% Telenor ownership in Uninor.
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Telenor Consolidated Income Statement
Exhibit-14
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Telenor Consolidated Balance Sheet

Exhibit-15 40 | P a g e
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Financing the Acquisition

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ITM Business School Warangal Telenor makes first payment of Rs.1, 250 cr to Unitech arm
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Marking its formal entry into the world's fastest growing wireless market, Norway-based Telenor Group today said it has completed the Unitech Wireless transaction and made the first investment of Rs 1,250 crore that gives it a stake of 33.5 per cent in the telecom JV. Telenor will inject a total of Rs 6,120 crore of new equity into Unitech Wireless for 67.25 per cent stake in the firm. Telenor's remaining investment of Rs 4,870 crore will be completed in three tranches during 2009.
Pitfalls
Telenor which was planning to raise money through the right issue to invest in Unitech has some opposition from the other party because Telenors 54% stake is held by the government. Thus, there is opposition coming and the rights issue may not be great due to a lot of share holder value getting deteriorated. Hence that might be a problem if there is a more significant opposition. Reacting to the deal, Telecom Minister A Raja said Telenor would have get clearances from both the Finance and Home Ministry. Having issued the licence and the spectrum, whatever be the dilution in terms of share of 74% FDI by the Finance Ministry, it will go to the Home Ministry. They will be allowed to start services only after getting all clearances from both the Finance Ministry and Home Ministry, he said.
Problems
Telenor also want to invest up to Rs 11,200 crore ($2.24 billion) in Unitech Wireless . So that company need a fund . Telenor is funding the deal through combination of cash flow & additional debt. The Indian arm of Norwegian telecom group Telenor has raised Rs 5,000 crore as a bridge loan from State Bank of India to fund the roll-out of its operations in the worlds fastest-growing mobile market .
Benefits
Benefits to Telenor Telenor's Unitech deal finalized; to get 67.25% instead of 60%,so effectively valuing the deal 11 per cent cheaper. Telenor is also looking at an entry into third generation (3G) mobile services, which are yet to be launched in India.
Benefits to Unitech The deal will help Unitech Ltd reduce its debt as it will no longer have to guarantee the loans, which have been given by banks to Unitech Wireless.
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The new deal puts the enterprise value = the sum of a companys market capitalisation + debt cash Unitech Ltd, has consolidated debt of nearly Rs 8,000 crore, and has to make a payment of Rs 2,700 crore of debt obligations by March. & telenor give1250 crore for first stage of deal.
Benefits to both Unitech Wireless, a telecom venture of the realty major Unitech Group and Norways telecom operator Telenor has got both National and International Long Distance Licenses (NLD and ILD). The NLD and ILD licenses will enable the telecom operator to provide cost-effective STD and ISD call services to its mobile subscribers. It will also help the operator to save on traffic carriage expenses as it will be carrying its own traffic in NLD and ILD segments.
The Road Ahead

Venture of Unitech Ltd and Norways Telenor, has launch its mobile services by December 2009, with initial rollout in eight circles, four in south, two in Uttar Pradesh and one each in Bihar and Orissa. The biggest winner in the market share game was Uninor, which gained nearly 2%, followed by Videocon, which increased its market share by around 1% in year 2011. Uninor has increase its market share from 2.63 in Jan 2011 to 3.09 in July 2011 which was a increase of 17.50% in only 6-7 months period. Uninor, the brand name of Unitech Wireless, targets to gain 8 per cent market share in India by 2018. Exhibit-16
REFERENCES
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Uninor- http://www.uninor.in Telenor- http://www.telenor.com www.vccircle.com/.../unitech-telenor-deal-to-close-in-january-2009 http://business.highbeam.com/408843/article-1G1-187998614/security-wheels-telenor-deal http://www.financialexpress.com/news/telenor-deal-affordable-housing-fuel-unitech-net/573510/ http://www.businessworld.in/businessworld/system/files/BHARTI_AFRICAN_PLAY_pu_0.jpg. http://www.itnewsafrica.com/2011/09/bharti-airtel-predicts-5billion-revenue-from-africa/ Airtel http://www.airtel.in http://www.zain.com/muse/obj/lang.default/portal.view/content/About%20us/Overview/Our%20 Strengths www.Indusview.com Business Outlook
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Indian Telecom Sector Introduction

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800 million connections by the year 2012.

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5. Research & Development

Indian Telecommunications at a glance

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Scorecard of Telecom Industry for the month of June 2011

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M&A or the Consolidation- Deal Buzz Continues

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BHARTI AIRTEL - ZAIN Deal Dissection

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Mode of acquisition Consideration Mode of Payment

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ITM Business School Warangal Bharti Airtel- Income Statement

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ITM Business School Warangal CHRONOLOGY OF KEY EVENTS

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May 26, 2008 July 2, 2008

September 30, 2009

February 16, 2010

March 30, 2010

ITM Business School Warangal STRUCTURE OF THE ACQUISITION9

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525 309 202 186 179 147

Deutsche Telekom Group Telenor Group Sistema Group Reliance Communications

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