Bharti Airtel-Zain Merger

Objectives
a) To understand the Vision, Mission and Strategy behind the acquisition b) To study & to understand the various Legal Aspects involved under such global M & A`s deal c) To understand the criticalities & nitty gritty involved in a mega deal. What can be the payment structure, what can be the source of funding etc? d) To understand the strategy, why a successful firm need to enter such M & A`s form of business & what can be the long term advantages of the same?

Bharti-Airtel
3rd LARGEST wireless operator in the world with operations in 19 countries across Asia and Africa. 5th LARGEST INTEGRATED telecom operator in the World. LARGEST TELECOM company listed on Indian Stock Exchanges It is structured into four strategic business units - Mobile, Telemedia, Enterprise and Digital TV. Bharti Airtel is the leader in Indian Wireless market with 20.2% market share, followed by Reliance Communications 16.7%,Vodafone16.5 %. Its Mobile Services partners are Nokia Siemens, Ericsson, Huawei. As per latest figures Bharti Airtel has 207.8 mn Customers and Net Assets are worth $ 32.3 bn.

Zain
Zain, formerly MTC, was the first mobile telecommunications company in the Middle East when it started its operations in Kuwait back in 1983. Its subsidiaries include; Mobile Telecommunications Company (MTC) SARL, Lebanon, and Sudanese Mobile Telephone (Zain) Company Limited, Sudan. 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 facilities and paging systems in Kuwait and 21 other countries in the Middle East and Africa. Zain Africa is Wholly owned subsidiary of Zain, incorporated in Netherlands and undertook the African operations of Zain.

Vision 2015

" Enriching lives means putting the customer at the heart of everything we do. We will meet their needs based on our deep understanding of their ambitions, wherever they are. By having this focus we will enrich our own lives and those of our other key stakeholders. Only then will we be thought of as exciting, innovation, on their side and a truly world class company."

Mission
We will meet the mobile communication needs of our customers through
Error- free service delivery Innovative products and services Cost efficiency Unified Messaging Solutions

Why Zain-Africa?
Bharti Airtel came up with an out of the box decision to hand over every core function from IT to Networks to IBM in 2004. Idea was to remain and grow as a core telecom company and it did. In May 09 it became largest telecom in India, but over a period profit margins were continuously falling view 13 competitors fighting fiercely for every chunk in market. Being a core telecom company it could not diversify its portfolio into other businesses and geographic expansion into new markets was the only alternative to escape slowing profit growth in India. Next round of telecom revolution is likely to happen in Africa and this emerging market was ideal for Bharti s business aspirations for days to come. To reduce its business dependence on fast-saturating Indian Market, this deal was a business necessity for Bharti Airtel.

Bharti Airtel Zain Deal

Bharti Airtel Ltd acquired Zain Group s ( Zain ) mobile operations in 15 countries across Africa for an valuation of USD 10.7 billion. With this acquisition Bharti Airtel became the 5th largest mobile operator in the world. Bharti s acquisition of Zain s African mobile services operations covers a total customer base of over 42 million with telecom penetration of approximately 40%. The countries in which Bharti has acquired the operations are - Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda, and Zambia. Zain is the market leader in 10 of the 15 countries and second in 4 countries. Leveraged buy out: Bharti Airtel has borrowed USD 7.5 billion from a consortium of banks led by Standard Chartered Bank and Barclays Bank. Bharti Airtel availed a rupee loan of USD 1 billion equivalent from SBI Group

trategy
Translate its expertise in Indian markets to other emerging economies.This could call for acquisitions globally. Technology leadership is a must Airtel must ensure that its reliance on GSM technology does not render it obsolete. Indian market inspite of being the worlds largest is still not matured. Opportunities abound in the hinterland

Legal and Regulatory considerations

Glossary of Terms Used
Merger: A Merger is a legal term which means dissolving the earlier business & folding its assets & liabilities into a newly created third entity, it entails the creation of a new corporation. Like ArcelorMittal merger in Steel Industry. Acquisition: When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the Target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. Like TATA`s acquisition of Land Rover & Jaguar from Ford & Tea Brand Tetley of U.K./Steel Company Corus of U.K. PVs/SPEs (Special Purpose Vehicle or Special Purpose Entity): A subsidiary company created as separate legal entity for large term projects without putting parent company at financial risk. Its legal status makes its obligations secure even if the parent company goes bankrupt. Like TATA created two SPV`s-TML Holdings Pvt.Ltd.in Singapore & Jaguar Land Rover Ltd.in U.K.while acquiring Land Rover & Jaguar. RoFR (Right of First Refusal): A contractual right to holder regarding entitlement to shares before the shares are made available to third party or public at large. Like in the case of ONGC/Cairn/ Vedanta. ONGC believes that by virtue of holding 30% in the Rajasthan block, it has the pre-emption or RoFR to buy Cairn India in case the company's ownership changed.

Overseas Direct Investment

Any Indian company if wants to acquire or invest in foreign company , it must comply with the FEMA ((Transfer or Issue of any Foreign Security) Regulations, 2004 (ODI Regulations). It means under ODI regulations,an Indian company is permitted to invest in a joint venture/wholly owned subsidiary upto 400%of the net worth of the Indian company in the form of equity/loan or guarantee without seeking prior approval of 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 In case of Bharti-Zain deal, Bharti created two SPV`s, one in Netherlands & one in Singapore

Guarantees Regulations
In means , a company in India promoting or setting up joint venture or subsidiary company has to give guarantee on behalf of the subsidiary company to the bankers for the loan. In this case, Bharti has to provide corporate guarantee on behalf of its SPV`s i.e. both Singapore & Netherlands SPV`s to bank for the loans for financing the transactions. Hence it attracts the regulation 5 (b) ) of Foreign Exchange Management (Guarantees) Regulations, 2000 (Guarantees Regulations)

Nigerian Hurdle
Econet Wireless International, A major telecom player in Nigeria, wanted to use its pre-emption rights of right of first refusal in respect of shares had been breached when Econet s predominantly Nigerian partners decided to sell their shares in Vee Networks (or V-Mobile) to Zain in 2006 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 Till the time the ownership issue over Zain Nigeria is resolved, Zain faces a hurdle in transferring its Nigerian assets to Bharti Airtel

Congo Controversy
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. The Government also claimed that the deal is in contravention to Zain`s local mobile license . It would be difficult for the Bharti to get all regulatory approval.

Gabon Glitch
In this case, the Government of Gabon raised a regulatory objection to the deal alleging that Zain had not complied with certain telecom regulations in Gabon. The Gabonese Government has disapproved the sale of Zain`s Gabonese assets & reserves the right to take all necessary measures. But off late, Government of Gabon gave its approval to the sale of Zain s assets in Gabon to Bharti.

BCG Model

Swot Analysis
Strength Post acquisition, Bharti Airtel will become fifth largest service provider in terms of the number of subscribers. The deal would give Bharti 42 million subscribers in 15 African countries, which have a combined estimated annual revenue of $3.6 billion Bharti, largest telecom player in India, can replicate the success of India in Africa Strategic Alliance with other stake holders, including Nokia, SingTel & Sony Ericson

Weakness
Bharti has paid a heavy price for the deal Zain Africa has made a net loss of USD 112 million in the nine months to September 2009. Seven of Zain s African units are loss-making, including its highest revenue earner, the Nigerian arm, Zain Nigeria. The deal is highly volatile and carries huge commercial risk for Bharti Airtel The loan would be a drag on Bharti Airtel's earnings with no immediate returns expected from the lossmaking target.

Opportunity
Telecom penetration in African countries varies from 37 per cent to 65 per cent. There are few markets with penetration less than 40 percent The African market is homologous to Indian market in term of its structural similarities. Monthly ARPU on the Continent averages USD 7.5, which is higher than India s ARPU of USD 5 Africa is too good an opportunity for Bharti Airtel to experiment the model that it has mastered in India, particularly its rural strategy.

Threat
Zain Africa is in trouble and financial paralysis is looming over its head 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. Bharti-Zain will be getting a tough fight with rival like MTN and China Mobile. There are greater political and economics risks in Africa . Most of the countries are politically unstable and operations are still loss making.

Reason for the deal

Competition in India. (13 operator in each of 22 circles) Cut call rates from Rs 16.80 pm to .50 pm. Huge decrease in Avg. Revenue per user. From 500 Rs to 145 Rs today. In last five years. Telecom density in India is almost 67.6 % Expected to be about 80% in 2015.

Advantage point
A) ZAIN from BHARTI Bharti may bring in tariff schemes for a low ARPU but high volume market. Zain can also benefit from Bharti is efficiency in managing network operations. B) BHARTI from ZAIN Bharti can understand African market better. It can learn a lot from Zain expertise in data service such as 3G and 3.5G

Competitors Analysis
Reliance communication (GSM+CDMA) (18.75%) Tata (DOCOMO) Idea Aircel MTNL BSNL (3G) VODAFONE (17.81%) Loop telecom (CDMA) MTS (Sistema shyam)

Conclusion
Bharti Airtel cross border acquisition of Zain Africa operations has made it one of the top global players in the telecom industry. There is huge potential in Africa and if Bharti is able to leverage it with its management team capability and experience, to replicate its successful business model in Africa, the deal will be able to create tremendous shareholder value in the long run. Bharti has already declared to outsource core customer service operation such as call centres and back office functions related to its mobile networks across Africa to the three firms IBM, Tech Mahindra and . This is in accordance with its Outsourcing model it practices in India.

Conclusion ..cont
The funding of the deal is strategically done through an LBO providing Bharti Airtel the levy to consolidate its operations in rural India and in the 3G space. Though the potential is huge the road ahead is not easy, Bharti will have to turn around Zain s current loss making operations and grow at the rate of 22 to 25% to justify the valuation behind the deal. Given the cultural differences, challenging macro and business environment the turnaround this will not be easy for the Bharti Airtel management. Cross-border acquisition was also the best strategy for Bharti to counter the hyper competition India. It also provides it the much needed diversification in revenues.

 Of the $10.7 billion enterprise value of Zain, Bharti will be paying $8.3 billion upfront and $700 million after a year. It would also take over approximately $1.7 billion of Zain's debts as on December 31, 2009. Of the $8.3 billion paid to Zain, Bharti has raised debt from a consortium of foreign banks and State Bank of India with the leadarranger and lead-advisor Standard Chartered Bank committing the highest amount -- $1.3 billion, followed by Barclays at $900 million. The rest of the co-advisors -- ANZ, BNP, Bank of America-Merrill Lynch, Credit Agricole CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation -- have allocated $600 million each. State Bank of India has agreed to an up to USD one billion loan in rupee terms.

 The deal, which makes Bharti the world s fifth-largest mobile-phone operator by subscribers, gives the company access to Africa, allowing it to tap a market with high growth potential. The acquisition provides Bharti with meaningful growth opportunities in Africa, which still has relatively low mobile phone penetration, and an opportunity to improve Zain Africa s relatively lower EBITDA [earnings before interest, taxes, depreciation and amortization] margins, Standard & Poor s credit analyst Mehul Sukkawala said in a note.

Transaction details of Bharti Airtel-Zain

Acq uirer -Bharti Airtel Limited Seller -Mobile Telecommunications Company KSC Target -Zain Africa International BV Acquisition -Bharti Airtel Limited indirectly acquired 100% of Zain Africa International BV and its business operations in Africa from Zain under a privately negotiated agreement. Mode of acquisition -Security (Share) Sale Consideration US D 10.7 billion Mode of Payment 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; andc) USD 1.7 billion assumed as debt on the books of Zain. Fun ding Leveraged Buy-out a) Bharti Airtel to borrow USD 7.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 SBIroup.