Indian School of Business

Analysis of Bharti Airtel’s

Acquisition of Zain Telecom’s
African Operations
Managing Strategic Partnerships

Team:
Suhas Khullar 61110575
Sushmita Sharma 61110155
Amit Ojha 61110036
Sai Swaroop Thota 61110378
Vikas Saroha 61110041
Abhishek Chitlangia 61110301
Bharti-Zain Acquisition Analysis Report

Acquisition rationale
1. Bharti’s primary motivation for the acquisition was to become a global player, and this
deal could propel Bharti to be world’s fifth largest telecom player by subscribers.
2. The acquisition also provided access to African markets – the hotbed of telecom activity.
With teledensity in India expected to reach saturation levels in next few years, Africa
provides a perfect potential for growth owing to low telecom penetration and higher
market growth rates.
3. With competition (13 players in 22 circles) cutting call rates in India, operating margins
have shrunk from 45c to 35c, so scouting for growth abroad is attractive.
4. Bharti
has
M&A
expertise in replicating its efficient processes, and so could do the same for Zain.

Strategic fit
The Bharti-Zain deal seems to fit with the long term goals of Bharti Airtel. Also, both the
companies can generate following synergies:

1. Network infrastructure: Better bargaining power with suppliers, Ease in providing inter-
continental ISD services.
2. Technology: Zain’s expertise in data services (3/3.5G) and Airtel’s expertise in
managing network technologies.
3. BPO and call center: Economies of scale
4. Shared services: Inter-continental roaming services, marketing
5. Business model: Bharti’s business model could be adopted leading to operating
efficiencies and cost savings.
6. Local knowledge: Local knowledge of market within Zain’s people.
7. Ready customers in a new geography: Cost and time required for setting up
operations and acquiring a customer base in Africa would be huge for Bharti

Strategically, the deal makes sense.

Financial fit
From a financial perspective, the deal will helps improve both the top and bottom line owing to
access to new markets and cost synergies. However, there are a few negatives about this deal:

1. The ARPU in Africa is approximately $1, much lower than $3 in India. Extra efforts will
be needed to increase this.
2. Even though Zain has positive EBITDA, African operations are currently not profitable.
This would require efforts at both ends to increase revenues as well as decrease costs.

The table below estimates Zain’s enterprise value:

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Bharti-Zain Acquisition Analysis Report

Driver Enterprise value

EBITDA Multiple = 8.5 (industry average)
  EBITDA = $1.1B (Africa operations)
  Enterprise value = 8.5 * 1.1 = $9.3B
   
Customer lifetime ARPU = $12
value CLTV = 12 + 12*1.05*.95/1.1 + …. = $130
  Number of subscribers = 70M
  Enterprise value = 70*130 = $9.1B

The estimated enterprise value is lower by $1.7B. Considering that the deal has numerous
synergies that it can capitalize upon, $10.7B seems to be a fair price for the deal.

Elements required and sources of value

Assets Processes People

Resources - Licenses to operate Not enough NA
in various African information
nations
- Customers
- Network
infrastructure
- Brand
- Multi Geographical
reach in Africa
Capabilities - Inter-country - Expertise in data - Local Sales and
roaming services services (3/3.5G) product
across Africa development to
- Ability to establish cater to local
presence in various preferences
African countries
Culture NA Not enough - Need to assess
information whether Zain culture
can offer some
benefit to Bharti.

Challenges
Regulatory Challenges
Integrative Complexity: Bharti needs to obtain regulatory approvals for the acquisition in each
of Zain’s 15 countries. They also need to ensure continued compliance with their regulations.

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Bharti-Zain Acquisition Analysis Report

Environment Uncertainty: Telecom regulatory policies differ by country. Further, due to

political instability, there is uncertainty around whether or not the regulations would continue to
be favorable.

Legal Challenges
Environment uncertainty: Certain ownership challenges exist (e.g. Nigerian operations).

Integration Challenges
Organization integrative Complexity: Africa differs from India in terms of political, social and
cultural milieu. Even though Bharti has vast human capital developed over a decade, there lies
a big challenge in integrating the processes in 15 different countries and bringing them under
one umbrella. The onus will lie on the local staff to ensure best practices and work towards the
core plan of growth in each market.

Product integrative complexity: With 3G services about to start in India, Bharti might require
the services of its trained market experts in India rather than transferring them to Africa.
Further, certain value added services may be specific to each market and hence, may not be
standardizable across the two markets.

Operational Challenge
Integrative Complexity: Bharti has been known to outsource its network to introduce cost
efficiencies, and to share the telecom infrastructure with other telecom service providers in the
region. This has lead to much lower cost of operations. This model is not present in Africa right
now and alliances with local players in the market might be difficult.

Product Uncertainty: A key driver for the deal is Bharti’s technical capabilities in low ARPU,
high volume markets. However, implementing it with localized, customized products is a big
challenge due to uncertainty in consumer preferences. Zain can help Bharti with the technical
knowhow of operating in 3/3.5G markets, but how effectively Bharti uses it is uncertain.

Market uncertainty
The growth and profitability of the African market is uncertain. The competitor and customer
response is also unpredictable. Bharti may struggle to realize its target ARPUs, and
competitors hit them hard armed with local knowledge.

Bharti’s plans could go haywire if the events unfold in a way which is not favorable.

Summary:
Integrative Complexity
Technical Incompatibility Medium
Target Maturity High
Product/Environment Uncertainty
Technical Uncertainty Low
Market Uncertainty High

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Bharti-Zain Acquisition Analysis Report

Integration Strategy
Asset retention – MEDIUM
- Licenses: Retain all
- Brand: Retain, but explore introducing a hybrid brand (Zain Bharti) to get global
customers and emphasize that they are on the same network across the world
- Network Infrastructure: Get rid of Zain’s self-owned network infrastructure and switch
to the low-cost outsourced model as in India. This plays on Bharti’s strength in
managing outsourced infrastructure
- Customers: Retain all
- Multi-geography presence: Retain all geographies taking Africa’s overall growth into
account

Process adoption – MEDIUM/LOW

- Zain’s operating business models: Discard, as they are less efficient than Bharti’s. 
Follow processes similar to Bharti to get efficiency. However, to account for Africa-
specific parameters, perform process disaggregation analysis and accommodate these
parameters into Bharti’s processes
- Expertise in 3/3.5G: Retain in Africa, selectively exploit in India

People retention – HIGH

- IMPORTANT: Create a cross-geography, cross-functional team to promote mutual
cultural understanding between people of the two countries
- Initially, retain all people that do not explicitly clash with Bharti’s new processes in order
to be sensitive to how Zain employees’ reaction to non-African ownership and control
- Retain entire sales force, as this is an expanding market, and operating profitability is
good

Degree of Organizational Integration - MEDIUM

Africa and India have several similarities in terms of market composition and (to a lesser extent)
work cultures. Also, both are emerging markets that will be strongly interdependent in the
future. Therefore, merging the two organizations at a functional level (i.e. VP of Sales controls
both Zain and Bharti sales teams) has strong potential for both, economies of scale and cross
learning. This makes the case for high degree of organizational integration. This has to be
balanced against the resulting loss of flexibility and adaptability, which is important because the
Africa telecom market is growing at a much faster pace while India may be cooling off.

Therefore, we recommend a hybrid structure with business flexibility but functional control.

Speed of integration - MEDIUM

Why FASTER?
- Bharti knows the business well, and is
profitable. Implementing this model
quickly will help realize the benefits
from its control quicker
- Bharti needs quicker returns on
investment due to the deal’s massive
debt financing
Why SLOWER?
- Zain employees need to develop trust
in this new management from a
different country.
- Timeline indicates only 2 months of
due diligence on this deal (beyond
previous MTN work), and practically
these exercises de-emphasize people-

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Bharti-Zain Acquisition Analysis Report

related integration issues

Therefore, we recommend the following approach:
- Integrate high-level business and financial metrics (and related systems, people and
processes) as soon as possible to communicate the key business goals to the entire
organization
- Integrate mid-level operational metrics more slowly to allow people to adjust to the
business goals
- Zain operational efficiency is not very suspect (as evidenced by its decent EBITDA), so
line employee level processes and systems can change more slowly (or not at all)

Knowledge transfer - HIGH

The African market seems to be following a similar growth trajectory as the Indian market did,
so knowledge transfer from Bharti to Zain is important. Similarly, Zain’s knowledge of 3G
technology will be useful to Bharti in India. However, to balance this with the need for focused
product delivery, we recommend a fast but selective knowledge transfer (e.g.: 3G). Locale-
specific information can be kept silo-ed but available to interested parties via a common access
portal.

Summary:
Asset Retention Medium
Process Adoption Medium/Lo
w
People Retention High
Degree of Organizational Integration Medium
Speed of Integration Medium
Knowledge Transfer High