Induvidual Assignment Submission Form

Course Name: Merger and Acquisition

Assignment Title: Bhart Zain merger Submitted by: Sahil Kapoor

Roll no Gnov09ibwm026
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Date: Sept 2, 2010

Introduction
This agreement is a landmark for global telecom industry and game changer for Bharti Sunil Mittal
Acquirer Seller Bharti Airtel Limited Mobile Telecommunications Company KSC Zain Africa International BV USD 10.7 billion Cash 9 billion , ZAF Debt 1.7 billion Security (Share) Sale

Target Consideration Mode of Payment

Mode of acquisition

. Bharti Airtel Ltd ( henceforth referred as BAL) finally managed to the enter the African telecom market after it managed to acquire Zains African operation (henceforth referred as ZAF) including Sudan and Morocco for a whooping 10.7 Billion (total enterprise value). This is the second largest Indian acquisition after the Tata Corus deal and the largest in the Indian telecom sector making BAL as the sixth largest telecom provider in the world. This was BAL third attempt to enter into the African market after its earlier attempts to strike a merger with South Africas MTN failed, ironically MTN will be its main competitor in the African markets.BAL will expand its operation in 15 African countries by Oct 2010.

Chronology of BAL ticket to the African Safari

May 5, 2008 May 24, 2008 May 25, 2009 July 31, 2009 August 3, 2009 August20, 2009 September30,2009 February 14, 2010 February 15, 2010 March 21, 2010 BAL approaches MTN Discussions discontinued due deal structuring issues Renewed potential merger discussion First deadline for exclusivity talks period ends Extended till August 31 due to issues regarding deal pricing Deadline extended till September 30 due to issue dual listing Talks called off Zain announces board meeting to discuss potential merger BAL gets into exclusive talks with Zain for acquiring its 15 country African operations Bharti Airtel says has tied up $8.3 billion from a clutch of foreign banks and State Bank of India to fund the acquisition of Zain telecom's African assets BAL announces definite merger as it completes due diligence Bharti Airtel signs deal to buy African assets of Kuwait-based Zain Telecom for $10.7 billion.

March 25, 2010 March 30, 2010

*:

Deal Structure

Bharti Airtel India Singapore SPV Zain Africa International BV

Bharti Airtel Netherland BV Company Profile Bharti Airtel

Operation in 15 countries

BAL, the flagship company of the Bharti Group was incorporated on July 7, 1995 and since it has grown to be the largest integrated telecom service provider. It commands a market share of 24% in the Indian Telecom sector and has its presence in all the 23 telecom circles. Its has been a pioneer in the Indian telecom industry providing world class products and services. The shares of the company are listed on NSE (national stock exchange) and the BSE (Bombay Stock exchange).BAL also has the License to operate in Sri Lanka and Seychelles. It a Dhaka based Warid Telecom for 300 million The operation are Sub divided into 3 SBU (Strategic Business Units) Mobile Services Provides GSM services in all the telecom circles and has the largest customer base in India Airtel Telemedia services Broadband and telephone service in 94 cities Enterprise services End-to-end telecom solutions to corporate customers and national & international long distance services to carriers

Bharti Airtel Ind

BAL also offers DTH and IPTV services. All these services are rendered under the brand name of Airtel Zain Zain established in 1983 was Kuwaits first mobile operator. Provides Mobile telecommunication and data services, including purchase, delivery, operation, Installation, management and maintenance of mobile telephone and paging system in Kuwait and 21 other countries in the middle east and North Africa. Mobile Telecommunication company lebanon(MTC) SARL, Lebanon and Sudanese Mobile Telephone (Zain) Company Limited, Sudan are its wholly owned Subsidiary. The proposed merger

reflects a shift in the companys strategy which earlier targeted to be one of the top ten telecom operators in the world with more than 150 million customers. ($mm ) Reven ue EBITD A PAT Capex Subs CY06 2,486 1,055 330 1,136 16,87 1 CY07 3,164 1,129 CY08 4,160 1,397 9m,CY 09 2,732 870 -112 844 42,190 Zain Africa Zain International BV, incorporated in Netherlands, is a wholly owned subsidiary of Zain. It holds its African operation and was acquired by Zain in 2005

EBITD A PAT Reven ue EBITD A PAT Subs

374 122 1,519 1,882 26,81 41,01 8 8 Margins % 42.4 35.7 33.6 13.3 11.8 2.9 Growth % 27.3 31.5 7.1 13 59 23.7 -67.3 52.9

31.8 -4.1 -12.4 -17 -221.8 3 India continues to be the most sought after destination for the telecom sector. It set a new world record in Jan 2010 by adding 19.9 million new subscribers. This is equal to 1.5 times the annual subscribers added in the US. In the year 2009 India continues to outpace China by adding 177 million subscribers vs 106 million in China. Growth opportunities in the rural India are huge. The ARPU for data service in India is extremely lo at $ 0.5 cents compared to China (data ARPU is 32%) and other developed markets. The nest spurt of growth is expected from rural India and the data segment. The 3 G services are also at a nascent state in India and will provide good growth opportunity. BAL holds a dominant position in the Indian telecom market and has a strong hold in rural region but is now facing stiff competition from new and existing players. The Industry is becoming extremely competitive. The recent price war among the players has adversely effected the margins of the telecom players. They have underperformed the broader market. The competitive landscape of the Indian market leading to declining profitability, its already large market share has forced it to look out for higher growth regions like Africa.

Indian Telecom Sector

Rationale for the Acquisition Geographical Diversification Indian telecom market has become highly competitive with 13 service providers battling out for a chunk of the revenue. BAL will experience a number of speed breakers along its growth path in India. The Indian telecom sector seems to have reached its saturation point with scope of expansion left only in the inner part of rural India.BAL is a core telecom company and will engage in product diversification leaving geographic expansion as the only strategic alternative to counter slowing profit growth in India. The Lure of Africa Africa is where the next destination which will experience a revolution in the telecom Sector. Factors which make Africa the hottest destination are Favourable Demographic

Aggregate population of 470m .The African population is expected to double to 2 billion people outpacing India and China which are expected to grow to 1.6 billion and 1.4 billion respectively The median age is 17-18 compared to the Indian median age of around 25-26.It is forecasted that 25% of the world youth will reside in Africa.

Spending Power Consumer spending potential is estimated to be around $1.4 trillion. The GDP is growing at rate of more than 5% in 27 of the top 30 economies in Africa. Social ad Democratic reforms are further cementing the growth potential of the continent

Huge potential Also the industry teledensity is only 20% with some countries as low 1012%, BAL managements expects to grow this to around 60%. MoU at 50 60 min vs Global average of 300 min and Indian Average of 450 min but ARPU (Average revenue per unit) is higher than India (7 US cents vs 1 US cents). MOU elasticity has played out in BAL current existing markets like India and Seychelles. Low competition, only 4 or less telecom operators in 12 countries (out of the 15 countries in ZAF operation). Strong market position of ZAF, it is the biggest operator in 10 countries, the second largest in the remaining 4 out of the 5 operators. An opportunity to increase its presence in Africa by venturing into other markets using ZAFs exiting infrastructure.

ZAF African Operation

Country Stake (%) 100.0 100.0 90.0 98.5 90.0 75.0 95.0 100.0 100.0 Sub (Mn) 1.4 1.2 1.4 3.6 0.9 1.2 2.2 1.4 1.7 Mkt Share(%) 51 70 53 45 62 9 17 38 72 Total Mkt (Mn) 2.8 1.7 2.7 7.9 1.4 13.4 12.9 3.8 2.4 Pop (Mn) 15.8 11.5 4.0 67.5 1.4 24.5 39.9 20.9 14.8 GDP/Capita ($ PPP) Penetration (%) 23 19 75 14 123 61 48 23 17 Peers Rank ARPU (US$) 7 10 12 8 25 3 4 5 8

Burkin Faso Chad Congo DRC Gabon Ghana Kenya Magadscar Malawi

1,259 1,670 4,044 340 14,747 1,513 1,735 995 850

2 1 2 4 2 4 3 2 1

1 1 1 1 1 4 2 2 1

Headroom to implement its successful low cost high usage model African markets BAL the opportunity 4to leverage its 16 1 10 management 3 which has the 45 2 7 expertise to operate1 effectively in 39 3 7 Indian markets characterised by 3 1 5 low 33 income, low tariffs (but high 35 3 margins) and a 2 large4 rural 33 8 population 2these 1 characteristic are shared by the African markets.BAL should be successful in scaling its business model in Africa as efficient telecom business models are highly scale able. Vodafone has displayed this India.

Niger Nigeria Sierra Leone Tanzania Uganda Zambia

90.0 65.7 100.0 60.0 100.0 78.9

1.4 14.9 0.6 4.8 2.2 2.9

67 25 46 39 37 70

2.1 59.7 1.2 12.2 6.1 4.2

15.4 155.8 6.1 45.8 33.3 12.5

691 2,142 6,095 1,352 1,148 1,397

Country

Competition

rkin Faso Chad Congo DRC Gabon Kenya Magadscar Malawi Niger Nigeria Sierra Leone Tanzania Uganda Zambia

Telemob (35%; Moov (14%) Tigo 30% MTN (40%); Warid (7%) Replicating BALs Match Vodacom (30%); Tigo (14%);CCT (11%) Box strategy. A distribution model Libertis (22%); Moov (16%) which ensures that Sim cards and Safaricom (78%); Orance (4%);Yu (1%) recharge voucher are available in Orange (40%); Telma (22%) every possible store. Such a TNM (28%) distribution mechanism is unheard Orange (14%); Moov (13%); of in Africa but if successfully MTN (45%); Glomobile (19%); replicated it could boast sales for Africell (34%); Comium (15%); BAL. Vodacom (33%); Tigo (23%); MTN (50%); UTL (8%); MTN (23%) and Zamtel (7%)

Operational synergies can be obtained by rationalizing operation and capital by implementing BALs outsourcing strategy. BAL has outsourced it entire network to IBM. Passive sharing on the same lines as that of Bharti

Valuation Expensive at Prime facie BAL acquired ZAF at an enterprise value of USD 10.7 Billion which is at an EV/EBITDA of 9.8x making it one of the most expensive valuation for a emerging market telecom player.USD 8.3 billion will be paid in cash three months after the deal closes and the remaining 700 million will be paid one year after the closure of te deal.BAL will assume debt of 1.7 billion on the books of ZAF. The valuation looks extremely expensive when you take in account the BAL was quoting at an EV to EBITDA of 7.2 times and it paid an EV to EBITDA of 9.8x for ZAF. The price appears ridiculously high if we consider that seven units are loss making. The cumulative losses in these segment till CY03 are $ 248 million offsetting the profits from the other segments. Nigeria poses a great threat as its a large revenue earner but the current operati[Type a quote from the document

or the summary of an interesting point. You can position the text box anywhere in the document. Use the Text Box Tools tab to change the formatting of the pull quote text box.] on are not profitable , a possible turnaround will be difficult as ZAF is not the market leader in this region. The huge incurred for the acquisition will increase the financial risk of the company and servicing this debt will reduce it profits.BAL will also be exposed to foreign currency risk as capex expenditure will be incurred in dollars but revenues will be earned in the local currency. The African region is marred with political instability, high Inflation and volatile currency ($mm) Enterprise value EBITDA EV/EBITD A Revenue EV/Sales Subscribe rs ('000) EV/Subscr iber Full Value CY08 CY09 E* 10,70 10,70 0 0 1,397 1,159 7.7 9.2 4,160 2.6 41,01 8 261 3,643 2.9 42,19 0 254 Adj for MI CY08 CY09 E* 10,70 10,70 0 0 1,087 923 9.8 11.6 3,310 3.2 32,41 6 330 2,936 3.6 33,74 2 317 EV to subscriber multiple Looking at the EV per subscriber multiple the deal looks fairly valued if compared to some deals in the past. Tata Tele acquisition by DoCoMo and Vodafone in Hutch Essar were at similar valuation

A gamble worth taking A few important consideration before using the EV multiple to pass a judgement on the deal Start up operation such as Ghana have negative EBITDA which distort the EV/EBITDA to some extent The African operation deserve a higher multiple as the effective tax rate in Africa is less The valuation should take into account the control premium ZAF has made cumulative capital investment to the tune of US$ 9 bn.BAL will require a capital expenditure of only 800 million to kick start its operation in the highly densely populated in Africa region

The huge reported losses may be misleading as the financial crises lead to significant devaluation of the African currency as the African economy is highly dependent on crude and remittance. The sharp currency devaluation contributed majorly to the revenues declining by 12.6% and the company reporting a negative PAT but with the global economy showing signs of revival we can expect stable currency. Performance in

the previous years has been exceptional. The company reported a revenue growth of 86% and maintained an EBITDA margin of 35% in CY07-08. Revenue local CY06 CY07 31,99 48,167 8 34,19 43,853 4 66,68 117,38 3 7 117,6 164,83 60 0 86,06 111,71 0 8 0 0 12,56 13,077 0 77,11 93,078 3 5,737 9,954 31,94 44,332 6 78,36 147,30 7 8 131,0 129,21 58 3 1,283 1,541 72,86 157,57 3 6 682,7 1,007,1 92 16 Currency (mm) CY08 CY09* 57,668 57,130 55,605 127,52 9 213,12 5 122,28 6 14 11,232 141,49 1 17,917 57,937 195,68 4 143,39 8 1,564 235,68 4 1,327,2 76 63,401 164,78 6 261,75 1 120,21 7 66 12,097 149,10 4 20,950 71,052 196,32 9 150,34 2 1,081 206,35 6 1,431,2 15 Growth % CY07 CY08 CY09* 51 20 -1 28 76 40 30 N/A 4 21 73 39 88 -1 20 116 47 27 9 29 9 N/A -14 52 80 31 33 11 1 50 32 14 29 23 -2 370 8 5 17 23 0 5 -31 -12 8

Burkin Faso Chad Congo DRC Gabon Ghana Kenya Magadscar Malawi Niger Nigeria Sierra Tanzania Uganda Zambia

Country

Currency Devaluati on -5 -5 -31 -31 -5 -24 -10 -13 -5 -20 -12

Burkin Faso Chad Congo DRC Gabon Ghana Kenya Magads car Malawi Niger Nigeria Sierra

Tanzani a Uganda Zambia

22 -15 -26

The deal will be fully financed by debt which will improve the capital structure of BAL. Unlike other Telcos BAL is comparatively under levered and has a net debt- equity ratio of 0.11x compared to the global average of 0,44 x this has helped BAL borrow at a cheap rate. The deal has been structured as an LBO .BAL has created 2 SPV at Singapore and Netherland. The cost of debt is Libor+195 bp which will result in a annual interest cost of USD 200 million. The company can also further leverage the African operation which also acts a hedge against currency fluctuation. The company has given guidance that it will be able to pay up most of its debt by FY 16/17 backed by its strong FCFF generating capacity and the deal will be EPS accretive by FY13 Considering the growth opportunities and huge scale presented the acquisition may be slightly expensive but will prove beneficial in the long run and will increase shareholder value. ($mm) Revenues EBITDA PAT EPS PAT Interest Interest Adjusted Adjusted O/s Shares Accretion/ (dilution) % FY11E 9,082 3,683 2,101 24.9 178 642 514 1,765 20.9 3,796 -16 FY12 E 10,22 3 4,097 2,411 28.6 277 514 411 2,277 27 3,796 -6 FY13 E 11,20 8 4,529 2,834 33.6 310 385 308 2,835 33.6 3,796 0 FY14 E 12,14 8 5,008 2,849 33.8 347 257 205 2,991 35.5 3,796 5

Market Reaction
The market reaction to the acquisition was not positive and BALs stock corrected by 11% post the announcement as the deal was considered expensive and the market was sceptical if BAL will be able to turn around a loss making company but as more clarity emerged on the deal structure the market has bee divided.

CRISIL placed a rating watch with negative implication on BAL long term debt on Feb 19 2010. The debt being financed by debt will affect the gearing ratio adversely increasing the financial risk of the company. CRISIL also believes that the deal is good in hte long term as it will improve the business profile due to the diversification of revenues.

Post Merger Integration and Challenges

Bal has a fully staffed integration team. They have already made changes in the existing management and a few Africans have been bought to work in India to understand the operation of BAL and scale at which they operate. Nairobi has been designated at the Head quarter and around 40 to 50 people from India have been moved to Africa.BAL is mainly encouraging local talent. BAL wants to go for Re branding in October but before that they working to improve the quality of their network as well as their service and distribution. They are keen to replicate their low cost high usage model, Match box (distribution strategy) and outsourcing strategy in the existing countries before they plan to leverage their existing African asset to expand further in the region. Initially they want to concentrate on higher income and commercial areas , they want to increase penetration in these areas. BAL realises that the opportunity in Africa is huge and is even greater than that in India. They are viewing the African assets in an independent fashion. There will significant amount of challenges BAL will face in order to achieve successful post merger Integration Firstly handling 15 regulatory will be a challenge. Addressing cultural misfits in a cross border deals is of paramount importance. Failed negotiation with MTN can attributed to some extent to cultural misfit between the two parties. Language barriers will cause be a major road block as they replicate their Match Box Strategy and increase penetration through the masses. Macroeconomic environment is not exactly welcoming for business, the continent has faced political instability and corruption and high crime rate. Theft of equipment and inadequate electricity would slowdown the operations. Competition in Africa will only grow as it is the most sought out destination for companies chasing growth Interacting and managing local talent will something new and challenging for the BAL management

Zain Nigeria may cause legal hassle for Bal as Econet a major telecom player in Nigeria claims that it has the first right of refusal was breached when V mobile was sold to Zain in 2006.A legal battle is on in the UK court. Nigeria is one of the highest revenue grosser in ZAF operation

Conclusion BAL cross border acquisition of ZAF has made it one of the top global players in the telecom industry. Though the acquisition was not cheap and the stock price corrected post the merger announcement there is huge potential in Africa and if BAL is able to leverage it management team capability and experience to replicate its successful business model in Africa the deal will be able to create shareholder value in the long run. Cross border acquisition was also the best strategy for BAL to counter the hyper competition India. It also provides it the much needed diversification in revenues. The funding of the deal is strategically done through an LBO providing BAL the levy to consolidate it operation in rural India and in the 3G space. Though the potential is huge the road ahead is not easy BAL will have to turn around the ZAFs 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 will no be easy for the BAL management.