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International HRM term paper
Robinson D F10048 Loyola Institute of Business Administration 3/19/2012
Only the Zain board has to give a go ahead. of course. Talk to the people at Bharti and they will tell you off the record that they expect this deal to be smooth sailing. the US$8. This potential transaction does not include Zain's operations in Morocco and Sudan and remains subject to due diligence. and we have to pay. a measure of caution. Bharti informed the Bombay Stock Exchange (BSE). The combined firm would have revenues of some US$13 billion.7 billion. Bharti shares plunged some 14% on the Mumbai stock exchange in just two days.14 billion Zain told their respective stock exchanges that they were in exclusive discussions until March 25.15 billion Bharti and the US$4. The comments range from "Pained by Zain. On the table were the African assets of Zain Africa BV which comprises 15 countries. Jordan. "In Zain. Bahrain. Africa‟s biggest telecom operator. The note is." Yet the proposed deal has given rise to misgivings. Iraq. as Bharti expects. .1. Bharti Airtel and Zain have agreed to enter into exclusive discussions until March 25 for the acquisition of Zain's African unit based on an enterprise value of US$10." Mittal told weekly business magazine BusinessWorld. Left with Zain would be Kuwait. depreciation and amortization (EBITDA) of around US$5 billion. there are no multiple clearances required. What they did question was the audacity of the Zain acquisition that required Bharti to shell out $10. and earnings before interest. customary regulatory approvals and signing of final transaction documentation.7 billion in cash. Almost nobody questioned India‟s largest telecom firm‟s great African push. "The MTN deal was complicated and needed many interventions from both governments. Almost every research house has been critical of the deal. Substantial amounts of this was loan In a deal announced on February 14. taxes. Lebanon. What is the business objective that made it happen? How did the organization benefit from the activity? Mittal‟s desire to hit the African market was evident even a year before when he bid without success to consummate an acquisition/ merger with MTN. Rating Cut" from Bank of America Merrill Lynch to "Very expensive diversification" by Credit Suisse. and two African markets Sudan and Morocco which are considered part of the Middle East cluster. after the deal closes in May. Saudi Arabia and Palestine.
7 per cent and -0. Zain‟s arch rival MTN continues to lead in Africa‟s biggest telecom markets such as Nigeria. though. CEO (international) and joint managing director of Bharti Airtel. “Bharti results reflect the expected drag from their Africa operations.4 per cent of the region‟s revenues and a net profit equivalent to 12 per cent. principal analyst at Gartner. is that it is the market leader only in the smallest of countries such as Chad. Bharti Airtel is weighed down by the burden of the Zain acquisition.5 per cent to Rs 413.” he says. We are digging our heels deep in a continent which is the biggest future market of the world.A year down the line. Zain. days before the company was to declare its June quarter results. “Now they call me Manoj. Bharti leads in eight of the 16 countries where it operates in Africa. In the year ended 31 December 2010. is still battling it out in the African markets. whose African colleagues initially found it tough to pronounce his name. That‟s an improvement over the $15-million net loss Zain incurred in June 2010.6 billion. And its parent Bharti is bearing the brunt of its struggle for profitability and market leadership. the African operations incurred a net loss of $75 million.” says Manoj Kohli. while Bharti‟s Indian and South Asian operations reported an Ebitda equivalent to 36. which was delisted and renamed as Bharti Airtel International BV headquartered in Nairobi. “We have taken the right step at the right time. to 46 million subscribers in the quarter ended June 2011. respectively. Bharti stock fell by 6. The fact. higher interest payout.” says Kamlesh Bhatia. but Bharti continues to hurt in the region with a net loss of $2 million on total revenues of $979 million. in the last quarter ended June 2011.42 billion on revenues of $16.50 anticipating yet another bad quarter due to African operations. In a reflection of the prevailing sentiment.2 per cent. . The African operation has grown from 36 million subscribers in the quarter ended June 2010. Malawi and Gabon. In the previous fiscal ended March 2011. the African operations were at 26. Technically. when Bharti acquired Zain Africa BV. Ghana and Uganda and continues to fend off Bharti‟s challenge with a worldwide subscriber base of 150 million and (about 60 million in its Africa operations) at the end of March 2011. falling Arpu (average revenue per user) and a far-from-enthusiastic response to 3G in India. 3G rollouts in India. MTN reported a net profit of $2. For instance.
has been badly bruised after triggering a price war in some of Africa‟s biggest markets. However.3). With 24 countries and 71. Bharti Airtel International BV will have 100 million subscribers (up from 46 million today).” says a Jaypee Research report on Bharti Airtel dated April 2011. The proposed sale of Zain Africa BV represents a change in course in the company's strategy. 12 months since the takeover. the company introduced GSM technology in Kuwait. cites the positives: Arpu in the region range from $3 to $18.Kohli has committed to the management that by March 2013. Zain was launched in 1983 as the region's first mobile operator. 2.8 million customers. . For one. it is $4. Zain was close to fulfilling Al Barrak's dream. It was known at that time as MTC. What are the IHRM challenges it faced? As is the case with every merger. Employee costs in the African markets are far higher than those in the Indian market. Bharti is yet to bring in the full economies of scale of outsourcing and network sharing. cultural factors will influence how the two companies will integrate their operations. A Deloitte report states that the demand for mobile connectivity in Africa is growing at an average of 25 per cent annually. Mobile penetration is just 40 per cent as compared to 60 per cent in India. He worked hard to convert a Kuwaiti telecom operator into a global one. Analysts and industry observers cite several reasons for that outlook. not everybody is as hopeful. with the mean being $7 (in India. $5 billion revenue ($2. Kohli. “We believe that Kohli‟s expectation of 40 per cent Ebitda margin is on a higher side and (we) remain conservative over Africa and don‟t see a turnaround in the near future. In 1994. however. The company embarked on an aggressive growth path after Saad Al Barrak took over as CEO of the Zain Group in 2002. which scoffs at the ongoing price wars in the Indian market. Bharti is still to unsettle the market leader in any of the African markets (Zain was already the leader in all of the six markets). The target set for 2011 was to be among the top 10 telecom companies in the world with more than 150 million customers.88 billion in March 2011) and $2 billion Ebitda (from $691 million) from African operations. becoming one of the first companies in the region to do so. Bharti Airtel.
If there is a problem on any of these fronts. the problem was the Indian shareholding in Bharti-MTN combined entity falling below the government-stipulated floor. "The company will have no problems in getting the resources in place for this deal. Bharti has about US$1. Bharti will assume US$1.] Raising funds for the deal from banks or other institutions in the international markets should be an easier and workable option." "I don't think raising funds for the proposed deal will be difficult. One of Bharti Airtel‟s biggest challenges is to integrate 6.5 billion in cash on its balance sheet. This reduces the cash requirement to US$8. All calculations have been made and there is no issue over which we need to fret. He also replied individually to the 300-odd people who wrote back within 24 hours. The amount of funding needed thus comes down to US$6. "A share swap may have led to legal complications. Kohli and his senior team travelled to all 16 countries in the first two months twice over to meet with all stakeholders — employees. Al Barrak announced his resignation. Also. dealers and distributors. Bharti could run into integration problems in Africa. it could make the deal look more expensive.7 billion in debt and pay US$700 million after one year. Zain employees had become a bit cynical having seen the company change hands five times in a decade. all government. raising the money is not. Kohli held over 100 town hall meetings to address anxious employees and personally wrote to all the employees about Bharti‟s intent. If valuations are a cause for concern.8 billion. banks and all key people and institutions. But the Zain corporate culture is imbued with his go-getting style." According to the agreement. which was promptly accepted.A few days before the Bharti deal was announced. [In the MTN case. though Mittal says that no government permissions are necessary (in fact. In the first two months. "We managed to get the resources in place when the bigger MTN deal was being discussed." says Bandyopadhyay of Spice Finance. It is an all-cash deal and there is no issue of stock trading. “The question . The strength of Bharti's existing balance sheet and some structure around Zain Telecom's shares or cash flows should do the trick.500 employees of Zain. both India and Kuwait have welcomed the deal). too. the telecom regulators of all the countries will have to approve the takeover.3 billion." Mittal told BusinessWorld.
Bharti Airtel's gearing. such as widespread prevalence of diseases.amongst them was — is Airtel here to stay?” says Rajan Swaroop. “We asked for USO funding and they agreed. CEO and managing director of Airtel Nigeria. credit rating agency CRISIL. CRISIL believes that Bharti Airtel will benefit from the proposed deal by way of diversification of revenues and the growth opportunities offered by the under-penetrated African market. from around 0. too. is expected to increase to more than 1 time. At the same time. This reflects CRISIL's belief that Bharti Airtel's proposed acquisition of Zain Africa BV's business for an enterprise value of US$10.7 billion will be largely debt-funded. Any other issues/findings? High-debt Deal On February 19. 2009. the government wanted affordable services. Kohli says Bharti requested for lowering of interconnect rates and the country‟s President agreed within 30 minutes and issued a statement by the evening. placed Bharti's long-term debt on rating watch with negative implications. and political upheavals. CEO (Anglophone markets). . In Sierra Leone. the acquisition can thereby adversely affect Bharti Airtel's gearing [debt-to-equity ratio] and debt protection indicators over the short term. Many heads of state fondly remember Indian teachers who taught them. after the acquisition.” says Kohli. Even as Bharti is slowly overcoming the HR challenge. the employee cost in Africa is 9 per cent higher than that of India. it is struggling with the cost of human resources. as cash accruals will be used to de-leverage. the Indian arm of Standard and Poor's.15 times as on 31 December. that the company's financial risk profile is expected to improve subsequently. In Zambia. poor rail. says Bharti empathised with local sentiments while integrating. however.” says Kohli. The agency adds. There are other challenges. “There is so much respect for India. road and air infrastructure. Jayant Khosla. the company has come across some pleasant surprises. 3. According to Jaypee Research. the government wanted Bharti to help create rural network.
The ARPU. a frequently used yardstick in the telecom industry. it could be highly profitable even at these low ARPUs. low penetration rates could mean either a huge upside opportunity or lack of demand needing many years of expensive market development.described as a "minute-factory" -. with 50%-75% market share in seven countries and 25%-50% share in six countries. is an average of US$6 for Zain's African operations against US$5 for Bharti in India." . but is it worth the price Bharti is paying? Zain's African operations are losing money. In contrast to Africa. given relatively low penetration in its footprint and high ARPU. Zain has an ARPU of US$55 in Kuwait and US$26 in Bahrain.to Africa. Nigeria. Zain has 42 million subscribers in Africa (September 2009) while Bharti has 121.7 million in India (December 2009). in its Middle East portfolio. "We believe that Zain's Africa unit is an attractive acquisition candidate for Bharti. Everyone seems to agree that Zain is a good target for acquisition. The balance sheet position appears comfortable for funding the deal. some operations are showing losses because of mismanagement. These are markets where the telephone penetration rates range from 14% in the Democratic Republic of the Congo to 123% in Gabon. Seven of the 15 countries reported losses..The principal issue is one of valuations. These numbers can be used to paint an optimistic picture or a pessimistic one. Moreover. The highest revenue earner. Zain is a market leader in most of its operations." says Motilal Oswal. they reported a net loss of US$112 million against a profit of US$169 million in the corresponding period the previous year. "Only three out of 15 countries in the Zain Africa portfolio have a mobile penetration in excess of 50%. For instance. which could enable Bharti to export its 'minute factory'-based business model. Bharti might argue it would change all that. Besides. Customer growth rates range from -14% in Kenya and -6% in Nigeria to 51% in Niger. But if Bharti can successfully transpose its high minutes of use model -. The average revenue per user (ARPU) is US$3 in Ghana and US$25 in Gabon. perhaps the only research house that has been positive about the buy. In the nine months to September 2009. though most are in the low double digits. which was nudging the US$1 billion mark. lost US$88 million. Low ARPUs could imply poor revenue streams or future growth potential.
16 per minute for the whole day.079 per minute after the end of certain hours as against $0. but the potential for growth over the next three to five years is significant both in terms of the number of customers as well as ARPUs. Voice call rates were slashed from $0. Its attempt at gaining a foothold with a price war has left Airtel badly bruised. "Yes. former executive vice-chairman. prices will fall because we have . it added pressure on Airtel Nigeria‟s margins as subscribers started keeping two phones — one for low-cost tariff for voice (from Airtel).) MTN is a major competitor in most of the markets. An attack on the ISD market with a new scheme called „2Good‟ halved the prices for all domestic calls (both on-net and offnet) and offered competitive rates for calls to the US. the strategy of getting its footprint across the 15 African countries is definitely a great value proposition. Airtel was prepared for a cut.24 for the first minute of each day to $0. Bigger rivals MTN. On the contrary. Battle Field Nigeria Bharti‟s biggest struggle is in Africa‟s largest market Nigeria (73 million subscribers). “I have continued to see tariff drop since the last exercise with respect to interconnect rates. group president of Spice Finance. Nigerian Communications Commission. But Airtel received support from Ernest Ndukwe. reported an Ebitda margin of 62 per cent as of December. The matter is pending. “It will take many years to catch them. too.” says Kohli. incidentally. and it is none of the India company's concern. EMTS Nigeria and Warid Telecom hit back by slashing rates by more than 70 per cent. The strategy could not produce the desired results. MTN. the other for low cost data from MTN and the others. who said. could impact valuations. where Bharti stands third in the pecking order. The country accounts for 36 per cent of Bharti‟s African revenues. "In the long run. Airtel Nigeria was dragged by its rivals to the telecom regulator Nigerian Communication Commission with complaints of predatory pricing. Going forward.Views about whether Bharti is overpaying for Zain depend on people's assessments about the growth potential of Africa's mobile telecom market. There is an ownership issue with the Zain Nigerian unit." Other issues. the ARPUs are low in Africa at this stage. but not to this extent." says Sudip Bandyopadhyay. 2010. Worse. (Bharti says Zain has to resolve that.
it had to rethink its business plan for the next year from successful tariff schemes for services like of Safaricom‟s Mpesa. says Nomura Research. Its profits during the financial year ending 31 March 2011 fell by about 13 per cent. Among the markets where it leads: Gabon (52 per cent marketshare) is a 1. Bharti trails at No. wrote. Mark To Market In Africa‟s other markets too.4-million market.” Airtel emerged partially successful by gaining more than 5 per cent in terms of subscribers. “Safaricom and MTN have understood the market well and been able to align with the local market. 4 with 10 per cent marketshare compared with market leader Scancom/MTN‟s 51 per cent. But competition isn‟t that intense in these markets. Zambia has three and Gabon four. In the third-largest market Tanzania. Bharti has a long way to go before leadership.4-million market and Zambia (60 per cent) is a 4. Kenyan War Africa‟s second-largest market Kenya has over 19 million subscribers. the leading newspaper from Kenya. the cost of voice calls fell 50 per cent to Shilling 3 per minute and consumers can send SMS at rock bottom price. including Safaricom. Kenya and series of retaliation from other operators. Chad (53 per cent) is a 2. “Ignited by Airtel. including Bharti. “Safaricom‟s results would have been better without the price wars that is without doubt. according to Nomura Research. Chad and Malawi have only two operators. Daily Nation. Bharti (28 per cent marketshare) is No. “It has . In the fourth-largest market Ghana.always insisted that more competition will affect tariffs in a positive way”. Safaricom CEO Bob Collymore of Safaricom commented on his company‟s poor performance saying.” Airtel executives say that the price cuts did open up the market. Kenya‟s largest telecom operator. The Airtel initiated price war caused a considerable dent on the balance sheets of its rivals. But.” says Nitin Navish Gupta. Total subscriber base of these countries is equal to the number of subscribers India adds every month. Kohli says the KYC (know your customer) norms in Africa are more stringent than they are in India. 2 behind Vodacom (41 per cent). Bharti ranks a distant second here. A bruised Safaricom hit back with a cut in its data tariff plans. Malawi (63 per cent) is a 2.7-million market.37-million subscriber market. assistant vice-president at Evalueserve.
While it has completed all legal formalities of acquiring Zain. transactions on the mobile have caught on in Africa. If we look at the 12month outlook most of these are turning into positive territory. Gabon.” “We have probably about six countries that are loss-making at this point. Bharti‟s most potent competitor continues to be MTN which is extremely strong player in West. Uganda and Ghana are the major problem areas while in the other 11 it has a strong financial position that it inherited from Zain. The rest will be taken up in phase 2. Zambia. .” Manik Jhangiani. All operators are struggling to get on top of this regulatory expectation. Malawi.” says Kohli. Bharti competes directly with MTN in Nigeria. DRC and Burkina Faso. An analyst in India advising the company says that financially — and on subscriber base — Nigeria. Central and South Africa. Tanzania. “My driver in Nairobi sends money to his wife everyday. The network capacities and coverage are still a challenge which I am sure (we) will overcome very soon. MTN has played on the African sentiment to build a very strong brand connect with the locals. M-commerce accounts for 10-12 per cent of the business of cellcos and is growing at 39 per cent per annum. Ghana. In some markets more and in some markets less. These include large markets such as Kenya. “Airtel will have to depend upon the government-to-government relations to expedite approvals. Uganda and Zambia) countries.” says Kohli. “We have gained revenue market share in all the markets.” says Kohli. In the East. Ghana. A report by HDFC Securities Institutional Research says.” says Gupta of Evalueserve. Madagascar. Congo. “Zain Africa (now Bharti Airtel) derives 54 per cent of its revenues and 52 per cent of its Ebitda from these five (Nigeria. Uganda and Zambia while Vodafone in Tanzania. Bharti Airtel is hamstrung here. Sierra Leone. Uganda. Kenya. Congo. the regulatory clearance to launch m-commerce in eight countries is expected only next year. Niger. “The central bank‟s approvals have been taken. Ghana. DRC and Kenya. it‟s Vodacom. These are critical markets both financially and strategically for Bharti to become the leader in Africa. group chief financial officer of Bharti Enterprises said at an analyst meet.slowed the market. break-page-break While India is still struggling to get its act right in m-commerce.
Having perfected managed services over the past six years in India. Huawei and Nokia Siemens Networks. says it will help improve the bottom line (when this rolls out). In Africa. “The Airtel brand and colour are engaging and have been liked by the customers.3 billion in the past year. like in India. strengthening the networks and regulatory clearances. The biggest challenges are to become profitable and take leadership position in the region. Right now.4. however. CEO for Francophone markets. the Arpu will fall and the focus will shift to MoU. What are some possible strategies that are critical to its success? The first year went into rolling out the Airtel brand to replace Zain. Bharti. The company designed a new red-and-white logo to mark its international expansion. Kunal Bajaj.000 towers it owns.2 as of March 2011 against $4. Revenue has grown 16.” Even though profitability is yet to be achieved. which has grown 342 per cent from 3. the subscriber base has grown 28 per cent since the time Bharti took charge.3 in India. Africa is the youngest population in the world. Another opportunity at cost-cutting would be infrastructure-sharing through 12. Bharti Airtel. responsible for seven countries. With a median age of 17 years (India: 25). Network operations and management to equipment vendors Ericsson. Other operators .7 billion to 16. Tech Mahindra and Spanco. Evalueserve‟s Gupta says.” says Tiemoko Coulibaly. targetted mainly at the youth. Bharti is only now replicating it in Africa. “Tower sharing is at a nascent stage in Africa. “Bharti in Africa does not have a short term plan. This was largely aided by Bharti‟s renewed focus on MoU (minutes of usage) in Africa. It has handed over business process outsourcing to IBM. while Ebitda has grown nearly 30 per cent. The red colour has a special significance in Africa — Coca-Cola and Toyota. takes comfort from the fact that its masterstroke — telecom and IT outsourcing — is still to play out in Africa. which have red logos are among the leaders. the Arpu in the 16 countries is $7.8 per cent from the quarter ended September 2010 till date. Airtel has taken a long term bet on Africa. But the MoU at 120 in Africa is about one-fourth of India‟s 449. Avaya and Comviva. But a higher number of subscribers no longer guarantee higher revenue. partner and director (India) at Analysys Mason. IT to IBM.
Kohli says the youth in Africa will be big users of broadband and Internet.should respond to it. they also opened up”. including the pioneering IT and infrastructure model that has since become the gold standard in the global telecom industry.2 billion in Capex in Africa. After all. It may be naive to dismiss Bharti‟s African safari just yet. The company plans to invest $1 to 1. a service that Bharti will provide using 3G and high speed packet access technologies. The opportunity of reducing capex on network is low.upenn. “Some firms did hesitate but when we offered our towers.in http://knowledge.wharton.edu . Even though the first year has left Bharti with little to write home about.businessworld. its formidable reputation is built on some incredible innovations. Most of them have infrastructure of their own.” Kohli says. References: www. It already has the 3G spectrum in 10 countries and expects in six other countries by next year. its most crucial initiatives are still to roll out.
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