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Samridhi Madaan Yogesh Luthra Priya Vatsalam Vishal Gupta Shefali Gupta Arpit Tandon
The rise of globalization has exponentially increased the
necessity for cross-border M&A. Companies have followed their customers – who are going global themselves – as they respond to the pressures of obtaining scale in a rapidly consolidating global economy. In 1997 alone, there were over 2333 cross-border transactions, worth a total of approximately $298 billion. Due to the complicated nature of cross-border M&A, the vast majority of cross-border actions have unsuccessful results Majorly companies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries.
Legal problems – The regulatory regime to be
followed, the index and domicile to be considered Flow back - unwillingness of target-company shareholders to hold foreign-domiciled equity of the acquirer Politics & Anti-trust Differing valuing criteria – Acquisition currency Multi-jurisdictional tax constraints affecting consideration, dividends and intercompany transfers Weak understanding of the fundamentals of the acquired business Divergent accounting rules Multiple security, governance & anti-trust laws
Melding country cultures, Communicating across long distances, Fundamental differences in the way business is
Telecom industry has recorded a growth of 45% which has the highest growth rate in the telecom sector in the world.Facts India is 3rd largest market in world after China and USA. .
Regardless of recession at the end of December 2008. offering cellular network access and business solutions Is a multinational telecommunications provider Core operations in 24 countries in Africa and the Middle East Presence in key markets such as Nigeria.WHY MTN?? Is a leading provider of communication services. growth expanded by 48% to 90. Cameroon. Uganda etc.7 million recorded subscribers Group subscribers up 14% to 103. Ghana.2 million from December 2008 Listed in South Africa on the Johannesburg Securities Exchange (JSE) under the Industrial – Telecommunications sector .
. developing a joint strategy to expand its global footprint and creating an integrated management structure. The deal will give Bharti access to nearly 100 million subscribers across 21 countries. which means there is very limited possibility of bad debts. Latin America and West Asia are at the point where India was in 2003 Telephone penetration levels where low which means huge potential in terms of higher subscriber addition The African telecommunication market is estimated to grow at roughly 40% The average revenue per user(ARPU) is much higher at Rs 600 in these emerging markets compared to Rs 250 in India. Leveraging the Economies of Scale. 99% of MTN’s subscribers are prepaid customers.BENEFITS FROM THE DEAL Create the world's 3rd largest telecom company with combined revenues of over $20 billion annually and a subscriber base of over 200 million Emerging markets such as Africa.
Companies reached an in-principle agreement MTN proposed an alternate structure which contemplated the acquisition of the majority of Bharti's shares. The modified deal structure was unacceptable to Bharti. Bharti proposed to acquire an approximate 40% stake in MTN. . thereby making Bharti a subsidiary of MTN.FIRST ROUND OF NEGOTIATION In 2008.
8bn STEP2: •MTN will acquire 25% posttransaction economic interest in Bharti Airtel •Bharti will receive 25% of the current share capital of MTN in part –settlement of above acquisition •Balance consideration will be paid out in cash of US $2.9bn by MTN to Bharti .SECOND ROUND OF NEGOTIATION DEAL STRUCTURE STEP1: • Bharti would acquire around 36% of the current share capital of MTN • 1 share of MTN = ZAR 86 + 0.5 newly issued Bharti shares • Total Cash Value = $6.
9bn by Bharti to MTN Total Deal worth = $23-26 bn .FINAL STAKE Bharti would have 49%stake in MTN MTN and its shareholders will have 36% stake in Bharti Net Cash Paid = $3.
SOME MORE POINTS ABOUT About Structure National Treasury of South African Government proposed a Dual Listed Structure to retain the identities of both the companies. the shareholders of MTN would hold shares of MTN and Bharti Airtel and shareholders of Bharti Airtel would hold shares of Bharti Airtel and MTN. It was proposed that Bharti Airtel would continue its listing in India while MTN would remain listed on Johannesburg Stock Exchange. . Post DLC.
The value of 36% economic interest acquired in Bharti Airtel by MTN and its shareholders had to be deducted from this value. Each consumer valued at USD 349.Valuation The valuation of the transaction was USD 24 billion. .
. Shareholders of MTN including Public Investment Corporation . Economic nationalism – South African Government insisted on MTN remaining a South African Company and clarified that the necessary approvals would be granted only if DLC structure was adopted.the largest shareholder .Why the deal failed to happen? Both the companies wanted to retain their independent identities.DLC Structure was not viable without amending the corporate and exchange control laws of India.was not happy with the deal. Regulatory restrictions .
1995. Chairman and Group CEO Sunil Bharti Mittal Established July 07. as a Public Limited Company Business description: Provides GSM mobile services in all the 23 telecom circles in India. Bangladesh and now in 15 Countries of Africa. Provides telemedia services (fixed line and broadband services through DSL) in 88 cities in India.Founder. Sri lanka. Other Enterprise solutions: DTH and IPTV Services .
Zain Africa Wholly owned subsidiary of Zain. 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 . incorporated in Netherlands and held the African operations of Zain.
including operation. . management and maintenance of mobile telephones and paging systems in Kuwait and 21 other countries in the Middle East and North Africa. purchase. installation.Place of Origin Kuwait. delivery.based telecom company Ownership It is a public company Bussiness In the provision of mobile telecommunication and data services.
17 billion $ Net Income 1.67 million $ .37million $ Customer Base 125.32 billion $ 6.30 million 71.80 Million Global Presence 5 Countries 24 countries ARPU 3.14 $ 3 $ .Total Revenue 6.
WHY BHARTI WANTS TO ACQUIRE ZAIN ? .
NEED FOR BHARTI TO GO GLOBAL? Saturation in the Indian Market Ongoing Price war cutting down of margins Risk Diversification .
The GDP is growing at rate of more than 5% in 27 of the top 30 economies in Africa. It is forecasted that 25% of the world youth will reside in Africa Spending Power • Consumer spending potential is estimated to be around $1.AFRICAN TELECOM INDUSTRY Favorable Demographics • Aggregate population of 470m .4 trillion.The African population is expected to double to 2 billion people outpacing India and China. • The median age is 17-18 compared to the Indian median age of around 25-26. .
Scope only in few rural areas 12 players on an average 20%(Low) 1. Market in Africa similar to what Indian telecom market was 5 years back Scope across 15 countries.5 USD 2. Low Per second billing + rural customers = Reduced Tariffs Average Minutes of usage is 450 minutes. All India ARPU is 4. of competitors 3-4 players on an average . All Africa ARPU is 7.5 USD 2. Falling ARPU 3. minutes of usage is 110 minutes Minutes of Usage No.STRATEGIC REASONS FOR THE DEAL Mobile Penetration Average Revenue Per User 53% (High) 1.
9 Ghana 7.2 0 10 20 10 5 0 Madagascar 2006 2007 2008 2009 2010 Uganda Niger Kenya Gabon Tanzania Nigeria Average Revenue per user (in US $) 23.9 7.6 12.8 30 .7 9.5 7.5 5.4 8.5 8.7 4.9 9.1 3.AVERAGE REVENUE PER USER BHARTI AIRTEL 15 ZAIN AFRICA ARPU (IN USD) 9.2 7.9 6.9 6 4.6 4.7 5.8 9 9.
Bharti Airtel will become fifth largest service provider in terms of the number of subscribers . Post acquisition.Long-term benefits Zain Africa is a strategic investment for Bharti Airtel from a long-term perspective.
Bharti Airtel to become 5th largest telecom company in the world 180 million customers and 18 countries .OTHER REASONS Cost of Setting up Network is high in India Pressure on the margins with costs going up Long time ambitions for the African market-MTN acquisition talks failed twice.
STRUCTURE OF THE ACQUISITION .
. provides various incentives under its tax regime including tax exemption on dividend payments and capital gains through the participation exemption regime.WHY WAS THE ACQUISITION ROUTED THROUGH NETHERLANDS? Netherlands. 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. with its efficient tax regime coupled with an investor friendly business environment.
Airtel Netherlands BV. subject to compliance with the applicable participation exemption conditions.Under the domestic tax laws of Netherlands. . no taxes are levied on dividends distributed between two Netherlands resident companies. Thus. it should provide for a tax free transfer of profits from Zain Africa to Bharti. 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.
3 billion within three months from the date of closing. USD 700 million after a year from the date of closing. USD 1.FUNDING OF THE DEAL Purchase consideration for the deal USD 10.7 billion assumed as debt on the books of Zain .7 billion USD 8.
5 years after rollout of operations SBI rupee loan of 1$ billion .5 billions from various bankers the break up of that is given below USD 8.5 Billions Consortium of 11 banks led by Standard Chartered and Barclays USD 7.5 billion(dollar loan) Tenure is 6 years First payment 2.TRANSACTION FUNDING-Leveraged Buy-out Bharti Airtel has availed a loan up to USD 8.
WHY ZAIN SOLD AFRICAN OPERATIONS TO BHARTI AIRTEL Focus on Kuwait Operations Company is making losses in many countries net including all the countries is in negative profit Unlocking the value in the Zain African Assets and improve the groups Revenues .
PROFIT OF ZAIN FROM DIFFERENT COUNTRIES .
Nigeria Congo Gabonese republic • Econet Wireless Pvt ltd raised the issue of ownership of Zain Nigeria • Objection from Broad Communications Ltd .single largest shareholder in Zain Nigeria • Approvals refused from the Republic of Congo • Allegation .Airtel initially .Zain had not informed it about the deal • Allegation .Zain didn’t comply with certain telecom regulations in Gabon • Disapproval of sale of Zain Assets to Bharti.
International reports note that Bharti has already secured indemnities and warrants to prevent it from any potential legal ownership disputes. Bharti needed clearance from telecom regulators in each of 15 nations. It also needed to convince the lender about the viability of the Zain deal . Bharti had to raise twice the debt it was to raise from MTN.
7 billion on the books of Zain Africa. .3 billion will be paid in cash within three months from the date of closing USD 700 million will be paid after one year Bharti Airtel will assume debt to the tune of USD 1.7 billion 10 times of EBIDTA USD 8.Is the transaction expensive for Bharti Airtel? Bharti Airtel paid Zain an enterprise value of USD 10.
Bharti Airtel has incurred exceedingly expensive loan worth USD 8. Zain Nigeria. The deal was highly volatile and carried huge commercial risk for Bharti Airtel.3 billion at an interest rate of 195 basis points over LIBOR . the Nigerian arm.At that point of time… Zain Africa has made a net loss of USD 112 million in the nine months to September 2009 Seven of Zain‟s African units were loss-making. including its highest revenue earner.
Cont… Another risk was foreign exchange exposure as the equipments were purchased in dollars but the revenue was to be generated in local currencies. . interest payable on loans availed and meagre revenues made this deal as a costly investment. Thus extremely high cost of acquisition.
From EV to EBITDA basis Zain-11-12 times EV to EBITDA which is 30-70% premium versus Bharti current valuation Bharti .2 times EV to EBITDA EPS dilutive Deal seems to be expensive .available at 7.
EV per subscriber basis 26% stake which DoCoMo took in Tata Tele.USD 270 So on this basis the deal doesn’t seem to be expensive keeping in view the geographical synergy.EV per subscriber of close to USD 350. Stake taken in Spice Telecom my Telecom Malaysia. . 68% stake by Vodafone in Hutch Essar-USD 730 Bharti zain.EV per subscriber USD 330. the growth and turnaround potential.
.. while the debt cost for the acquisition has also weighed on the company's earnings. Bharti Airtel's Africa operations have recorded net loss of USD 95 million for the quarter ended September 30.8 percent from its India and other south Asian operations Six of Bharti's 16 African markets are currently making losses.Current scenario. Over the past one month Bharti shares fell 15 per cent due to fear of The African operation has a higher cost structure. losses in Africa. Bharti had operating margins of 24 percent in its African compared with 36.
limited spectrum availability Lack of experience in non-telecom related industries Zain-Africa offers a strategic fit to capture untapped demand for telecom services in Africa Low penetration.Strategy Acquisition to counter slowing growth in India Price war. local markets similar to India Leverage Zain’s strong presence in local markets Reputed brand in most local markets Established telecom infrastructure to build upon .
Key challenges Geographical and regulatory Creating infrastructure across 15 countries Managing varied regulatory regimes Structural. cultural and operational issues Overcome language barrier to connect to masses Corruption. theft and political instability Limited overseas experience .
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 . Lack of commercial synergies: Nullify the disparities between the two companies to leverage the worth of the enterprises to the maximum and reap profits in the times to come.
Strategies Replicate Minute’s Factory Model Average usage is low in Africa (vs other countries) Push for low-cost high-volume – would help in increasing monthly usage/ consumer Need to invest massively in building infrastructure to support increase in expected call volume Try to capture untapped rural markets Need to strengthen distribution network to increase penetration of dealer network Can try to implement “Matchbox Strategy” in African markets as well .
Investor’s reaction Negative due to concern over high valuation paid for loss making business (almost 2x of market leader MTN) African markets are structural difficult & even macro factors are also not good in many countries Negative impact on Bharti’s earning due to high interest outflow to service debt Debt level to further increase due to upcoming 3G auction Returns from this investment are expected to come only after 6-8 years .
price & size of the target company . Communication & Trust Leadership capabilities and previous experience Strategic fit & Classic finance parameters horizontally related companies will have more opportunities to create competitive business strategies Financial health. the more successful a merger would be Integration Team & Speed – Assures the employees of the new structure HR.Factors leading to success of CrossBorder M&A Cultural differences – the lesser they are.
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