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Bharti completes Zain acquisition: What next? - Views on News from Equitymaster
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Bharti completes Zain acquisition: What next?
Jul 15, 2010

Bharti Airtel yesterday held a conference call to discuss the completion of its Zain acquisition. The management reiterated the opportunities and its plans for the African operations. It also provided an update of the company's financial position post the acquisition and 3G auctions. African opportunity: The management is upbeat about the huge opportunity Africa presents. The 15 countries that Zain has operations in have an average tele-density of 20%. There is also a huge opportunity on the usage front. This is both on the voice and data fronts. The average voice usage in these countries is about 60 minutes (300 in India, 400 worldwide). This thus presents a huge potential for growth.

Competition: The competition in Africa is moderate with 3-5 main players in most of the countries. The governments do not favor new entrants. In addition to this, the available free spectrum in these countries is also very low. This does not justify the business case for new entrants.

Regulatory issue: The management has met up with regulators as well as the governments of all the 15 countries. It was well received as Bharti is expected to mirror their initiatives of improving network quality as well as expanding rural coverage. Therefore, the management does not see any regulatory risk in carrying out its plans.

Road so far: Bharti has already established its African headquarters in Nairobi (Kenya). The management has followed a strategic approach of retaining and empowering the key management personnel in the region. This move will ensure employee commitment, something that Zain lost when they replaced the top management with their own management team at the time of taking over these operations from Celtel in May 2005.

The management is in the process of finalizing business partners for putting its low cost business model in place. This is expected to be completed soon. Post that, Bharti plans to launch its brand in all the 15 countries simultaneously in October. The launch will be made only after the network quality comes up to an acceptable level. Adequate number of customer service centers and a wide product line up is also on the top of the priority list.

The transition and integration process is going smoothly. It is expected to be completed within the next 180 days.

Future plans: Bharti plans to use its Indian experience in Africa and hope to replicate the “minute factory” model effectively.

For expanding coverage at a low cost, it would be forming a tower company in each country to promote infrastructure sharing. It is in talks with other operators for infrastructure and network sharing. It is also in talks with the governments in some of these countries for using the USO* (unified service obligation) funds. This will go towards reducing the cost of rural expansion. The plan is to bring down costs be able to pass on the benefit to the customers.

Bharti has earmarked a capex of US$ 800 m for these operations. The management believes that it would be sufficient for its plans till March 2011.

Financing: Bharti has funded the entire acquisition through debt. This debt is taken at very favorable terms. It is repayable over a period of 6 years with the first phase of repayment after 2.5 years. The cost of debt is 1.95% over LIBOR (London Inter Bank Offered Rate). The cost of servicing the debt will be around US$ 200 m each year. It will be funded entirely by the African operations.

Other issues: The other issue discussed during the call was the acquisition of 3G and BWA license and spectrum. The costs of these are funded through debt as well. The total net debt for the group (including African operations) now stands at US$ 12 bn. The net debt to EBITDA (FY10) position stands at 2.8x.

What to expect?

Zain's acquisition has been widely criticized by the investor community due to the uncertainty regarding its ability to turn around in the future. The debt taken on combined with the huge capex requirements in addition to the existing capital commitments of Bharti seem quite huge in the near term. However, once the returns start coming in from the international operations, we see Bharti emerging as a strong global player. We continue to maintain our positive view on the stock from 2 to 3 years perspective.

* USO fund is a fund set up by the Government wherein it funds part of the network expenditure if the operator expands coverage in rural areas.

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