India’s Bharti places $10b bid for Zain Africa

Kuwait-based mobile phone firm Zain’s acceptance of a $10.7 billion offer for its Africa operations promises a major realignment of the wireless telecoms landscape on the continent, analysts said, citing a possible renewal of market share wars in countries such as Kenya.

The Kuwaiti firm, which has been looking for a buyer of its Africa operations since early last year, said its board had accepted the Valentine’s Day bid from India’s Bharti Airtel but warned that the deal remains subject to completion of due diligence by the potential buyer and approvals from the relevant regulatory authorities.

“This potential transaction remains subject to due diligence, customary regulatory approvals and signing of final transaction documentation. There can be no assurance that a transaction will be consummated,” said a statement posted on Bharti’s website.

If successful, Bharti’s takeover of Zain’s Africa operations will place it in the league of the world’s top five biggest mobile firms and underscore Africa’s continued attractiveness to global operators looking for a presence in one of the remaining growth markets.

Bharti Airtel is one of Asia’s leading integrated telecom service providers and boasts the financial and technical muscle to turn around the fortunes of Zain Africa business that has been flagging since the Kuwaiti firm bought it from Sudanese billionaire Mo Ibrahim’s Celtel three years ago.

Although Africa tops the list of telecoms’ most promising growth markets in the world, Zain’s Africa division has struggled to deliver value to its shareholders and accounts for less than a quarter of the company’s profits.

The division, with a footprint in 15 African countries accounts for 62 per cent of Zain’s 65 million subscriber base but contributes only 15 per cent to the group’s net profit pointing to the low average revenue per user (ARPU) from the region.

Telecoms market analysts say the business with a leadership position in nine markets remains an attractive proposition for global operators locked in saturated markets such as Europe and Asia.

Zain Africa has registered strong growth in markets such as Nigeria, Malawi and Madagascar besides delivering solid profits in Sudan and Morocco, which are not part of the proposed sale deal.

This skewed landscape of Zain’s operations has been the main driver of multiple valuations that have put a price tag of $10 billion or less on the Africa business.

Last June, French multimedia firm Vivendi engaged the Kuwaiti firm in lengthy negotiations for a possible buyout of its Africa operations for between $10-12 billion but ultimately called it off on grounds that it did not fit into its strategy.

Zain also reckoned that the offer from the French firm was too low.

In a research note released following revelation of Vivendi’s interest in Zain’s Africa operations, JP Morgan analyst Johan Snyman said the business was worth no more than $6.5 billion, making Bharti’s offer well a premium price for the Kuwaiti firm’s African interests.

On Monday, Shubham Majumder of Macquarie Group told Bloomberg that the Bharti offer was too expensive citing the low profit margins in the company’s Africa operations.

He described Zain Africa’s business outlook as “significantly inferior” compared to other operators in the region.

“Given the trend of multi-SIM ownership, unique subscriber penetration is likely to be significantly less than 50 per cent by end of 2014. This shows the extent of the opportunity for operators to reach new users,” said Informa principal analyst Nick Jotischky.

Market reaction

Bharti Airtel’s shares dropped more than 9 per cent at the Mumbai Stock Exchange on concerns that the leading Indian mobile firm’s $10.7 billion offer for Zain’s African assets could strain its finances.

Bharti shares were down 9.1 per cent at 285.90 rupees in a market that fell 0.7 per cent.

Bank of America-Merrill Lynch downgraded Bharti to “underperform” from “buy”, citing rich valuation of the potential deal and unexciting growth outlook for Zain’s African portfolio.

Controversy also appeared to stalk the transaction after Econet’s chief executive Strive Masiyiwa announced that Bharti Airtel’s planned $10.7 billion acquisition of Zain’s African assets must exclude the Nigerian unit until an ownership dispute with Econet Wireless Holdings Ltd. over the unit is resolved.

“Zain Nigeria is not for sale,” Masiyiwa said in an interview in Johannesburg.

Econet is trying to overturn a 2006 deal in which Celtel bought a 65 per cent stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria.

Analysts said the lure of the untapped potential of Africa’s telecoms market would remain attractive for the Indian firm that is facing stiff competition and market maturity at home.

“In terms of subscriber base the Africa portion of Zain is more than 50 per cent of the group’s total subscriber base with a revenue line of close to $20 billion.

The buy warrants substantial goodwill above any financial valuation,” said Reginald Kadzutu of Amana Capital.

Bharti has been aggressively searching for an entry point into the African market in the last four years hoping to gain new growth momentum as competition at home shrunk its profits.

In September 2009, Bharti proposed a merger with South Africa’s MTN Group that would have created the world’s third biggest mobile firm valued at $24 billion.

It was however forced to let go of the deal due to regulatory obstacles but announced that it was shopping for similar opportunities.

A statement attributed to MTN’s CEO Phuthuma Nhleko said it too was looking for new opportunities and would consider buying Zain’s Africa units if “there were no regulatory problems.”

Bharti Airtel’s arrival in the African market marks an emerging trend in which Asians operators are fighting for a piece of the cake that has long been dominated by European players.

If successful, Bharti Airtel’s takeover of Zain Africa will make it the second Indian operator to own a majority stake in a Kenyan mobile operation, joining Essar which controls 80 per cent of Essar Telecom Kenya which trades as Yu.

Bharti will take over the 95 per cent stake in Zain Kenya previously owned by Zain Group.

The entry of a second Indian player into the local telecommunications market is likely to intensify the fight for rural, low spending clients, industry analysts said.

“Africa works just like India, because of a mix of factors including the lower spending power and the lack of formal infrastructure. We can count on the strategies that worked in India to work here,” said Srinivasa Iyengar, the former CEO Essar Kenya in a previous interview.

Bharti has used Essar’s pursuit of a low tariff, rapid subscriber acquisition model in other markets, setting the stage for intense competition on the local front.

Still, analysts insist that the operation currently known as Zain Kenya is likely to benefit from a renewed flow of investment from the deal.

“In terms of performance on the technical side Zain has a wider footprint, less congestion and has proved to have the all important innovation mantle. What has been lacking is a clear market segment, focus and a consistent marketing strategy,” said Mr Kadzutu.

The local unit has managed to maintain its number two position in the highly competitive market due to a focus on its tariff table and value added services such as its international roaming program and the mobile money transfer product Zap that trades across borders.

Zain Kenya has 280 employees down from 550 last May, a number that has progressively declined in the last eight months.

Between May and November 2009, the firm retrenched 170 employees in a staff rationalisation program, and thereafter enjoined 100 of its workers to Nokia-Siemens in a knowledge transfer deal.

For Bharti, the deal represents a second attempt to enter the Kenyan market after its bid to become the country’s second national operator failed in October of 2006.

At the time, Bharti refused to give a reason for its pullout from bidding for the licence of a second national telecommunications operator to rival Telkom Kenya.