Bharti in Talks with Zain to Acquire Sub-Saharan African Assets

Bharti Airtel has confirmed that it is in exclusive talks until 25 March 2010 with Zain for the acquisition of the latter’s sub-Saharan African assets. Several press sources claim that a deal has already been reached for US$10.7 billion, a figure Bharti cites as the enterprise value of Zain Africa.

Over the past year, there have been several pretenders to a stake in Zain or ownership of its sub-Saharan African assets.

• In December 2009, BSNL, the Indian state-owned incumbent, said that it had put on hold plans to acquire a 46% stake in Zain via the Vavasi-led consortium (see Middle East and North Africa: 3 December 2009: BSNL Puts Zain Purchase on Hold).
• In October 2009, Kuwait's Securities Group said that it was considering acquiring Kuwait Investment Authority's 24.6% stake in Zain (see Kuwait: 12 October 2010: Kuwait's Securities Group Seeks KIA's Stake in Zain).
• In August 2009, Al-Rai reported that Zain was in talks with three major telcos on the full or partial sale of its African assets. In the previous month, Vivendi, the French entertainment and telecoms group, had pulled out of talks with Zain and Etisalat had denied any interest in acquiring Zain’s sub-Saharan African assets (see Sub-Saharan Africa: 21 July 2009: Vivendi Suspends Talks with Zain over Acquisition of Majority Stake in African Operations).

Behind Zain’s apparent openness to withdraw from sub-Saharan Africa at the right price are ongoing efforts to reduce debt and Zain's drive, labelled "Drive2011", to lower operating costs and double operating margins (see Sub-Saharan Africa-North Africa: 8 May 2009: Zain Restructures Global Operations to Reach 2011 Growth Target). Zain’s overall revenues and profitability have also been dragged down by rapidly falling ARPU in many of its sub-Saharan African markets, as well as weaker local currencies against the U.S. dollar.

Outlook and Implications

• African Promise ... and Challenges: Bharti has long been interested in making a major push into sub-Saharan Africa. Previous attempts to tie up with MTN, the largest African telecoms group, floundered, so Bharti has proceeded to target’s the region’s second-largest player by mobile subscriber base (see Sub-Saharan Africa: 4 February 2010: MTN and Bharti Airtel End Discussions over Potential Merger). Should this deal go through, however, Bharti will have a job on its hands. Zain’s largest sub-Saharan African asset, Zain Nigeria, which accounted for 16% of group revenues in the nine months to 31 September 2010, saw ARPU (in U.S. dollar terms) fall by one-third, and revenue and earnings before interest, tax, depreciation and amortization (EBITDA) drop 17% on a year-on-year (y/y) basis. It was a similar story in Zain’s second-largest sub-Saharan African market, DRCongo, where a higher usage tax and a local recession pushed ARPU down from US$11 to US$8 from the nine months to 30 September 2008 to the same period in 2009, with revenues and EBITDA falling a respective 13% and 14%. Notwithstanding these current challenges, Zain’s current sub-Saharan African markets have plenty of room for long-term subscriber growth. Nigeria’s mobile penetration was 50.6% at the end of 2009 and Ghana’s was 67.6%. Zain also has assets in Burkina Faso, Chad, Congo, Gabon, Kenya, Madagascar, Malawi, Niger, Sierra Leone, Tanzania, Uganda and Zambia. Zain’s North African assets of Morocco and Sudan are not included in a prospective deal.
• Likeliness of Deal Going Ahead: In its press release, Bharti made the usual reference to due diligence and regulatory approvals required for a deal to go ahead. Political concerns played their part in the Bharti-MTN deal not proceeding, but shareholder concerns at both Bharti and Zain could yet stop this deal going ahead. On the Indian side, Bharti’s share price slid on concerns that it may be overpaying, while Zain’s shareholders may not all agree to what would be a strategic divestment. Recently, Zain’s chief executive, Saad al-Barrak, announced his resignation, reportedly owing to differences over strategy (see Kuwait: 4 February 2010: Chief Executive of Zain Submits Resignation). Bharti has yet to specify the proportion of cash within the offer for Zain’s sub-Saharan African units, which could be critical to a deal going ahead. If this doesn’t proceed, other bidders may take a look at Zain.