Feb. 15 (Bloomberg) -- Bharti Airtel Ltd. is offering $10.7 billion for most of the African assets of Kuwait’s Zain, said two people familiar with the matter, underscoring the push to buy emerging markets phone assets.
India’s largest wireless operator, based in New Delhi, may begin due diligence on the deal as soon as today and has exclusivity until the end of March, one of the people said. The board of Kuwait’s Mobile Telecommunications Co., or Zain, accepted the Bharti offer, according to the people who declined to be identified since the decision is not public.
The offer marks Bharti’s third attempt to enter Africa and would create one of the biggest emerging markets phone operators. Bharti, led by billionaire chairman Sunil Mittal, faces intense price competition at home that has driven call rates for many of its 121 million Indian subscribers to lower than a penny a minute. Mittal has tried to gain access to other fast-growing markets, including a second failed attempt last year to buy South Africa’s MTN Group Ltd. for about $23 billion.
“The real attraction lies in the size and the large geographies” that Bharti may be able to access with the Zain assets purchase, said John Slettevold, a UBS AG analyst speaking by phone from Johannesburg. “The premium they are paying for these assets appears high.”
France’s Vivendi SA, owner of Maroc Telecom, walked away from buying Zain’s African assets in July, saying the purchase didn’t fit “its usual criteria of profitability and financial discipline.” Zain had valued those assets at about $10 billion, three people familiar with the plans said in June.
Emerging Drive
Bharti’s moves mirrors efforts by other telecommunications companies to seek growth in emerging markets as profits slide in their home markets. Vivendi, owner of French mobile operator SFR, said Nov. 13 it gained control of Brazilian phone company GVT (Holding) SA, after its $4.18 billion offer topped Spanish company Telefonica SA’s $4 billion bid. Newbury, England-based Vodafone Group Plc made acquisitions in India, Turkey and Qatar to make up for slumping demand in its main European markets. In 2008, it took control of South Africa’s Vodacom Group Ltd.
All operators are “in the same process” of finding growth in emerging markets, said Emmanuel Soupre, who helps manage about $15.6 billion at Neuflize OBC in Paris.
Zain told the Kuwaiti bourse its board met Feb. 14 to discuss an offer for its African assets, excluding Sudan and Morocco. Neither Zain nor Bharti have confirmed the transaction.
Coveted Assets
Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria, the continent’s most populous nation. The company has more than 40 million subscribers in Africa, about 62 percent of its client base. More than half of its $7.4 billion of annual sales in 2008 came from Africa, according to Bloomberg data.
Zain’s African assets have been coveted by Vivendi and other telecom majors. In the past year, Luxembourg-based Millicom International Cellular SA has said it would be interested in some of Zain’s assets.
MTN and Vivendi had shown interest as late as last week, a person familiar with the matter said. MTN Chief Executive Officer Phuthuma Nhleko said Aug. 27 that it may consider buying Zain’s Africa units if “there were no regulatory problems.”
At $10.7 billion, Bharti would be paying about $250 for each of Zain’s 42 million African customers, excluding Sudan and Morocco. When Vodafone Group paid $10.7 billion in May 2007 to buy a controlling stake in India’s Hutchison Essar Ltd., it valued each Indian subscriber at about $720.
‘Dangerous Trend’
Since then, India’s mobile phone market has grown more competitive, as newcomers including Japan’s NTT DoCoMo Inc and Norway’s Telenor ASA have started operations, bringing the total number of mobile-phone operators in India to 11, prompting Bharti to look outside of the world’s second-fastest-growing mobile-phone market for opportunities to increase profit growth.
“My only worry is that there is this dangerous trend of Indian companies trying to buy overseas assets at any cost,” said R.K. Gupta, portfolio manager and managing director at Taurus Asset Management in New Delhi. “If you get a company at cheap valuation or fair cost it’s O.K., but if you pay aggressively it’s going to affect profitability for years.”
Bharti’s purchase of Zain assets would be the second- largest overseas acquisition by an Indian company, after Tata Steel Ltd. paid $12.9 billion for Corus in 2007.
“I have no doubt that this is an operationally sensible decision, as Bharti can probably cut costs even further than Zain” said G.V. Giri, an analyst with IIFL Capital Ltd. in Mumbai. “Bharti does need to come up with that sort of cash, and that could lead to some weakness in the stock for a while.”
For Zain
Slowing profit growth and the unsuccessful MTN merger attempts have made Bharti’s stock worst performer in India’s benchmark Sensitive Index, losing 7.8 percent as the Sensex gained 81 percent.
The company announced a $300 million bid on Jan 12 to buy a 70 percent stake in the Bangladeshi assets of Abi Dhabi-based Warid Telecom, adding 2.92 million subscribers. The following day, it named Chief Executive Officer Manoj Kohli, 51, to a new role to head overseas expansion. Kohli hung up when contacted Feb 12, and has not replied to request for comment.
For Zain’s main shareholders, led by the Kharafi Group, the transaction would end almost a yearlong effort to sell the company as a whole or in parts.
“This sale will surely affect Zain Africa and whatever is left in the Middle East,” said Hajjaj Bu Khudour, an independent Kuwaiti economist. “It will devalue Zain.”
Previous Attempts
He said whatever profit is made from selling most of the African assets won’t compensate for Zain’s investment in the market to fund expansion.
Zain’s many previous attempts to sell the group or some of its assets have failed. This month, Saad al-Barrak resigned as Zain’s chief executive officer after delays in the proposed sale of the company by the Kharafi Group, Zain’s second-largest shareholder.
Kharafi announced in September it signed a preliminary agreement to sell a 46 percent stake in Zain, valued at $13.7 billion, to a group led by India’s Vavasi Group and Malaysian billionaire Syed Mokhtar Al-Bukhary. At the time, the sellers and buyers pledged to complete the deal in four months.
To contact the reporter on this story: Fiona Macdonald in Kuwait on fmacdonald4@bloomberg.netMehul Srivastava at msrivastava6@bloomberg.net.
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