About Bharti Airtel Limited

Bharti Airtel Limited, a group company of Bharti Enterprises is among Asia’s leading
integrated telecom services providers with operations in India, Sri Lanka and Bangladesh.
The company has an aggregate of around 137 million customers across its operations. Bharti
Airtel has been ranked among the six best performing Technology Company’s in the world.

Bharti Airtel is structured as four strategic business units - Mobile, Tele media, Enterprise
and Digital TV.

The mobile business offers services in India, Sri Lanka and Bangladesh. The
Tele media business provides broadband, IPTV and telephone services in 94 Indian cities.
The Enterprise business provides end-to-end telecom solutions to corporate customers and
national and international long distance services to carriers. The Digital TV business provides
DTH services across India.
All these services are provided under the Airtel brand. Airtel’s national high-speed optic
fibre network currently spans over 118,337 km across India.
About Zain

Zain Group is a mobile telecommunications company founded in 1983 in Kuwait as MTC or

Mobile Telecommunications Company, and was later rebranded to Zain in 2007. Zain has
commercial presence in 8 countries across the Middle East and North Africa with about 46.1
million customers as of 31 December 2013. It employs over 6000 people. The group CEO is
Scott Gegenheimer, who was appointed in December 2012
Telecom Sector in Africa: Business Overview

Africa presents great opportunities in the telecom sector. The liberalisation of the sector,
the extension of services by multinational conglomerates and the active competition
currently in place in the sector have all contributed to the telecom revolution. Since the
processes of liberalisation and
privatisation have been taken into
consideration by African countries such
as Uganda, Tanzania, Nigeria, the Sudan,
South Africa and Kenya, their
telecommunication infrastructures have
improved drastically. Many African
governments have developed their
telecommunication infrastructure by
privatising their former state-owned
enterprises.

As a result, the telecom sector in the

African sector has opened up new vistas of business opportunities. Africa has been the
fastest-growing mobile market in the world during the past five years. There are now more
than 82 million mobile users in Africa: Nigeria's mobile market is growing at over 100% per
year. Mobile telephony has a positive and significant impact on economic growth, and this
impact may be twice as large in developing countries as in developed countries.
Attractiveness of African Market

The tariffs had declined significantly in India and the penetration levels had crossed 45% in
India, there was little opportunity left in the domestic market for Bharti

The penetration levels in Africa were around 33% and

the ARPU levels were high varying from $8 – 12 (apart from Kenya and Ghana where it is
closer to India ARPU levels of $4)

Bharti could replicate its low cost model in the African market which would not only bring
the cost down but would also result in significantly higher subscriber addition

The level of competition in Africa was not as intense as India as most of the countries had
no more than 4-5 operators.

Airtel’s acquisition of Zain in Africa

Airtel acquired Zain at about US $ 10.7 billion to become the fifth biggest telecom major in
the world. Since Zain is one of the biggest players in Africa covering over 15 countries,
Airtel’s acquisition gave it the opportunity to establish its base in one of the most important
markets in the coming decade.

Bharti Airtel Limited Asia’s leading telecommunications service provider entered into a
legally binding definitive agreement with Zain Group to acquire Zain Africa. Under the
agreement, Airtel had acquired Zain’s African mobile services operations in 15 countries
with a total customer base of over 42 million. Zain was market leader in ten of these
countries and ranks second in four countries. With this acquisition, Bharti Airtel became the
world’s fifth largest wireless company with operations across 18 countries. Bharti group’s
global telecom footprint will expand to 21 countries along with the operations in Seychelles,
Jersey, and Guernsey. The company’s network had now cover over 1.8 billion people, the
second largest population
coverage among Telco’s globally.

Benefits from the Deal

Airtel had got a total hold in the African market that would help them get a stronger
presence in the continent.

Africa was attractive for Airtel as the mobile user base was low there, with just over a third
of the population having a mobile.

Telecom Zain's 15 African operations included in the deal have a combined user base of
about 42 million, and the operator is No.1 in 10 markets.

The market was also showing early signs of saturation, with penetration reaching about 45
percent. To beat the slowdown, Airtel has been scouting overseas, with a focus on high
growth-potential emerging markets. After failing to get a deal with South Africa's MTN
Group, the company had set up a new unit to drive overseas expansion.

Reasons for Bharti

 Having covered the footprint in India, they wanted to enter other emerging markets
(Sri Lanka, Bangaldesh, Africa)
 Larger operations give higher ability to negotiate better rate with the vendors
 Africa was the only continent available where there was low penetration rate and
license costs
 Zain was the obvious choice after MTN

Reasons for Zain

 Zain was the second largest operator in Africa and was being consistently beaten by
MTN
 They were run by a Kuwait based business group and wanted to focus their
management time on Middle East operations
 Most of the money they got was distributed to investors as dividend, which means
they were under pressure to provide returns rather than infuse capital

Why Zain accept the acquisition deal

The principal issue is one of valuations, that Zain’s African operations are losing money.
When the acquisition was taken place the Zain was in the losses, that is why they accept the
acquisition deal of Airtel. In 2009 the principal shareholders of the Zain Group of Kuwait
service providers, had been looking for a buyer for the company’s assets in Africa In the nine
months to September 2009, they reported a net loss of US$112 million against a profit of
US$169 million in the corresponding period the previous year. Seven of the 15 countries
reported losses. The highest revenue earner, Nigeria, which was nudging the US$1 billion
mark, lost US$88 million.

Deal structure – Financials

This was all in cash deal Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion
upfront and $700 million after a year It also take over approximately $1.7 billion of Zain's
debts as on December 31, 2009 Of the $8.3 billion paid to Zain..

 Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion upfront and $700
million after a year
 It also take over approximately $1.7 billion of Zain's debts as on December 31, 2009
 Of the $8.3 billion paid to Zain, Bharti raised debt from a consortium of foreign banks
and State Bank of India with the lead-arranger and lead-advisor Standard Chartered
Bank committing the highest amount — $1.3 billion, followed by Barclays at $900
million.
  The rest of the co-advisors — ANZ, BNP, Bank of America-Merrill Lynch, Credit
Agricole CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking
Corporation — allocated $600 million each.
 State Bank of India agreed to an up to $ 1 billion loan

Source of funds

Airtel raised debt from a consortium of foreign banks and State Bank of India with the lead
arranger and lead-advisor Standard Chartered Bank committing the highest amount $1.3
billion, followed by Barclays at $900 million. The rest of the co advisors ANZ, BNP, Bank of
America-Merrill Lynch, Credit Agricola CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and
Sumitomo Mitsui Banking Corporation allocated $600 million each. State Bank of India
agreed to an up to $ 1 billion loan.

VALUATIONS

The deal enterprise value of USD 10.7 billion implied a valuation of:

USD 320 per proportionate subscriber

3.6 times revenue

11.6 times EBITDA, a 30-70% premium versus Bharti's valuation at that time

Zain's peer, MTN traded at 5.5-6 times EV/EBITDA

Analysis

The deal made sense for Bharti for the following reasons:

Low Financial leverage

 Airtel had a very low “Net Debt to Equity Ratio” of 0.05 at the end of Dec. 2009
which means that it was virtually a debt free company.
 It is good to have low debt but zero debt is not a desirable situation as debt can
increase the shareholders’ return on their investment due to tax advantages
associated with borrowing.
 Airtel is a profitable company with over 40% EBIDTA margins which is higher than
the cost of debt. This means that it is better for the company to pay interest than
paying dividends to a large number of shareholders and hence it should either
reduce the shareholding (through share buyback) or increase debt and deploy debt
in a profitable way. Bharti selected the second option and took debt to buy Zain that
would return higher profits in the long term.
Free Cash
 Bharti is one of the few carriers across the world that has free cash flow and it didn’t
make sense for the company to keep sitting on the pile of cash when it can deploy it
in productive assets
 The capex in the Indian operations had started to decline and hence the free cash
flow was likely to increase even further in future
 The company would not have found much problem in servicing the debt raised to
fund the acquisition due to generation of free cash flow in the years to come
“Due Diligence

Objective
 Validating the assumptions underlying valuation
 Identify and confirm sources of value
 Mitigate real or potential liability by looking at fatal flaws that reduce value
 Create comprehensive checklists

Three primary reviews:-

Strategic/ Operational/ Marketing review - Focus on seller’s management team,

operations and sales & marketing strategies
Financial review - Focus on accuracy, timeliness and the completeness of the seller’s
financial statements
Legal review - Corporate records, management and employee issues, material contracts
and obligations of the seller (e.g. litigations and claims) and tangible & intangible assets of
the seller

Need for Due Diligence (Strategic Review)

 Zane’s African business had $2 billion of debt on its books, when acquisition was
taking place in 2010.

 Regulatory issues, which were widely blamed as a deal-breaker in the Bharti/MTN

talks, are not seen as a major concern. But legal disputes surrounding Zain's Nigerian
unit, the biggest among its African assets, could potentially delay or disrupt a deal

 Airtel’s success with Zain was hinge upon how fast it is able to grow the African
operations, post-acquisition. But this looks much more daunting. This is because nine
out of Zain’s 15 African markets are well penetrated with more than 33% subscriber
population.

 Further, mobile penetration exceeds 45% in five markets. These include Ghana and
Nigeria where Zain’s operations are bleeding due to stiff competition from MTN. Zain
was also suffering losses in Uganda, again a territory with 35% penetration and has
MTN as the market leader.

 With substantial market penetration and MTN as a bigger competitor, Bharti found it
very tough to turn around Zain’s loss-making operations. Zain’s African operations
had posted a loss of $111 million in nine months ended September 2009.

 A dispute over the ownership of Zain’s crucial Nigerian unit as well as a legal
offensive by a minority shareholder could complicate for this deal.
Need for Due Diligence (Financial Review)

 Any Indian company if wants to acquire or invest in foreign company, it must comply
with the FEMA ((Transfer or Issue of any Foreign Security) Regulations, 2004 ( ODI
Regulations )
 It means under ODI regulations, an Indian company is permitted to invest in a joint
venture/wholly owned subsidiary up to 400% of the net worth of the Indian
company in the form of equity/loan or guarantee without seeking prior approval of
RBI.
 Regulation 13 of the ODI Regulations permits a wholly owned subsidiary setup by an
Indian company to set up a step down subsidiary
 In case of Bharti-Zain deal, Bharti created two SPV`s, one in Netherlands & one in
Singapore
 It means, a company in India promoting or setting up joint venture or subsidiary
company has to give guarantee on behalf of the subsidiary company to the bankers
for the loan.
 In this case, Bharti has to provide corporate guarantee on behalf of its SPV`s i.e. both
Singapore & Netherlands SPV`s to bank for the loans for financing the transactions.
 Hence it attracts the regulation 5 (b) ) of Foreign Exchange
Management(Guarantees) Regulations, 2000 ( Guarantees Regulations )

Need for Due Diligence (Legal Review)

Competition Commission of India/Anti-Trust laws

 Competition Act 2002 enacted to replace Monopolies & Restrictive Trade Practices
Act, 1969
 It was enacted to provide institutional support to healthy and fair competition.
 The Competition Act seeks to:-Prohibit anti-competitive agreements including
cartels;-Prohibit abuse of dominant position; and-Regulate combinations (mergers
and amalgamations, and acquisitions).
 In the current case:-Bharti-Zain has to give details of the acquisition to CCI.-Upon
receipt of such notifications, CCI will conduct investigation on the basis of criterion
mentioned above.-CCI shall give its ruling within a maximum period of 210 days

Nigerian Law Hurdles

 Econet WIreless International: A major telecom player in Nigeria, wanted to use its
pre-emption rights
 In respect of shares had been breached when Econet"s predominantly Nigerian
partners decided to sell their shares in Vee Networks (or V-Mobile) to Zain in 2006.
 Econet has also applied for interim measures to prevent Zain from selling,
transferring, disposing of, dealing with or otherwise encumbering the disputed stake
until the matter is resolved.
 Till the time the ownership issue over Zain Nigeria is resolved, Zain faces a hurdle in
transferring its Nigerian assets to Bharti Airtel
Congo Controversy
 The Government of Republic of Congo said that they had not been informed of
Bharti Airtel’s deal with Zain and that the deal was a clear violation of the law in our
country
 The Government also claimed that the deal is in contravention to Zain`s local mobile
license
 Until it would be difficult for the Bharti to get all regulatory approval

Gabon Glitch
 In this case, the Government of Gabon raised a regulatory objection to the deal
alleging that Zain had not complied with certain telecom regulations in Gabon.
 The Gabonese Government has disapproved the sale of Zain`s Gabone’s assets &
reserves the right to take all necessary measures.
 But off late, Government of Gabon gave its approval to the sale of Zain’s assets in
Gabon to Bharti.

Need For Due Diligence ( IT Due Diligence)

 Business operations; Management Information Systems; Financial Reporting capital

and operational expenditure item To establish with greater certainty that
 The impact of the acquisition process on combined business operations is minimal
 Assess the further investments required in IT to maintain the EBIT of the acquired
business
 Strategies for managing the IT related aspects of a transaction including legacy issues
 Reduce risk associated with integrating” IT systems
 The IT systems supporting the target business are fit for purpose and identifying
resources critical to continued business as usual operations