BHARTI AIRTEL-ZAIN MERGE

OBJECTIVES
a) To understand the term Merger & Acquisition, on global platform.

b) To study & to understand the various Legal Aspects involved under such global M & A`s deal. c) To understand the criticalities & nitty gritty involved like what can be the payment structure, what can be the source of funding etc. in such megadeal. d) To understand the strategy behind , why a particular successful firm need to enter in to such M & A`s form of business & what can be the long term advantages of the same.

ABOUT BHARTIAIRTEL

It is one of Asias leading integrated telecom services providers with operations in 19 countries across Asia and Africa. It is structured into four strategic business units - Mobile, Telemedia, Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh. Telemedia business provides broadband, IPTV and telephone services in 94 Indian cities.

Bharti Airtel is the leader in Indian Wireless market with 24.0% market share, followed by Reliance Communications 18.3%,Vodafone 17.5 %.
Its Mobile Services partners are Nokia Siemens, Ericsson, Huawei. Telemedia & Long Distance Services partners are Nokia Siemens, Juniper, Cisco, Alcatel Lucent, ECI, Tellabs. Call Centre Operations partners are IBM Daksh, Hinduja TMT, Teleperformance, Mphasis, First source & Aegis.

ABOUT ZAIN

Zain, formerly MTC, was the first mobile telecommunications company in the Middle East when it started its operations in Kuwait back in 1983. Its subsidiaries include; Mobile Telecommunications Company Lebanon (MTC) SARL, Lebanon, and Sudanese Mobile Telephone (Zain) Company Limited, Sudan. It is a public company engaged, together with its subsidiaries, in the provision of mobile telecommunication and data services, including operation, purchase, delivery, installation, management and maintenance of mobile telephones and paging systems in Kuwait and 21 other countries in the Middle East and North Africa. Zain Africa is Wholly owned subsidiary of Zain, incorporated in Netherlands and held the African operations of Zain.

STRUCTURE OF ACQUISITION

* The fifteen jurisdictions are: 1) Burkina Faso, 2) Chad, 3) Republic of the Congo, 4) Democratic Republic of the Congo, 5) Gabon, 6) Ghana, 7) Kenya, 8) Malawi, 9) Madagascar, 10) Niger, 11) Nigeria, 12) Sierra Leone, 13) Tanzania, 14) Uganda and 15) Zambia.

Transaction Details of Bharti Airtel-Zain

Acquirer Seller Target Acquisition Bharti Airtel Limited Mobile Telecommunications Company KSC Zain Africa International BV Bharti Airtel Limited indirectly acquired 100% of Zain Africa International BV and its business operations in Africa from Zain under a privately negotiated agreement.

Mode of Security (Share) Sale acquisition Consideration USD 10.7 billion Mode of Payment All cash deal Bharti Airtel to pay: a) USD 8.3 billion within three months from the date of closing; b) USD 700 million after one year from the date of closing; and c) USD 1.7 billion assumed as debt on the books of Zain. Funding Leveraged Buy-out a) Bharti Airtel to borrow USD 7.5 billion from a consortium of banks led by Standard Chartered Bank and Barclays Bank. b) Bharti Airtel to avail of a rupee loan of USD 1 billion equivalent from SBI Group.

LEGAL & REGULATORY CONSIDERATIONS

Glossary of Terms Used
Merger: A Merger is a legal term which means dissolving the earlier business & folding its assets & liabilities into a newly created third entity, it entails the creation of a new corporation. Like Arcelor-Mittal merger in Steel Industry. Acquisition: When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the Target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. Like TATA`s acquisition of Land Rover & Jaguar from Ford & Tea Brand Tetley of U.K./Steel Company Corus of U.K. SPVs/SPEs (Special Purpose Vehicle or Special Purpose Entity): A subsidiary company created as separate legal entity for large term projects without putting parent company at financial risk. Its legal status makes its obligations secure even if the parent company goes bankrupt. Like TATA created two SPV`s-TML Holdings Pvt.Ltd.in Singapore & Jaguar Land Rover Ltd.in U.K.while acquiring Land Rover & Jaguar. RoFR(Right of First Refusal): A contractual right to holder regarding entitlement to shares before the shares are made available to third party or public at large.Like in the case of ONGC/Cairn/ Vedanta. ONGC believes that by virtue of holding 30% in the Rajasthan block, it has the pre-emption or RoFR to buy Cairn India in case the company's ownership changed.

OVERSEAS DIRECT INVESTMENT

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 rgulations,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 set up 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

GUARANTEES REGULATIONS
In 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)

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 HURDLE
Econet Wireless International: A major telecom player in Nigeria, wanted to use its pre-emption rights of right of first refusal 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 Airtels 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 Gabonese assets & reserves the right to take all necessary measures. But off late, Government of Gabon gave its approval to the sale of Zains assets in Gabon to Bharti.

SWOT ANALYSIS

Strength:
Post acquisition, Bharti Airtel will become fifth largest service provider in terms of the number of subscribers.
The deal would give Bharti 42 million subscribers in 15 African countries, which have a combined estimated annual revenue of $3.6 billion Bharti, largest telecom player in India, can replicate the success of India in Africa Strategic Alliance with other stake holders, including Nokia, SingTel & Sony Ericson

 WEAKNESS

Bharti has paid a heavy price for the deal Zain Africa has made a net loss of USD 112 million in the nine months to September 2009. Seven of Zains African units are loss-making, including its highest revenue earner, the Nigerian arm, Zain Nigeria. The deal is highly volatile and carries huge commercial risk for Bharti Airtel The loan would be a drag on Bharti Airtel's earnings with no immediate returns expected from the loss-making target.

 OPPORTUNITY

Telecom penetration in African countries varies from 37 per cent to 65 per cent. There are few markets with penetration less than 40 percent The African market is homologous to Indian market in term of its structural similarities. Monthly ARPU on the Continent averages USD 7.5, which is higher than Indias ARPU of USD 5 Africa is too good an opportunity for Bharti Airtel to experiment the model that it has mastered in India, particularly its rural strategy.

 THREAT

Zain Africa is in trouble and financial paralysis is looming over its head Bharti Airtel will have to put in a lot of effort to align the varied cultures; with 15 countries to tackle it definitely will be a nightmare. Bharti-Zain will be getting a tough fight with rival like MTN and China Mobile There are greater political and economics risks in Africa . Most of the countries are political unstable and operation are still loss making.