Bharti gains after Zain deal; eyes on execution

NEW DELHI/MUMBAI Wed Mar 31, 2010 3:58pm IST

A boy rides his bicycle past an advertisement of Bharti Airtel in Kochi March 31, 2010. REUTERS/Sivaram V

A boy rides his bicycle past an advertisement of Bharti Airtel in Kochi March 31, 2010.

Credit: Reuters/Sivaram V

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NEW DELHI/MUMBAI (Reuters) - Bharti Airtel's billionaire chairman Sunil Mittal has signed on the dotted line to pay $9 billion for Kuwaiti telco Zain's mobile operations in 15 African operations.

Now he has to make the deal work.

Bharti must win regulatory clearance in key markets such as Nigeria for what is India's second biggest overseas acquisition after Tata Steel's $13 billion buy of Corus in 2007 -- and turn around the loss-making assets.

The deal, which makes Bharti the world's No.5 wireless firm by subscribers with a presence in 18 countries, brings tough financial and management challenges for a company scrambling to defend its lead in a fiercely competitive home market.

"A big challenge is streamlining operations across all these countries with limited resource availability," said Kamlesh Bhatia, principal analyst at research firm Gartner. "They also have to turn the company around in the fastest time possible."

Bharti shares rose as much as 2.7 percent on Wednesday after the company signed agreements with Zain in Amsterdam late on Tuesday. By 1015 GMT, the stock was up 0.3 percent in a slightly easier Mumbai market.

The deal brings Bharti 42 million new subscribers and a combined estimated annual revenue of $3.6 billion in a business that was loss-making for the first nine months of last year.

"The main challenge for Bharti lies in raising revenues and adding subscribers as Zain has been losing both in some of the countries," said Amit Ahire, analyst with Ambit Capital.

Bharti uses outsourcing and network-sharing to keep costs low and focuses on generating high network usage, rather than the more popular ARPU (average revenue per user) model -- squeezing more revenue out of each customer. It will look to bring its "minutes factory" model to Africa, where it is untested.

REGULATORY ISSUES, OWNERSHIP DISPUTE

Bharti already has a taste of some of the potential obstacles that lie ahead in Africa.

The government of the small central African nation of Gabon has come out against the deal, saying Zain Gabon had not complied with regulations, and it reserved the right to take "all necessary measures".

There is also a dispute about minority ownership of Zain's operations in Nigeria, the biggest market in the deal.

Econet is seeking to overturn a 2006 deal by Zain -- then called Celtel -- in which it bought a majority stake in Nigerian mobile operator Vee Networks Ltd, now Zain Nigeria.

There are seven different lawsuits being heard in various courts across countries such as Nigeria, Britain and the Netherlands on the Nigeria issue, according to a BNP Paribas report.

"Gabon is a very small market and in most cases regulators can always be dealt with. But Nigeria is a bigger stumbling block because it's a key market and shareholders are always trickier to deal with," said Gartner's Bhatia.

Mittal, who is a step nearer his goal of making Bharti a global operator, particularly in emerging economies -- he twice failed recently to buy South Africa's MTN -- has said Bharti will work with regulators and expected "tremendous support" in countries including Gabon.

Bharti would also talk to minority shareholders in Zain Nigeria, he said.

STRETCH ON FINANCIALS

Many telecoms industry experts reckon Bharti is paying over the odds with its $9 billion in cash. After assuming $1.7 billion of debt on Zain's books, the deal is valued at around 10 times EBITDA, more than Bharti's own valuations.

Bharti has secured debt of up to $8.5 billion from a clutch of lenders to fund the deal, and may have to spend more to expand networks that analysts say have been under-invested for years.

The success of Bharti's "minutes factory" model will depend on deepening networks and upgrading technology -- all at a price.

After the deal, Bharti's gearing is seen rising to more than 2 times EBITDA, from 0.4 times now.

On top of that, Bharti must spend to compete in next week's third-generation (3G) spectrum auction in India, which analysts estimate could cost up to $2 billion.

Building 3G networks across sprawling India will cost billions of dollars more.

(Additional reporting by Ami Shah; Editing by Ranjit Gangadharan and Ian Geoghegan)

(For more business news on Reuters Money visit www.reutersmoney.in)

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