By Manish Sharma

Indian telecom czar Sunil Mittal is widely being referred as third time lucky. After two failed attempts to clinch a deal with African telecom major MTN, Bharti Telecom, the largest mobile company in India, finally expanded its footprints in African continent. The acquisition of African assets of Kuwait based Zain Telecom by Bharti for an estimated amount of US$10.7 billion is the second biggest overseas acquisition by an Indian company.

After the acquisition of Bangladesh based telecom operator Warid Tele in January, this is the second deal inked by the top brass of Bharti this year. Clearly, company is in overdrive mode with its expansion plans. Reasons are not too difficult to assess. Domestic mobile market that provides for nearly 80 per cent of Bharti’s revenue is becoming crowded by day. In the last few months, six new players – Sistema Shyam, S Tel, Uninor, Etisalat, Videocon and Tata DoCoMo have forayed in Indian mobile sector and intensified the competition in a sector that is witnessing 10 million new additions every month. Furthermore, the introduction of the ‘per second billing’ model by Tata-DoCoMo triggered a tariff war among existing players. Heightening competition and falling revenue is already having an adverse impact on the Average Revenue per User (ARPU) of mobile companies. The average ARPU of industry today stands at US$ 4.8 against the average figure of almost US$ 7.7 nearly two years ago. According to a recent report by Credit Suisse First Boston (CSFB), the new competitive environment would lead to a decline of 33-35 per cent revenue per minute (RPM) over the next two years.

Therefore, Bharti Telecom who became the first cellular company in India to register 100 million subscribers was keen to expand its territory of operations. After its repeated failure to materialize a complex deal with MTN, Africa’s biggest mobile company, Zain turned out to be a willing ally. Bharti is tapping Zain for growth given Africa’s low penetration levels, large population base and lower competitive intensity. The population base of Africa with 470 million people has a mobile penetration level of around 35 per cent. There are only four operators per country on an average in Africa. Moreover, Zain’s average ARPU at US$7.2 is at a 40 per cent premium to Bharti’s ARPUs of US$5.1.

However, going will not be smooth for Bharti whose shareholders have not shown enough confidence in a deal that will lead to earning dilution in the next few years. Also, Zain is not doing a great business 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. In the same period, seven of the 15 African regions reported losses. Nigeria, which accounts for 1/3rd of Africa’s revenue, lost US$88 million in the first nine months of 2009. Though, various reports have been quite bullish about the average revenue figures in Africa but figures of Zain’s Middle- East business are more lucrative. Compared to the African countries, where average ARPU is around US$7, Zain has an ARPU of US$55 in Kuwait and US$26 in Bahrain.

If strategic maneuvering in Africa fails to deliver, the high debt funding will drag the stock down in Indian market. Bharti is sewing up a debt deal of US$8 billion. It will be paying approximately US$500 million as interest and need to scale up EBITDA by the same level; this will mean pushing up EBITDA margin by 30-35 per cent. A tall order indeed! If Bharti can successfully transpose its high minutes of use model - describedas a "minute-factory", the venture will add significant value; otherwise, Zain will turn out to be a pain for Mittal.

Indiabiznews, April 02, 2010