Está en la página 1de 12

Bharthi Airtel – Zain Merger

International HRM term paper
Robinson D F10048 Loyola Institute of Business Administration 3/19/2012

What they did question was the audacity of the Zain acquisition that required Bharti to shell out $10. "In Zain.14 billion Zain told their respective stock exchanges that they were in exclusive discussions until March 25." Yet the proposed deal has given rise to misgivings.7 billion. The comments range from "Pained by Zain. Almost nobody questioned India‟s largest telecom firm‟s great African push. Iraq. Bharti shares plunged some 14% on the Mumbai stock exchange in just two days. The combined firm would have revenues of some US$13 billion. Talk to the people at Bharti and they will tell you off the record that they expect this deal to be smooth sailing.1. after the deal closes in May. Saudi Arabia and Palestine. Bharti informed the Bombay Stock Exchange (BSE). as Bharti expects. Substantial amounts of this was loan In a deal announced on February 14. Bharti Airtel and Zain have agreed to enter into exclusive discussions until March 25 for the acquisition of Zain's African unit based on an enterprise value of US$10. Rating Cut" from Bank of America Merrill Lynch to "Very expensive diversification" by Credit Suisse. This potential transaction does not include Zain's operations in Morocco and Sudan and remains subject to due diligence. depreciation and amortization (EBITDA) of around US$5 billion. and we have to pay. there are no multiple clearances required. Only the Zain board has to give a go ahead. Bahrain. Almost every research house has been critical of the deal. of course. taxes. "The MTN deal was complicated and needed many interventions from both governments.15 billion Bharti and the US$4. On the table were the African assets of Zain Africa BV which comprises 15 countries. and two African markets Sudan and Morocco which are considered part of the Middle East cluster. Left with Zain would be Kuwait.7 billion in cash. . customary regulatory approvals and signing of final transaction documentation. Jordan. the US$8. What is the business objective that made it happen? How did the organization benefit from the activity? Mittal‟s desire to hit the African market was evident even a year before when he bid without success to consummate an acquisition/ merger with MTN. and earnings before interest. Africa‟s biggest telecom operator. Lebanon." Mittal told weekly business magazine BusinessWorld. The note is. a measure of caution.

higher interest payout. Technically. is that it is the market leader only in the smallest of countries such as Chad. while Bharti‟s Indian and South Asian operations reported an Ebitda equivalent to 36. to 46 million subscribers in the quarter ended June 2011. CEO (international) and joint managing director of Bharti Airtel. In a reflection of the prevailing sentiment. Zain.4 per cent of the region‟s revenues and a net profit equivalent to 12 per cent. the African operations were at 26. when Bharti acquired Zain Africa BV.” he says. In the previous fiscal ended March 2011. Zain‟s arch rival MTN continues to lead in Africa‟s biggest telecom markets such as Nigeria. the African operations incurred a net loss of $75 million. Malawi and Gabon. Bharti stock fell by 6.A year down the line. The African operation has grown from 36 million subscribers in the quarter ended June 2010. days before the company was to declare its June quarter results.50 anticipating yet another bad quarter due to African operations. MTN reported a net profit of $2. respectively. principal analyst at Gartner. For instance. falling Arpu (average revenue per user) and a far-from-enthusiastic response to 3G in India.” says Manoj Kohli.” says Kamlesh Bhatia. in the last quarter ended June 2011. “We have taken the right step at the right time. The fact. though. “Bharti results reflect the expected drag from their Africa operations.42 billion on revenues of $16. In the year ended 31 December 2010.6 billion. is still battling it out in the African markets.7 per cent and -0. which was delisted and renamed as Bharti Airtel International BV headquartered in Nairobi. That‟s an improvement over the $15-million net loss Zain incurred in June 2010.5 per cent to Rs 413. And its parent Bharti is bearing the brunt of its struggle for profitability and market leadership. “Now they call me Manoj. Bharti Airtel is weighed down by the burden of the Zain acquisition. whose African colleagues initially found it tough to pronounce his name. We are digging our heels deep in a continent which is the biggest future market of the world. Ghana and Uganda and continues to fend off Bharti‟s challenge with a worldwide subscriber base of 150 million and (about 60 million in its Africa operations) at the end of March 2011. 3G rollouts in India.2 per cent. Bharti leads in eight of the 16 countries where it operates in Africa. but Bharti continues to hurt in the region with a net loss of $2 million on total revenues of $979 million. .

Employee costs in the African markets are far higher than those in the Indian market. For one. cites the positives: Arpu in the region range from $3 to $18. Analysts and industry observers cite several reasons for that outlook. With 24 countries and 71.88 billion in March 2011) and $2 billion Ebitda (from $691 million) from African operations. $5 billion revenue ($2. not everybody is as hopeful. Bharti Airtel. The proposed sale of Zain Africa BV represents a change in course in the company's strategy. Mobile penetration is just 40 per cent as compared to 60 per cent in India. becoming one of the first companies in the region to do so. Zain was launched in 1983 as the region's first mobile operator.” says a Jaypee Research report on Bharti Airtel dated April 2011. however. with the mean being $7 (in India.Kohli has committed to the management that by March 2013. Kohli. The target set for 2011 was to be among the top 10 telecom companies in the world with more than 150 million customers. What are the IHRM challenges it faced? As is the case with every merger. However. Bharti is still to unsettle the market leader in any of the African markets (Zain was already the leader in all of the six markets). The company embarked on an aggressive growth path after Saad Al Barrak took over as CEO of the Zain Group in 2002. the company introduced GSM technology in Kuwait. “We believe that Kohli‟s expectation of 40 per cent Ebitda margin is on a higher side and (we) remain conservative over Africa and don‟t see a turnaround in the near future. He worked hard to convert a Kuwaiti telecom operator into a global one. A Deloitte report states that the demand for mobile connectivity in Africa is growing at an average of 25 per cent annually. which scoffs at the ongoing price wars in the Indian market.8 million customers. Bharti Airtel International BV will have 100 million subscribers (up from 46 million today). has been badly bruised after triggering a price war in some of Africa‟s biggest markets. it is $4. Zain was close to fulfilling Al Barrak's dream. cultural factors will influence how the two companies will integrate their operations. 2. Bharti is yet to bring in the full economies of scale of outsourcing and network sharing. . In 1994. 12 months since the takeover.3). It was known at that time as MTC.

[In the MTN case." says Bandyopadhyay of Spice Finance.500 employees of Zain." Mittal told BusinessWorld.5 billion in cash on its balance sheet. This reduces the cash requirement to US$8. But the Zain corporate culture is imbued with his go-getting style. dealers and distributors. Bharti will assume US$1.7 billion in debt and pay US$700 million after one year. which was promptly accepted. both India and Kuwait have welcomed the deal).] Raising funds for the deal from banks or other institutions in the international markets should be an easier and workable option. "We managed to get the resources in place when the bigger MTN deal was being discussed. The amount of funding needed thus comes down to US$6. though Mittal says that no government permissions are necessary (in fact. Bharti could run into integration problems in Africa. Kohli and his senior team travelled to all 16 countries in the first two months twice over to meet with all stakeholders — employees. If valuations are a cause for concern. “The question . Al Barrak announced his resignation. If there is a problem on any of these fronts. raising the money is not. In the first two months. All calculations have been made and there is no issue over which we need to fret. "The company will have no problems in getting the resources in place for this deal. The strength of Bharti's existing balance sheet and some structure around Zain Telecom's shares or cash flows should do the trick. the telecom regulators of all the countries will have to approve the takeover." According to the agreement. the problem was the Indian shareholding in Bharti-MTN combined entity falling below the government-stipulated floor. Kohli held over 100 town hall meetings to address anxious employees and personally wrote to all the employees about Bharti‟s intent. It is an all-cash deal and there is no issue of stock trading. Bharti has about US$1. Also. all government.8 billion. "A share swap may have led to legal complications. Zain employees had become a bit cynical having seen the company change hands five times in a decade.3 billion.A few days before the Bharti deal was announced. banks and all key people and institutions. it could make the deal look more expensive. One of Bharti Airtel‟s biggest challenges is to integrate 6. He also replied individually to the 300-odd people who wrote back within 24 hours." "I don't think raising funds for the proposed deal will be difficult. too.

Many heads of state fondly remember Indian teachers who taught them. as cash accruals will be used to de-leverage. In Sierra Leone. road and air infrastructure. the government wanted affordable services. Any other issues/findings? High-debt Deal On February 19. CEO and managing director of Airtel Nigeria. Even as Bharti is slowly overcoming the HR challenge. According to Jaypee Research. it is struggling with the cost of human resources. the government wanted Bharti to help create rural network. There are other challenges. 3.” says Kohli. such as widespread prevalence of diseases. placed Bharti's long-term debt on rating watch with negative implications. too. This reflects CRISIL's belief that Bharti Airtel's proposed acquisition of Zain Africa BV's business for an enterprise value of US$10. the acquisition can thereby adversely affect Bharti Airtel's gearing [debt-to-equity ratio] and debt protection indicators over the short term. and political upheavals. after the acquisition. that the company's financial risk profile is expected to improve subsequently. In Zambia. says Bharti empathised with local sentiments while integrating. CRISIL believes that Bharti Airtel will benefit from the proposed deal by way of diversification of revenues and the growth opportunities offered by the under-penetrated African market.15 times as on 31 December. CEO (Anglophone markets). The agency adds. “There is so much respect for India. the company has come across some pleasant surprises.amongst them was — is Airtel here to stay?” says Rajan Swaroop. however. . poor rail.7 billion will be largely debt-funded. At the same time. “We asked for USO funding and they agreed.” says Kohli. credit rating agency CRISIL. is expected to increase to more than 1 time. Kohli says Bharti requested for lowering of interconnect rates and the country‟s President agreed within 30 minutes and issued a statement by the evening. the employee cost in Africa is 9 per cent higher than that of India. 2009. Bharti Airtel's gearing. the Indian arm of Standard and Poor's. Jayant Khosla. from around 0.

These are markets where the telephone penetration rates range from 14% in the Democratic Republic of the Congo to 123% in Gabon. The balance sheet position appears comfortable for funding the deal. Zain is a market leader in most of its operations. though most are in the low double digits. The ARPU. given relatively low penetration in its footprint and high ARPU. but is it worth the price Bharti is paying? Zain's African operations are losing money. lost US$88 million.The principal issue is one of valuations.described as a "minute-factory" -. But if Bharti can successfully transpose its high minutes of use model -. In the nine months to September 2009." . it could be highly profitable even at these low ARPUs. The highest revenue earner. Besides. For instance. with 50%-75% market share in seven countries and 25%-50% share in six countries. a frequently used yardstick in the telecom industry. Low ARPUs could imply poor revenue streams or future growth potential. Nigeria.. These numbers can be used to paint an optimistic picture or a pessimistic one. Customer growth rates range from -14% in Kenya and -6% in Nigeria to 51% in Niger. Bharti might argue it would change all that. "We believe that Zain's Africa unit is an attractive acquisition candidate for Bharti. perhaps the only research house that has been positive about the Africa. In contrast to Africa. "Only three out of 15 countries in the Zain Africa portfolio have a mobile penetration in excess of 50%. low penetration rates could mean either a huge upside opportunity or lack of demand needing many years of expensive market development. The average revenue per user (ARPU) is US$3 in Ghana and US$25 in Gabon. which could enable Bharti to export its 'minute factory'-based business model." says Motilal Oswal. Seven of the 15 countries reported losses. in its Middle East portfolio. Zain has 42 million subscribers in Africa (September 2009) while Bharti has 121. which was nudging the US$1 billion mark. they reported a net loss of US$112 million against a profit of US$169 million in the corresponding period the previous year. Everyone seems to agree that Zain is a good target for acquisition. some operations are showing losses because of mismanagement.7 million in India (December 2009). Moreover. is an average of US$6 for Zain's African operations against US$5 for Bharti in India. Zain has an ARPU of US$55 in Kuwait and US$26 in Bahrain.

An attack on the ISD market with a new scheme called „2Good‟ halved the prices for all domestic calls (both on-net and offnet) and offered competitive rates for calls to the US.Views about whether Bharti is overpaying for Zain depend on people's assessments about the growth potential of Africa's mobile telecom market. "Yes. reported an Ebitda margin of 62 per cent as of December. the other for low cost data from MTN and the others.16 per minute for the whole day. group president of Spice Finance." says Sudip Bandyopadhyay. “I have continued to see tariff drop since the last exercise with respect to interconnect rates. former executive vice-chairman. but not to this extent." Other issues. “It will take many years to catch them. but the potential for growth over the next three to five years is significant both in terms of the number of customers as well as ARPUs. incidentally. could impact valuations. Airtel Nigeria was dragged by its rivals to the telecom regulator Nigerian Communication Commission with complaints of predatory pricing. The strategy could not produce the desired results. The country accounts for 36 per cent of Bharti‟s African revenues. Battle Field Nigeria Bharti‟s biggest struggle is in Africa‟s largest market Nigeria (73 million subscribers).) MTN is a major competitor in most of the markets. EMTS Nigeria and Warid Telecom hit back by slashing rates by more than 70 per cent.” says Kohli. (Bharti says Zain has to resolve that. it added pressure on Airtel Nigeria‟s margins as subscribers started keeping two phones — one for low-cost tariff for voice (from Airtel). prices will fall because we have . who said. the ARPUs are low in Africa at this stage. There is an ownership issue with the Zain Nigerian unit. But Airtel received support from Ernest Ndukwe. too. Airtel was prepared for a cut. Going forward. "In the long run. MTN. On the contrary. Worse. 2010.24 for the first minute of each day to $0. where Bharti stands third in the pecking order. and it is none of the India company's concern. Its attempt at gaining a foothold with a price war has left Airtel badly bruised. Bigger rivals MTN. Voice call rates were slashed from $0.079 per minute after the end of certain hours as against $0. the strategy of getting its footprint across the 15 African countries is definitely a great value proposition. The matter is pending. Nigerian Communications Commission.

The Airtel initiated price war caused a considerable dent on the balance sheets of its rivals. Bharti trails at No.37-million subscriber market.always insisted that more competition will affect tariffs in a positive way”. Mark To Market In Africa‟s other markets too. the cost of voice calls fell 50 per cent to Shilling 3 per minute and consumers can send SMS at rock bottom price. But competition isn‟t that intense in these markets. Malawi (63 per cent) is a 2. Bharti ranks a distant second here. the leading newspaper from Kenya. In the third-largest market Tanzania.” Airtel executives say that the price cuts did open up the market. Safaricom CEO Bob Collymore of Safaricom commented on his company‟s poor performance saying. according to Nomura Research. 2 behind Vodacom (41 per cent). “Ignited by Airtel. But. Kenyan War Africa‟s second-largest market Kenya has over 19 million subscribers. Among the markets where it leads: Gabon (52 per cent marketshare) is a 1. Zambia has three and Gabon four. “It has . Daily Nation. assistant vice-president at Evalueserve. Bharti has a long way to go before leadership. In the fourth-largest market Ghana.4-million market and Zambia (60 per cent) is a 4.7-million market. A bruised Safaricom hit back with a cut in its data tariff plans.” Airtel emerged partially successful by gaining more than 5 per cent in terms of subscribers.4-million market. “Safaricom‟s results would have been better without the price wars that is without doubt. including Safaricom. 4 with 10 per cent marketshare compared with market leader Scancom/MTN‟s 51 per cent. Chad and Malawi have only two operators. Its profits during the financial year ending 31 March 2011 fell by about 13 per cent. it had to rethink its business plan for the next year from successful tariff schemes for services like of Safaricom‟s Mpesa.” says Nitin Navish Gupta. including Bharti. Bharti (28 per cent marketshare) is No. wrote. Chad (53 per cent) is a 2. “Safaricom and MTN have understood the market well and been able to align with the local market. Total subscriber base of these countries is equal to the number of subscribers India adds every month. Kenya and series of retaliation from other operators. Kohli says the KYC (know your customer) norms in Africa are more stringent than they are in India. says Nomura Research. Kenya‟s largest telecom operator.

Malawi. The network capacities and coverage are still a challenge which I am sure (we) will overcome very soon. Zambia. Uganda and Ghana are the major problem areas while in the other 11 it has a strong financial position that it inherited from Zain. Sierra Leone. it‟s Vodacom. Ghana. group chief financial officer of Bharti Enterprises said at an analyst meet. the regulatory clearance to launch m-commerce in eight countries is expected only next year. Bharti‟s most potent competitor continues to be MTN which is extremely strong player in West.” says Kohli. . An analyst in India advising the company says that financially — and on subscriber base — Nigeria. “My driver in Nairobi sends money to his wife everyday. Madagascar. “The central bank‟s approvals have been taken.” says Kohli. DRC and Kenya.” says Kohli. DRC and Burkina Faso. If we look at the 12month outlook most of these are turning into positive territory. These include large markets such as Kenya. While it has completed all legal formalities of acquiring Zain. Central and South Africa. Gabon. Niger. break-page-break While India is still struggling to get its act right in m-commerce. A report by HDFC Securities Institutional Research says. Bharti Airtel is hamstrung here. “We have gained revenue market share in all the markets. Uganda and Zambia) countries.” Manik Jhangiani. “Zain Africa (now Bharti Airtel) derives 54 per cent of its revenues and 52 per cent of its Ebitda from these five (Nigeria. In the East. All operators are struggling to get on top of this regulatory expectation. These are critical markets both financially and strategically for Bharti to become the leader in Africa. Uganda and Zambia while Vodafone in Tanzania. The rest will be taken up in phase 2. Ghana. transactions on the mobile have caught on in Africa. Congo. Ghana. Congo.” “We have probably about six countries that are loss-making at this point. “Airtel will have to depend upon the government-to-government relations to expedite approvals. Tanzania. Bharti competes directly with MTN in Nigeria.” says Gupta of Evalueserve. M-commerce accounts for 10-12 per cent of the business of cellcos and is growing at 39 per cent per annum.slowed the market. MTN has played on the African sentiment to build a very strong brand connect with the locals. Kenya. In some markets more and in some markets less. Uganda.

Bharti Airtel. the subscriber base has grown 28 per cent since the time Bharti took charge. In Africa.” says Tiemoko Coulibaly. IT to IBM. Revenue has grown 16. “The Airtel brand and colour are engaging and have been liked by the customers. the Arpu will fall and the focus will shift to MoU. CEO for Francophone markets. Having perfected managed services over the past six years in India. The company designed a new red-and-white logo to mark its international expansion.4. But a higher number of subscribers no longer guarantee higher revenue. With a median age of 17 years (India: 25). Network operations and management to equipment vendors Ericsson. “Bharti in Africa does not have a short term plan. Tech Mahindra and Spanco. Bharti is only now replicating it in Africa.7 billion to 16. responsible for seven countries.” Even though profitability is yet to be achieved. Kunal Bajaj. The red colour has a special significance in Africa — Coca-Cola and Toyota. takes comfort from the fact that its masterstroke — telecom and IT outsourcing — is still to play out in Africa. It has handed over business process outsourcing to IBM. Airtel has taken a long term bet on Africa. strengthening the networks and regulatory clearances. however. partner and director (India) at Analysys Mason. which has grown 342 per cent from 3.000 towers it owns. which have red logos are among the leaders. This was largely aided by Bharti‟s renewed focus on MoU (minutes of usage) in Africa. The biggest challenges are to become profitable and take leadership position in the region. says it will help improve the bottom line (when this rolls out). like in India. Avaya and Comviva. Huawei and Nokia Siemens Networks. Bharti. targetted mainly at the youth. Evalueserve‟s Gupta says. Right now. the Arpu in the 16 countries is $7. “Tower sharing is at a nascent stage in Africa.2 as of March 2011 against $4. But the MoU at 120 in Africa is about one-fourth of India‟s 449.3 in India. Another opportunity at cost-cutting would be infrastructure-sharing through 12. Africa is the youngest population in the world.8 per cent from the quarter ended September 2010 till date.3 billion in the past year. What are some possible strategies that are critical to its success? The first year went into rolling out the Airtel brand to replace Zain. while Ebitda has grown nearly 30 per cent. Other operators .

including the pioneering IT and infrastructure model that has since become the gold standard in the global telecom industry. “Some firms did hesitate but when we offered our towers.” Kohli says. After all. a service that Bharti will provide using 3G and high speed packet access technologies. its most crucial initiatives are still to roll out. It may be naive to dismiss Bharti‟s African safari just yet.wharton.businessworld. It already has the 3G spectrum in 10 countries and expects in six other countries by next year. Kohli says the youth in Africa will be big users of broadband and Internet.2 billion in Capex in Africa. they also opened up”. The company plans to invest $1 to 1. its formidable reputation is built on some incredible innovations. References: www. Even though the first year has left Bharti with little to write home about. The opportunity of reducing capex on network is low. Most of them have infrastructure of their own.should respond to .