Bharti-Zain deal edges towards finishing line

2 special purpose vehicles formed, in Singapore and the Netherlands

BHARTI AirTel has reportedly formed two special purpose vehicles (SPV), in the Netherlands and Singapore, for the acquisition of Zain's assets in South Africa.

India's Economic Times said that Bharti officials are expected to make their way to the Netherlands in the next few days to finalise this SPV arrangement.

SPVs are typically used to acquire and finance specific assets and companies tend to use them to bankroll large projects to avoid putting the entire firm at risk.

Beyond the establishment of these SPVs, the report said that Zain has also agreed to reimburse Bharti for the legal costs incurred for its ongoing dispute between its Nigerian unit and Econet Wireless Holdings.

This could remove the final hurdle in the acquisition talks between the two operators.

Bharti on Wednesday said that it had completed due diligence for its US$9 billion bid to acquire Zain Africa and the official paperwork for the deal is 'expected to be signed soon'.

This comes after a month of exclusive negotiations between the two parties. Once completed, Bharti, in which Singapore Telecommunications has a 32 per cent stake, will gain some 42 million mobile subscribers across 15 African markets.

Their combined operations will have a revenue base of nearly US$13 billion and Ebitda (earnings before interest, taxes, depreciation and amortisation) of around US$5 billion.

Bharti failed in its two previous attempts to expand to the African continent. The first opportunity surfaced in 2008 when it engaged in merger talks with South African telecommunications conglomerate the MTN Group but a deal could not be reached then.

Bharti and MTN entered into exclusive merger negotiations for a second time last year but the proposed US$24 billion cash plus share swap deal was eventually canned due to regulatory hiccups.

Bharti set to wrap up US$9b Zain Africa deal

(NEW DELHI) Bharti Airtel looked set to wrap up its US$9 billion deal to buy most of Kuwaiti telecom group Zain’s African assets, giving India’s top mobile operator a foothold in the frontier market in its third attempt.

Bharti, which failed twice to acquire African telecoms operator MTN Group, is desperate to expand in new markets, as cut-rate competition in its home turf – the world’s fastest growing – squeezes margins and clouds growth outlook.

Controlled by billionaire Sunil Bharti Mittal, who started his career selling bicycle parts in India, Bharti is battling newcomers such as Norway’s Telenor and Tata Teleservices, part owned by Japan’s NTT DoCoMo.

‘It’s a good deal because Africa is the last bit left among emerging markets. And Bharti gets access to a lot of synergies in value-added services,’ said Girish Trivedi, deputy director of the South Asia and Middle East technology team at consultancy Frost & Sullivan. ‘Imagine the time it would have taken them to build a leadership position in so many countries through greenfield expansion?’

Zain’s board approved the deal on Wednesday and the company expects to sign the deal in the next few days. Africa has already attracted global players such as Vodafone and France Telecom, while China Unicom, China’s No 2 mobile carrier is keen to participate in the privatisation of a Nigerian telecoms company.

Bharti, 32 per cent owned by Singapore Telecommunications, will also battle with MTN, with which it tried to seal a US$24 billion deal before tie-up talks collapsed in October.

Bharti is expected to make an announcement as the deadline for exclusive talks with Zain ended yesterday.

‘The reaction of the stock price reflects the deal being done at attractive financing terms. But how Bharti is going to benefit from it will only be known in the next 2-3 quarters,’ said Deepak Jasani, head of research at HDFC Securities.

Due diligence for the deal, the second-biggest overseas acquisition by an Indian buyer after Tata Steel’s US$13 billion purchase of Corus in 2007, has been completed successfully, Zain said on Wednesday.

Bharti, with 125 million subscribers, has thrived on low incomes and tariffs and a large rural population – characteristics shared by African nations – and is keen to replicate its Indian model in the 15 African countries where it is buying Zain’s assets.

But some analysts have said Bharti is paying a high price for the deal, with enterprise value of US$10.7 billion at around 10 times Ebitda, and may be a drag on the Indian firm’s earnings.

‘We can know whether the valuation was right only after some time. So yes, there are opportunities, but there are also mine-fields and pitfalls ahead. We have to see what comes first,’ Mr Jasani said.

The shares, valued at about US$26 billion, were the second-worst performer in the benchmark index in 2009. So far this year, the shares have lost more than 5 per cent.

Bharti would pay US$9 billion in cash to Zain, including US$700 million to be paid one year after the deal closes. Bharti will also assume US$1.7 billion debt on the target firm’s books.

Bharti said on Sunday it had secured US$8.3 billion in loans from a clutch of lenders, led by Standard Chartered, Barclays and State Bank of India. Banking sources said Bharti was getting an attractive interest rate of around 200 basis points over Libor.

Standard Chartered and Barclays were advising Bharti on the deal, while Zain was being advised by UBS. — Reuters