Zain okays Bharti bid

Kuwait-based Zain Telecom's board cleared Bharti Airtel's proposal to buy its African assets for $10.7 billion (around Rs 48,600 crore), marking the Indian company's first successful attempt to acquire operations in Africa after two failures.

Bharti had expressed its interest in Zain in the second week of February and the deadline for exclusive talks was to lapse tomorrow.

The combined entity, with a subscriber base of 171 million in 19 countries (15 in Africa), will become the world's seventh-largest telecom company from its pre-deal ranking of number 10. The rankings are based on the number of subscribers a company has in all operations in which it has any stake.

The key countries to be added to Bharti's network will be Tanzania (Zain has 39 per cent share), Zambia (70 per cent), Nigeria (25 per cent), Congo (45 per cent) and Chad (70 per cent) amongst others. Apart from India, Bharti also has operations in Bangladesh, Sri Lanka, and Seychelles.

"The Zain board's approval was never in doubt," said a top source in Bharti Airtel but added that finalising and signing the documents would take time and will be followed by regulatory approvals needed in each of the countries in which Zain operates. Neither side had issued an official statement till this newspaper went to press.

Bharti Airtel, India's largest telecom company by number of subscribers, had already arranged a $8.3 billion (Rs 37,750 crore) loan to finance the Zain buy. In a statement a few days ago, the company said its debt issue had been oversubscribed and major international banks had committed to underwrite the total amount.Of the loan, $7.5 billion (Rs 34,072 crore) is dollar denominated and $1 billion (Rs 4,550 crore) is in rupees.

The rupee loans are expected to cover any associated transaction costs.

According to agencies, State Bank of India has committed $1.5 billion (around Rs 6,900 crore). Other mandated lead arrangers include StanChart ($1.3 billion), Barclays ($0.9 billion), and Citi, JP Morgan among others.

The bank-syndicate has priced the loan 195 basis points above the London Interbank Offered Rate (Libor). The loan will carry a tenure of five years.

Bharti Airtel had earlier said Zain's enterprise value of $10.7 billion was likely to result in a payout of $9 billion (Rs 40,887 crore), which includes any loan payable by the operating companies to Zain Group based on estimated net debt of about $1.7 billion (Rs 7,723 crore) as on December 31, 2009. A further $700 million (Rs 3,180 crore) is to be paid a year after the deal closes.

Analysts continue to be cautious about the impact of the deal on Bharti. "We need to understand at what rates the debt has been raised. There are challenges for Bharti because the acquisition entails an upfront cost and it will take two or three years to see any benefits that might come out of the deal. I do not think it will be positive and don't expect the stock price to go up," said Harit Shah, an analyst with Karvy Stock Broking.

But Rahul Jain, an analyst with Angel Broking, however, says they are "positive" on the deal. "Bharti's balance sheet is very strong and it has tied up enough debt to fund the deal. This will only add value to the stock. The benefit that it will get in the long term will be more than the cost they will pay."

After initially falling following equity analysts' reservations about the deal, the Bharti Airtel stock bounced back to pre-announcement levels of Rs 315 (it fell to Rs 280 after the deal).

On Tuesday the Bharti share fell 3 per cent closing at Rs 306.80 from Rs 316.30 the previous day (the markets were closed on Wednesday on account of Ram Navami).

Bharti has been eyeing the African market for several years as growing competition in Indian markets and slowing markets impact domestic margins. Africa is among the world's fastest-growing telecom markets. Last year a deal with MTN's South Africa failed for the second time on regulatory hurdles.

Zain's promoters, led by the Kharafi family which owns over 11 per cent, have been looking for a buyer some months. Last year, they announced a preliminary agreement last year with a consortium led by Vavasi Group - a Delhi-based realtor and communications company - and Malaysian billionaire Syed Mokhtar Al-Bukhary to sell 46 per cent for $13.7 billion. The consortium included state-owned Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd.

Both these companies withdrew from the consortium because they found the asking price too high. They were unwilling to pay more than $10 billion.

Zain has been on the radar of many suitors including Vivendi, Europe's largest entertainment group, Etisalat of Egypt as well at MTN.