Mumbai: When it couldn't forge a merger with Africa's leading asset MTN, Bharti AirtelBSE -0.81 % did the most natural thing, it settled for second best - Zain Africa. Making a combined entity with $13 billion in revenue, the deal was huge. Bankers, lawyers and telecom officials lined up to be a part of history in the making.
Analysts conjured astronomical profit figures - since the company projected a roughly one-year break-even on the Africa business. The options for Bharti Airtel, India's largest mobile phone operator, at the time seemed limitless.
Three years down the line, like many businesses in recent times, things haven't quite panned out as per plan. Africa's profit is ever elusive, the $9-billion debt burden is beginning to weigh, and losses are dragging overall profits. The diversion from the Indian market has started to show. This, at a time when the Indian market appears to be taking steady steps towards a recovery.
So, when Bharti Airtel on Tuesday announced an acquisition in Congo, most voices said this is a step to right some of the wrongs in recent times.
Bharti entered into an agreement with the Warid Group to fully acquire Warid Congo. The company declined to disclose financial details. While brokerage PhillipCapital (India) pegged Warid's revenue at $80-90 million, industry experts estimated the acquisition to be worth $100-120 million ( 620-750 crore).
Earlier this year, Bharti had acquired Warid's Uganda operation, and back in 2010, it had bought a majority stake in the company's Bangladesh telecom business. The latest acquisition will result in Bharti Airtel leading in the Congo market by number of subscribers - 2.6 million post acquisition - and taking out Warid, the number three operator that had been raising competitive intensity by reducing prices in the market.
"Warid was desperate enough to sell, with an agreement of a staggered payment," a banker, who asked not to be named, said, as being number three in a four-player market is a bad situation to be in. For the transaction, Bharti did not empanel a negotiating banker; its in-house team managed the deal. A note by brokerage Goldman Sachs said that these "small acquisitions will help reduce competition, improve scale and could help Bharti leverage more on scale benefits."
In its recently-announced quarterly result, Bharti Airtel reported Africa revenue at $1.1 billion ( 6,860 crore) and it is yet to make a net profit. A person familiar with financial details said, "Warid Congo is itself a loss-making entity, so there will be profit dilution in the first year for Bharti." However, with pricing power and scale in Congo now in the hands of Bharti Airtel, the acquisition should make the combined entity stronger, he added.
A banker who had worked with Bharti at the time of the Zain deal said, "The Zain deal did not give Bharti the kind of scale needed to make economies work."
Bharti Airtel had hoped to transpose the India model and leverage its learning here in Africa. It took with it partners like IBM to deploy technology; it has an uncompleted plan to separate the tower assets. Bharti also took price wars that the Indian market saw between 2008 and 2012.
Unfortunately, the lay of the land was too different in Africa. Customer loyalty was harder to break. Local regulations made ownership changes and bringing in managing partners for towers, for example, unfeasible. Not only was there a power problem in Africa, but transporting fuel to keep off-grid towers running was an additional expense for Bharti.
Privately, top Bharti executives admit that Africa is taking more time than expected to turn around, but have stood by their decision to have entered the continent. "Strategically, Bharti is hoping to get optimal scale now," said another banker. It had initiated talks to buy Essar Group's Yu Telecom in Kenya, but those have not fructified so far.
Manoj Kohli, managing director and CEO (international), Bharti Airtel is known to have said the company will consider a string of pearls acquisition approach in Africa, meaning more small acquisitions are likely to be lined up.
The company recently received cash from the Qatar Foundation and is expected to get more fund infusion, filling its coffers for more buys. The company has also said that it may be interested in buying some assets in India, even though analysts suggest there is none truly suited to Bharti Airtel.
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