Thursday, February 18, 2010



February 17, 2010
By Mehul Srivastava
Feb. 18 (Bloomberg)

For Sunil Mittal, Bharti Airtel Ltd.’s founder and chairman, there’s a lot riding on the planned $9 billion purchase of the African assets of Kuwait’s Zain, not least of which is his credibility.

The 52-year-old self-made entrepreneur, who built his mobile-phone company from scratch into India’s largest wireless operator with a market value of $23 billion, has failed twice to take over South Africa’s MTN Group Ltd. Mittal is seeking assets in Africa as an increasingly crowded market at home brings him call rates of less than half a U.S. cent a minute. He can’t afford to fail a third time, investors said.

“The credibility of Mittal will be at stake this time; your ability to close deals, your killer instinct,” said A. S. Thiyaga Rajan, senior managing director at Aquarius Investment Advisors Pte in Singapore, which manages $260 million in assets, including Bharti shares. “He wasn’t able to convince MTN that they would be better off by going to bed with them. If he doesn’t succeed now, then what next?”

Completing the purchase would give Bharti 42 million customers across 15 African markets, creating the world’s ninth- largest mobile-phone operator. He needs to convince investors who drove Bharti stock to a 16-month low within two days of its Feb. 15 announcement that the purchase fits Bharti’s larger strategic plan and that he’s not paying too much. Mittal said he can do both, given a little time.

“We believe we have the right price,” he said in an interview in Barcelona, Spain. “It’s not a distressed asset for sure but is it over the top? The answer is no. Analysts don’t have enough information at the moment, and I am constrained from giving out more information.”

Search for Size

Bharti investors have seen their holdings lose 22 percent of their value since January 2009. Profit growth has slowed for 10 straight quarters for South Asia’s largest mobile-phone company as price competition in India from newcomers such as Japan’s NTT DoCoMo Inc. and Norway’s Telenor SA slashed rates for many of Bharti’s 125 million customers.

Bharti was the second-worst performing stock amongst 87 telecommunications stocks tracked globally by Bloomberg, and is the worst performing member this year.
In the past year, Mittal started mobile-phone operations in Sri Lanka and paid $300 million to buy 70 percent of the Bangladeshi assets of Abu-Dhabi based Warid Telecom.
If the Zain transaction succeeds, Mittal will create a company selling mobile services to 1.75 billion people from the western coast of Africa to the Himalayas. In the countries Mittal is negotiating to buy Zain assets, mobile penetration is an average of 36 percent for a population of 479 million, according to a September Zain investor presentation.

‘Inferior Profits’

“The real attraction lies in the size and geographies” that Bharti may be able to access, said John Slettevold, an analyst with UBS Securities in Johannesburg.
While Bharti needs to look beyond its home market for growth, it may be overpaying, says Macquarie Securities Ltd. Regional Head of Telecom Research, Shubham Majumder, who says the Zain assets are “inferior in terms of profitability, metrics and growth,” to MTN’s.

France’s Vivendi SA walked away from a Zain Africa deal in July after the asking price of $10 billion didn’t fit “its usual criteria of profitability and financial discipline.”

“The prevailing sense that there is no future in developed markets is pushing up the prices for assets in developing markets,” said Aquarius’s Rajan.

Nigerian Woes

Fissures have appeared, suggesting the Zain deal won’t be easy. Johannesburg-based Econet Wireless Holdings Ltd., involved in an ownership dispute with Zain’s Celtel Nigeria B.V. unit, this week said it’ll block the sale of the unit.
Mittal says he isn’t worried. If Zain says they are “selling something that they own, I have to believe them,” he said. “The seller will definitely have to give the comfort to the buyer that what they are selling is correct.”

Nigeria, Africa’s largest mobile-phone market by subscribers, is a key piece of Mittal’s purchase.

Zain has lost both money and subscribers in Nigeria in the six months ending Dec. 31, according to Macquarie. Zain invested $435 million in Nigeria in the last 12 months, while revenue per subscriber fell 30% in the period to $7. Zain’s Nigeria unit lost $58 million, contributing to a net loss of Zain’s Africa assets of $35 million.
“It is my view that Nigeria amongst the pieces that Zain has is the important piece and we are committed in developing the Nigeria asset extremely well,” said Mittal.


Mittal will need to work quickly to complete the deal before the March 25 deadline for exclusive talks. He says he’s not averse to acting fast.
“If you’re caught between speed and perfection, always choose speed, and perfection will follow,” he told the U.S.- India Business Council, according to an interview published by the University of Pennsylvania’s Wharton School of Business. “In business, you don’t have time.”

Mittal’s rise in telecommunications has been meteoric since he set eyes on his first mobile phone in 1991 on a European trip. Until then, he had dabbled in building bicycle parts, importing timber, plastics, zipper fasteners and portable generators. His first brush with telecommunications came with assembling phones from Siemens AG parts. Bharti won its first mobile-phone license in 1994.

“For me, new things, a larger canvas, is very important,” he said in a Bloomberg Markets interview in 2004. “I don’t see any new fun in the market or regulation in four years.” In 2008, he made his first bid for MTN.

Lesson Learned

Mittal is hands-on in negotiations and yesterday said he has met with ministers of many of the 15 countries in which Zain operates, and “they were very warm.”
By Mittal’s reckoning, the Zain deal is different from his unsuccessful MTN bids.
“One of the biggest lessons we learned was that a deal can be one of two things: the deal can be big and needs to be simple, or it can be a helluva complicated deal, but needs to be small,” Mittal said yesterday. “MTN was both big and complicated. Thankfully, this one is big, but very straight.”

---With Assistance from Simon Thiel and John Dawson in Barcelona. Editors: Vidya Root, Robert Valpuesta