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Bharti Airtel Zain Deal Analysis
Prepared by Deepali Rai 09FN-064 Parvesh Bansal 09FN-074 Rohit Sharda 09FN-093 Sahil Pabby 09FN-096
31/12/2010
Submitted to Prof. Alok Kumar as part of the MACR project undertaken in Term V of the PGDM course in Finance
Contents
Introduction .................................................................................................................................................. 3 Transaction details ........................................................................................................................................ 4 Parties involved in the Transaction............................................................................................................... 5 What attracted Bharti Airtel to takeover Zain Africa? .................................................................................. 6 Reaction to the deal ...................................................................................................................................... 7 Cost savings in Zain ....................................................................................................................................... 8 Valuations ..................................................................................................................................................... 8 Annexure 1 : Airtel Valuation (RS MILLION) ................................................................................................. 9 Annexure 2 : Synergy valuation .................................................................................................................. 11
Introduction
On February 15, 2010, Bharti Airtel announced that it had entered into exclusive discussions with Mobile Telecommunications Company KSC (Zain) for the acquisition of Zain Africa International BV (Zain Africa) and thereby the entire African operations of Zain, excluding the operations in Sudan and Morocco. With bitter experience to haunt, Bharti Airtel strategically played it safe this time and made an offer to Zain which it just could not refuse. For a commercially ailing Zain, Bharti Airtel's offer of USD 10.7 billion was a jackpot. On March 30, 2010, Mr. Sunil Bharti Mittal, Chairman and Managing Director of Bharti Airtel and Mr. Asaad Al, Banwan, Chairman, Zain Group executed the definitive agreements at Netherlands marking the transformation of Bharti Airtel into an emerging-market multinational. The acquisition is the largest by an Indian company, second only to the USD 12 billion takeover of Corus by Tata Steel in 2007. In the Indian telecom space, the deal is the second largest after the USD 11.2 billion (approximately) Vodafone Hutchison transaction in 2007.
Transaction details
Acquirer Seller Target Acquisition Bharti Airtel Limited Mobile Telecommunications Company KSC Zain Africa International BV Bharti Airtel Limited indirectly acquired 100% of Zain Africa International BV and its business operations in Africa from Zain under a privately negotiated agreement. Mode of acquisition Consideration Mode of Payment USD 10.7 billion All cash deal Bharti Airtel to pay: a) USD 8.3 billion within three months from the date of closing; b) USD 700 million after one year from the date of closing; and c) USD 1.7 billion assumed as debt on the books of Zain. Funding Leveraged Buy-out a) Bharti Airtel to borrow USD 7.5 billion from a consortium of banks led by Standard Chartered Bank and Barclays Bank. b) Bharti Airtel to avail of a rupee loan of USD 1 billion equivalent from SBI Group. Security (Share) Sale
Zain Africa Wholly owned subsidiary of Zain, incorporated in Netherlands and held the African operations of Zain. The company was originally named Celtel which was acquired by Zain in 2005 and renamed as Zain International BV. The same has been acquired by Bharti Airtel now through Bharti Airtel Netherlands BV.
The African market has high growth potential for Bharti Airtel as the region is currently underpenetrated. The average revenue per user of Zain Africa is quite high and that justifies its current valuation by Bharti Airtel. If Bharti Airtel can attain operational synergies with Zain Africa, it can go for more such acquisitions in the coming days as the Indian market is gradually getting saturated. Financing is strategically managed Bharti Airtel has structured this acquisition as a leveraged buyout and the loan for financing the transaction has been availed by the two SPVs created in Netherlands and Singapore for the purposes of this acquisition. The SPVs will take the borrowings, aggregating to USD 8.3 billion, on its balance sheet. Bharti Airtel Netherlands BV will avail loan to the tune of USD 5.5 billion and the Singapore SPV will borrow the rest of the amount. Once Bharti Airtel is able to transplant its Indian model to Africa, the negative earnings per share of the African assets on Bharti Airtels financials would diminish. Bharti Airtels decision to opt for the SPV route makes a lot of sense since it will not impact the parents balance sheet in the near term. At the end of the quarter to December 2009, Bharti Airtels debt-equity ratio was 0.4 and this would have shot up to 1.2, had Bharti Airtel taken the loan on its books. That would have limited Bharti Airtels ability to raise funds in the future for expansion into new third generation technologies through participation in the 3G spectrum allocation. Hence, Bharti Airtel has structured the acquisition strategically and routed it through the SPVs keeping Bharti Airtels standalone financials intact. However, that does not absolve Bharti Airtel from overall responsibility of a borrower since it has provided a guarantee to bankers for the loan that will be in the SPVs books.
Valuations
Airtel Airtels valuation is done using Discounted Free Cash flow model using which the value of the form is coming out to be Rs. 2353520mn (refer to annexure 1). In this valuation, the increase in ARPU is also considered due to 3G introduction. It is assumed that around 5% of the 2G users will switch from 2G to 3G for year 2012 and 2013 while 7.5% will switch to 3G for year 2014. The intrinsic value of the share price is coming out to be Rs 593 (approx.). Zain Free cash flows for Zain are negative considering the existing cost conditions. Using EV/EBITDA approach value of Zain is coming out to be around USD 7bn (considering EBITDA of USD 1bn).
Revenue breakup
2009 369615 247642.1 121973 369615 2010 418472 280376.2 138095.8 418472 2011 2012 2013 2014
Revenue Calculation
2011 3 G tarrif 2G Weighted Average ARPU Growth in MOU/Subscribers Num for growth in revenues 2012 3 0.44 0.568 1.08 0.61344 2013 2.5 0.44 0.543 1.08 0.58644 2014 2 0.44 0.557 1.08 0.60156
Revenues Ebitda margin (Pre acquisition) Ebitda Ebitda margin (Post Acquisition)
CapEx improvement
2009 6115.2 2010 6726.72 2011 7399.392 6881.435 2012 8139.331 6714.948 2013 8953.264 6714.948 2014 9848.59075 7386.44306
Post deal Ebitda 2011 6289.483 2012 7325.398 2013 8505.601 2014 9848.591
Ebitda - Dep (Ebitda - Dep)(1-t) Plus : Dep minus : CAPEX Rough FCF
Therefore, the present value of the cost savings is Rs. 7450.147 Cr.