Mergers and

Acquisitions in
Telecom Industry

Presented By:
Ankush Dhingra (Infrastructure 03)
Ishan Sharma (Infrastructure 07)
 Agenda
• Introduction to telecom industry
• Mergers & Acquisitions
• Takeover Patterns
• Motives Behind M & A activities
• Factors Facilitating M & A
• Failure of M & A to create Synergy
• Regulatory Framework
• Telecom Mergers & Acquisitions
• Analysis: Airtel Zain Deal
• Conclusion
 Introduction
• One of the most profitable and rapidly developing
industries in the world
• India's telecom density has risen to 51.05 per cent after
18.76 million new phone connections were added in
February this year -TRAI
• Regarded as horizontal mergers
• The m & a in the telecommunications sector are governed
or supervised by the regulatory authority of the
telecommunication industry of a particular country, for
instance the Telecom Regulatory Authority of India or TRAI.
 M&A
•Mergers and Acquisitions (M&A) are strategic tools in
the hands of management to achieve greater efficiency
by exploiting synergies and growth opportunities.
•Mergers are motivated by desire to grow inorganically
at a fast pace, quickly grab market share and achieve
economies of scale.
•M&A are also referred as Corporate Marriages and
Alliances.
Takeovers generally have three
typical patterns
1. In the first model, the investor acquires a controlling stake in
the acquired company and retains it as a separate entity.
• Avoid the legal hurdle for merging the company into the parent
company.
• gives the acquirer a flexibility to sell off the operation on a stand alone
basis later on, in case the merger is not successful.

This mode has been followed by Hutchison, which has

retained most of the acquired companies (Usha Martin-
Kolkata, Fascel- Gujarat, Aircel Digilink – Haryana,
Rajasthan and UP East,
Sterling Cellular- Delhi, Escotel - Punjab) as separate legal
entities.
 Takeovers patterns Contd.
2. In the second model, the acquirer merges the acquired
company with the parent after acquiring controlling stake.
• This model requires completion of merger formalities
with due approval of High courts and also from DoT.

This model has been followed by Bharti, which has

merged most of the acquired entities with the parent in
due course of time.
 Takeovers patterns Contd.
3. The third model entails purchase of assets of the
target company on stand alone basis without
purchasing the company as a whole.

• In some cases, where the licences were cancelled

by DoT due to default, such companies sold the
telecom assets and customer database to the
acquirer, who could easily integrate the same into
his existing licence and strengthened his network
and customer base at a nominal cost. The seller
company which was stripped of licence as well as
telecom network was ultimately wound off.
Motives/ Benefits Behind M & A
• Attain competitive benefits

• Cut down on their expenses

• Achieve greater market share

• Grow globally

• Acquisition of spectrum
 Cont.
•Licensing options for mergers and acquisitions
are often found to be easier
•Brand value
•Acquisition of customer base to achieve an
economic base
•Wide array of products and services
•Building of infrastructure in a more convenient
way
 Factors Facilitating M & A

• Deregulation
• Introduction of sophisticated technologies
(Wireless land phone services)
• Innovative products and services (Internet,
broadband and cable services)
 Failure of M&As to create
synergy
•In cross-border acquisitions the acquiring firms would likely
be operating in a new environment characterized by
difference in languages, cultures, laws, and socioeconomic
conditions.
Such differences may make access to information to forecast
revenues, costs, assets, and liabilities difficult to garner and
interpret.

•Synergy rarely justifies the premium paid, and many

acquisition premiums require performance improvements that
are virtually impossible to realize even for the best managers
in the best of the industry conditions
 Indian M&A Regulatory
Environment
• The Indian M&A environment is a strongly regulated by the following major
pieces of legislation/bodies:
− The Companies Act, 1956
− The Takeovers Code, 1997
− The Monopolies and Restrictive Trade Practices Act, 1969
− The Foreign Exchange Management Act, 1999
− The Foreign Investment Promotion Board (FIPB)
− The Reserve Bank of India
− The Income Tax Act, 1961
• Mergers, amalgamations, de-mergers, acquisitions of business units or
divisions, are all governed by The Companies Act for all registered companies
• Acquisition of shares in listed Indian companies is governed by The Takeover
Code, 1997.
 REGULATORY FRAMEWORK
M&A in telecom Industry are subject to various statutory
guidelines and Industry specific provisions e.g. Companies Act,
1956; Income Tax Act, 1961; Competition Act, 2002; MRTP Act;
Indian Telegraph Act; FEMA Act; FEMA regulations; SEBI
Takeover regulation; etc.

TRAI Recommendations:-
TRAI is of the view that while on one hand mergers encourage
efficiencies of scope and scale and hence are desirable, care
has to be taken that monopolies do not emerge as a
consequence.
 DoT Guidelines
(DoT) can be credited with issuing a series of liberalising
initiatives in telecom sector which has led to phenomenal growth
of the Industry.
• Prior approval of the Department of Telecommunications will be
necessary for merger of the licence.
• The findings of the Department of Telecommunications would normally
be given in a period of about four weeks from the date of submission of
application.
• Merger of licences shall be restricted to the same service area.
• There should be minimum 3 operators in a service area for that service,
consequent upon such merger.
• Any merger, acquisition or restructuring, leading to a monopoly market
situation in the given service area, shall not be permitted.
*Monopoly market situation is defined as market share of 67% or
above of total subscriber base within a given service area.
 FEMA Guidelines

•Foreign investment can be made in telecom sector

upto 74% cap without prior approval of RBI.
•In case, investment by foreign investor(s) in an
Indian telco is likely to exceed sectoral cap of 74%,
then they should seek approval of (FIPB) Foreign
Investment Proposal Board.
•FDI scheme prohibits investments by citizen or
entities of Pakistan and Bangladesh (regulation 5)
primarily on security concerns. In the recent past,
DoT has also delayed its approval to an Egyptian
company’s investment in Hutch India on similar
grounds.
 SEBI Takeover Guidelines
SEBI takeover guidelines called Securities and
Exchange Board of India (Substantial acquisition of
shares and takeover) Regulations,1997 are applicable
to listed Public companies and hence would be
applicable in case of M&A in listed telecom companies
like Bharti, Reliance Communication, Shyam Telecom,
VSNL, Tata Teleservices (Maharashtra) Limited, etc.
These guidelines have been amended by SEBI and
notified vide SO No. 807(E) dated 26.05.2006.
 The Competition Act, 2002
Competition Commission of India (CCI), established in 2003,
holds statutory responsibility for ensuring free and fair
competition in all sectors
of the economy.
• CCI can also take suo motu cognisance of a merger perceived as
potentially anti competitive and it can also enquire until one year after
the merger has taken place.
• Once CCI has been notified, it must decide within 90 days of
publication of details of the merger or else it is deemed approved.
• The CCI can allow or disallow a merger or can allow it with certain
modification.
 Significant Mergers and Acquisitions
in Telecom Sector
Recent Mergers and Acquisitions in the Indian Telecom Industry
Deal Date/ Target Company Acquirer Company Deal Value
Month/ Year (US$mn)

March, 2010 Zain Telecom Bharti Airtel 10, 000.70

Jan 12. 2010 Warid Bharti Airtel 300
Telecommunications
September15,200XLTelecom&EnergyLtd MorganStanleyMauritius 3.68
9 Co
August19,2009 WirelessTTInfoServicesLt QuippoTelecom 1,320.63
d infrastructure
July23,2009 WordsInfocommPvtLtd LighthouseFundsLLC -
July20,2009 ShreeShreeTelecomPvtLtd GoldstoneInfratechLtd -

July 14, 2009 SpiceMobilesLtd SpiceTeleventuresLtd 7.05

July 12, 2009 STelLtd InvestorGroup 225

Source: Thomson One Banker

 Significant Mergers and Acquisitions in
Telecom Sector
Recent Mergers and Acquisitions in the Indian Telecom Industry
Deal Date Target Company Acquirer Company Deal Value
(US$mn)

July 08, 2009 HFCLInfotelLtd InvestorGroup 17.78

June 06, 2009 SpancoLtd InvestorGroup 3.93
May 27, 2009 AllianzInfratech(P)Ltd SwanTelecomPvtLtd -
July20,2009 ShreeShreeTelecomPvtLt GoldstoneInfratechLtd -
d

July 08, 2009 HFCLInfotelLtd InvestorGroup 17.78

June 06, 2009 SpancoLtd InvestorGroup 3.93
May 27, 2009 AllianzInfratech(P)Ltd SwanTelecomPvtLtd -

Source: Thomson One Banker

 Analysis – Bharti-Zain deal
• Company profile
Bharti Airtel (Bharti) is India’s largest integrated
telecom operator with a pan-India footprint and a
wireless subscriber market share of 22.7%. Bharti is a
pioneer in the industry and outsources its core network
and IT activities through strategic partnerships with
Nokia, Ericsson and IBM respectively.

• Offer of $10.7 billion for Zain's assets

• Deal excludes Zain's operations in Morocco and Sudan
• Bharti Airtel paid $254 per subscriber in the case of
Zain Telecom.
 Deal valuation

• Bharti has valued Zain Africa on 7.7x and 9.2x CY08

and CY09E EBITDA of the company (full value)
against 7x for its own domestic operations. This
valuation, we believe, is fair taking into consideration
the premium attached to the controlling stake as well
as the high growth profile of the African territory.
However, adjusted for the minority interest in Zain
Africa, the deal becomes expensive at 9.8x and 11.6x.
 Key Positives
• Zain’s African operations enjoy a average blended ARPU of ~$7 vs ~$5 for Bharti
• 6 out of 15 countries covered under the deal have penetration levels of less than
25%. Competition levels are lower than that in India with average 4.5 operators
per country.
• Average per capita income $1075 for 15 countries vs 1070 for India. Countries in
which Zain operates have average mobile penetration of 31% (excluding two
countries with penetration levels of 75% and more) vs close to 48% in India.
• Bharti could replicate its successful network outsourcing strategy in Africa and cut
costs vigorously. EBITDA of Zain at 32% could inch up to Bharti’s levels of 40%
once Bharti gets involved in network and other costs management.
• Zain's subscriber base grew 13% year on year at the end of Sept 2009.
• Bharti has the potential to cut down call charges and expand the African
subscriber base by introducing its Indian model. Call rates in the continent are
nearly double the rates in India.
• Africa is characterised by low minutes of usage currently; Bharti is likely to
transport its low-cost model to Africa which has the potential to improve usage
significantly.
• There is room for improvement in Zain’s processes which could make it a
turnaround candidate subject to improvement in efficiencies and potential
management change
 Key Negatives
• On EV/Subscriber basis, Zain is valued at $255 vs $161 for Bharti.
• EV of $10.7 bn includes $1.7 bn of debt attributable to Zain’s African
operations. The actual EV or valuation is higher as Zain owns less
than 100% stake in 9 out of 15 countries with shareholdings between
65.7% to 98.5%. In Tanzania and Nigeria, Zain has less than 75%
stake. These two countries contribute to 47% of the total subscribers.
However Nigerian operations are loss making at the net levels. Hence
the valuations on EV/EBITDA made on the basis of 100% ownership,
goes up even further.
• In Nigeria there is a pending litigation by minority shareholders against
Zain over their buying stake in the company in 2006. The two minority
owners in Zain Nigeria, are trying to overturn the sale in 2006 of a
65% stake in the company to the Kuwaiti mobile operator claiming
they were not given the first right of refusal on the shares.
• In the near term, earnings for Bharti could be affected by higher debt
and lower EBITDA margins for Zain.
 Key Negatives Contd.
• Zain Africa is emerging out of a series of challenges, including depreciating
African currencies (impacting its revenues and PAT for year 09) and poor
management. Operating expenses could be higher for Zain as you have to cover
an entire continent, ten times the size of India, to cover as many people under
your network as in India. Managing African assets is a very challenging job, due
to corruption, bureaucracy, and crime.
• Notably, Zain acquired Celtel, Netherlands in April 2005 for US$3.4bn, giving it
presence in 13 African countries. Later, Zain made several more acquisitions in
Africa, including Nigeria. In August 2008, the Group rebranded all its 14 African
country operations to Zain and also launched Ghana operation in late 2008.
Bharti may need to make additional investments to upgrade/expand networks,
and licence renewals are due in five countries by 2013, thus increasing the
acquisition cost.
• Atleast seven countries in which Zain operates are geo-politically sensitive.
Congo (Democratic Republic), Chad, Kenya, Niger and Zambia are classified as
very high risk on the Economist Intelligence Unit.s (EIU) Political Instability
Index.
• For year 09, reported revenues declined 12% y-o-y. However, on constant
currencies, revenues from the African business grew 9%. Post September2009,
most currencies have continued to depreciate albeit at slower pace. We believe
currency risks and issues on repatriation of money from African markets may
aggravate investor concerns.
 Airtel Zain deal Conclusion
• Significant management effort and capital
will need to be devoted to turn Africa PAT-
positive when India itself is under pressure
• EPS Dilution in long term
 CONCLUSION
•Mergers and acquisitions in the telecommunications sector have been
showing a prosperous trend in the recent past and the economists are
advocating that they will continue to do so.
•Critics claim telecom mergers reduce competition and promote monopoly.
In reality, these mergers are part of a healthy competitive process and would
foster innovation and bring benefits to consumers.
•Finally, the success of a merger hinges on how well the post-merged entity
positions itself to achieve cost and profit efficiencies.

“careful valuation and disciplined negotiation are

vital to successful acquisition, but in business as
in life, it is sometimes more important to be lucky
than smart.” -Robert C Higgins of Univ. of Washington