AV Ghosh Garg Sharma Rihana Sanket

Group 10 Section F SIX SAMURAI

Merger and Acquisition Analysis
ZAIN BHARTI
Group company of Bharti Enterprises
Indias largest telecom service provider
137 million customers across India, Sri Lanka
and Bangladesh
Valued at US $8.15 billion
Premerger Analysis: Bharti Airtel
Subsidiary of Zain Group (MTN)
Valued at US $4.14 billion
Lowest net profit margins in Africa of 5.3%
7/15 loss making units in Africa
Lower than 50% penetration rate
Customer base of about 41.9 Million

Premerger Analysis: Zain Africa
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
High market concentration more than 15
players
ARPU around Rs. 115
Expanding marketing network semi-urban and
rural High future prospects for all the players
Easy regulations on inter and intra circle mergers
High
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
Buyers price sensitivity high
Product differentiation high
Size and concentration of buyers relative to products high
Buyers switching cost low
Buyers information high
Buyers ability to integrate backward - low
High High
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
Mobile Tower Companies SIM Card Manufacturers Mobile Phone Handsets
Product differentiation low
Competition between suppliers high
Size and concentration of buyers relative to
products low
Buyers switching cost low
Buyers ability to integrate forward - low

High High Low
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
Emerging substitutes
IP Telephony Skype, Hangout
Instant Messaging Gtalk, Yahoo, Facebook, whatsapp
o Buyers Propensity to substitute Moderate
o Relative Prices High
o Performance of substitute moderate to high
High High Low
Mod
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
Leasing of towers high
Declining ARPU low
Access to Optical Fibre Network low
Government barriers moderate


High High Low Mod Mod
Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Telecom Industry
High Low Mod Mod High
Moderately unattractive Industry quickly reaching its
maturity stage
Growth Strategies
Intensive Growth Integrative Growth Diversification Growth
Session 3
Growth Strategies
Intensive Growth Integrative Growth Diversification Growth
Session 3
Market
Penetration
Product
Development
Market
Development
Diversification
Current Products New Products
Current Markets
New Markets
Growth Strategies
Intensive Growth Integrative Growth Diversification Growth
Session 3
Market
Penetration
Product
Development
Market
Development
Diversification
Current Products New Products
Current Markets
New Markets
African Opportunities: Expected Synergies
Low mobile phone penetration in Africa 8 of 15 countries in Africa
operating at sub-35% teledensity
Zain Africas relatively lower EBITDA margins*
Zains presence: 15 African countries, overall subscriber base of 41.9 Mn
Scope to become world's fifth largest wireless company with a subscriber
base of around 180 million (131+49)
Zains 50% higher average ARPU than Bhartis India ARPU



*S&Ps credit analyst Mehul Sukkawala
High growth African market and Economies of Scale
Lower competitive intensity in Africa
Scope for OpEx rationalisation for Zain
To emulate Bhartis Indian minutes factory model by lowering tariffs to
spur usage and improve market share and profitability
Material synergies arising via OpEx/CapEx efficiencies post integration of
Zain
Global brand image

African Opportunities: Expected Synergies
Factors Affecting the Acquisition
Session 7
Synergy Modular Sequential Reciprocal
Nature of Resources Hard Soft
Redundant Resources*
* Reserves and Surplus Rs. 256, 295, 074 (2009) Rs. 346, 523, 215 (2010),
Annual Report
Market Uncertainty Low Medium High
Competition Low Medium High
Low Medium High
Acquisition
Equity Alliance
Acquisition
Equity Alliance
Equity Alliance
The possible reason why the Bharti management
considered this acquisition can be explained by the
Differential Efficiency Theory:
Create Operating synergies economies of scale, greater
pricing power, higher growth in new markets
Gain Management efficiencies - take over of a poorly
managed firm
Sunil Mittals Empire Building Strategy
Acquisition Strategy
Timeline of Acquisition
May 5,
2008
Bharti
announce
s its early
discussio
ns with
MTN
May 24, 2008
Bharti withdraws
from the talks
due to
unacceptable
demands of MTN
May 26, 2008
Rcom enters
into merger
discussions
with MTN
July 2, 2008
Bharti Airtel
again starts
talks with
Zain to
acquire its
African
assets
July 19,
2008
RCom and
MTN
formally
end talks
Sep 30, 2009
The proposed
transaction
between Bharti
and MTN called
off again
February 15,
2010
Bharti Airtel
and Zain
agree to enter
into exclusive
discussions
again
March 30,
2010
Parties sign
the definitive
agreements in
Netherlands
The paid sum of $10.7Bn was 10 times the Enterprise Value to EBITDA multiple for Zain
Bharti paid a premium of 40% to Zain even though RoE and RoCE of Zain were low
Prior acquisition Zain Africa posted a net loss of US$112 million in the 9 months to
September 2009
The deal proved to be expensive because at that time Bharti itself was available at 7.2
times EV to EBITDA
The deal carried a huge commercial risk because in order to acquire Zain, Bharti
incurred loans worth US$8.3 billion at an interest rate of 195 basis point over LIBOR
The analysis of this deal from an EV per subscriber basis point of view does not prove
to be as expensive. The enterprise value per subscriber worked out to be $217.3. This
is comparable to the prices at which most deals have taken place earlier like stake
taken in Spice telecom by Telecom Malaysia worked out to be US$330.
Valuations
This acquisition deal was an all-cash deal, amounting to $10.7
billion:
$7.9Bn was immediately paid by Bharti
Over the next 6 months, $400Mn was paid
$700Mn was paid one year after the acquisition
Debt obligations of $1.7Bn were assumed

For this Leveraged Buyout:
Bharti borrowed $7.5Bn from a consortium of banks led by
Standard Chartered Bank and Barclays Bank.
Bharti availed of $1Bn equivalent from SBI Group

Structure of Deal and Financing
10.7
Bn
7.9
Bn
0.4
Bn
0.7
Bn
1.7
Bn
Session 11
Bharti as an Emerging Giant
Product Market
*Based on countries of operation and customer base
Glocal
Local
Bottom
Global
The Change
On the day of announcement, Bhartis stock fell down
3.77 per cent to Rs 257.80 due to:
High price of the deal*
Future profitability doubts
Difficult to implement Bhartis volume based low cost
model in Africa*
Small individual markets in Africa

*Telecom industry expert Mahesh Uppal
Stock Market Reactions
Session 8
Control Mechanism of Bharti
Organization form to control
cross-border operations
Centralized Hub a Global Framework
Implementing parent company strategies
To obtain global scale efficiencies
With knowledge developed and retained at the centre
Slowdown in the African economy
Fluctuations of exchange rates

Post Merger Analysis
External
Firm-
specific
Results
Bharti had to pay taxes on its profit-making
entities and wasnt able to offset the taxes
on its loss-making entities
Higher advertisements led to higher SG&A
expenses
Forex losses in a few countries and a sharp jump in taxes
mainly caused rise in losses
Strong growth in 3G and Airtel Money in Africa
Bhartis net profits declined by 27% from 2009-10 to 2010-11
Declined bottom line at a 5.1% CAGR over FY2010-2012