Bharti shares up on Zain but execution a challenge

Bharti Airtel now needs to work on getting regulatory clearances for its $9 billion deal to buy 15 African operations of Kuwaiti telecom Zain, and turning around the loss-making assets would be its priority.

The acquisition, which would help Bharti become the world’s No. 5 wireless firm by subscribers with presence in 18 countries, also comes with tough financial and management challenges for the Indian mobile market leader already battling a highly-competitive home turf.

“A big challenge is streamlining operations across all these countries with limited resource availability,” said Kamlesh Bhatia, principal analyst at research firm Gartner.

“They also have to turn the company around in the fastest time possible.”

Bharti shares rose as much as 2.7 percent on Wednesday morning after the company signed definitive agreements with Zain late on Tuesday.

At 0518 GMT, the shares were trading 1.3 percent up in a Mumbai market that was down 0.1 percent.

The deal would give Bharti 42 million subscribers in 15 African countries, which have a combined estimated annual revenue of $3.6 billion, but are currently making losses.

“The main challenge for Bharti lies in raising revenues and adding subscribers as Zain has been losing both in some of the countries,” said Amit Ahire, analyst with Ambit Capital.

Also, issues in Gabon and Nigeria are examples of what Bharti is going to face in a new continent.

The government of the small central African nation of Gabon weighed in on Monday against the deal, saying Zain Gabon had not complied with regulations and that it reserved the right to take “all necessary measures”.

Minority ownership of Zain’s operations in Nigeria, the biggest market in the deal, is also in dispute.

“Gabon is a very small market and in most cases regulators can always be dealt with. But Nigeria is a bigger stumbling block, because it is a key market and shareholders are always tricker to deal with,” said Gartner’s Bhatia.

Bharti Chairman Sunil Mittal has said the company would work with regulators and expected “tremendous support” in countries including Gabon. Bharti would also talk to the minority shareholders in Zain Nigeria.

Bharti is paying $9 billion in cash to Zain, what many regard as a full price, and after assumption of $1.7 billion of debt on the target firm’s books, the deal is valued at around 10 times EBITDA, more than Bharti’s own valuations.

Bharti has secured debt of up to $8.5 billion from a clutch of lenders to fund the deal and may have to spend more to expand the networks, which analysts say have been under-invested for years.

And adding to that would be spending for next month’s 3G spectrum auction in India, which analysts estimate could cost a firm up to $2 billion just for the licence.

Reuters.