Airtels Acquisition of Zain

CHRONOLOGY OF KEY EVENTS

May 5, 2008 Bharti Airtel announces that it has entered into
exploratory discussions with the MTN Group.
May 24, 2008 Bharti Airtel withdraws from the talks, following
the MTN board presenting a structure completely unacceptable
to Bharti Airtel.
Bharti Airtel sees this new proposal as a convoluted way of
getting indirect control of the proposed combined entity, which
would have made Bharti Airtel a subsidiary of MTN.
May 26, 2008 Reliance Communications (RCom) enters into
exclusive merger discussions with MTN.

 July 2, 2008 Financial Express reports that Bharti Airtel is in

talks with Zain for acquisition of its African assets.

News denied by Bharti Airtels spokesperson.

July 19, 2008 RCom and MTN formally end talks.

Bharti Airtel makes a media statement announcing that it has
entered into talks with MTN for a strategic merger with
exclusivity period till July 31, 2009.
September 30, 2009 The proposed transaction between Bharti
Airtel and MTN called off for the second time in two years on
the expiry of the exclusivity period.

 February 15, 2010 Bharti Airtel and Zain agree to enter into
exclusive discussions till March 25, 2010 for the acquisition of
Zain Africa for an enterprise value of USD 10.7 billion.

 On March 30, 2010 Airtel entered into a legally binding

definitive agreement with Zain Group (Zain) to acquire
Zain Africa BV .
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.
The enterprise valuation was of USD 10.7 billion.
Under the agreement, Bharti acquired Zains African
mobile services operations in 15 countries, total customer
base under of over 42 million.
http://www.airtel.in/about-bharti/media-centre/bharti-airtel-news/corporate /

 In the Indian telecom space, the deal is the second largest

after the USD 11.2 billion (approximately) Vodafone
Hutchison transaction in 2007.
USD 8.3 billion within three months from the date of
closing.

USD 700 million after one year from the date of closing.

USD 1.7 billion assumed as debt on the books of Zain.

Bharti groups global telecom footprint will expand to 21

countries along with the operations in Seychelles, Jersey,
and Guernsey.

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 Africa BV.
The same has been acquired by Bharti Airtel through Bharti
Airtel Netherlands BV.
Zain Africa BV has mobile operations in the following 15
countries - Burkina Faso, Chad, Congo Brazzaville,
Democratic Republic of Congo, Gabon, Ghana, Kenya,
Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania,
Uganda, and Zambia.

WHY EXPANSION WAS NECESSARY?

Bharti Airtel overtook BSNL to become Indias largest

telecom company by revenues but there was continuous drop
in the margin of profit over the years.

The mounting competition in the Indian telecom market with

the service providers battling out for a chunk of the revenue.

The Indian telecom market had almost reached its saturation

point with scope of expansion left only in the inner part of
rural India.
Being a core telecom company it could not diversify its
portfolio into other business and geographic expansion into
new markets was the only strategic alternative to escape
slowing profit growth in India.

 The acquisition provides Bharti with meaningful growth

opportunities in Africa, which still has relatively low mobile
phone penetration, and an opportunity to improve Zain
Africas relatively lower EBITDA [earnings before interest,
taxes, depreciation and amortization] margins.
This realization is what compelled Bharti Airtel to establish its
presence in Africa.
Also, concerns about pending litigations which threatened to
upset Bhartis entry in Africa have somewhat been put to rest
with the Indian telecom company saying it has signed an
agreement with Broad Communications Ltd., which owns a
14% stake in Zain Nigeria, to settle all legal cases Broad had
in 2009 filed a suit with the Federal High Court in Lagos,
seeking an order to restrain Zain from selling a stake.

 The Nigerian unit is also involved in another long-standing

dispute with South African telecom company Econet
Wireless Holdings, a Zain Nigeria shareholder, attempting to
overturn a 2006 deal through which Zain bought a 65% stake
in the Nigerian business.

 A challenge for Bharti Airtel will be to integrate the

operations of Zain Africa in all 15 countries, which
currently operate largely as stand-alone units, said Kamlesh
Bhatia , a principal research analyst at Gartner.
Bharti was able to achieve this important milestone through
much hard work and support from SingTel and the external
advisors.
The total population of these 15 countries stands at over 450
million with telecom penetration of approximately 32%.
With this acquisition Bhartis total customer base will
increase to around 179 million in 18 countries.
http://articles.economictimes.indiatimes.com/2010-06-08/news/27617925_1_zain-s-africa-zain-telecom-largest-ever-crossborder-deal

 The Zain acquisition, the second largest by an Indian entity

after Tatas' Corus deal, was contemplated to take the
revenue of the combined entity to an estimated US $13
billion.
Of the $10.7 billion enterprise value of Zain, Bharti paid
$8.3 billion upfront and $700 million after a year.
It would also take over approximately $1.7 billion of Zain's
debts as on December 31, 2009.
Of the $8.3 billion paid to Zain, Bharti has raised debt from
a consortium of foreign banks and State Bank of India with
the lead-arranger and lead-advisor Standard Chartered Bank
committing the highest amount -- $1.3 billion, followed by
Barclays at $900 million.
http://articles.economictimes.indiatimes.com/2010-06-08/news/27617925_1_zain-s-africa-zain-telecom-largest-ever-cross-bord
er-deal

 A $1 billion rupee loan from SBI and the company's own

money will account for the rest of the deal amount.
The rest of the co-advisors -- ANZ, BNP, Bank of
America-Merrill Lynch, Credit Agricole CIB, DBS,
HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo
Mitsui Banking Corporation -- have allocated $600
million each.
Bharti Airtel has formed two special purpose vehicles
(SPVs) in the Netherlands and Singapore to execute the
$10.7 billion deal with a minimum financial risk.

 Also referred to as a "bankruptcy-remote entity" whose

operations are limited to the acquisition and financing of
specific assets. The SPV is usually a subsidiary company with
an asset/liability structure and legal status that makes its
obligations secure even if the parent company goes bankrupt.

The SPVs, whose dealings will be guaranteed by Bharti, will

own the African assets of Kuwait's Zain.

While $5.5 billion of the total loan amount will be routed

through the Netherlands SPV, the remaining will be routed
through the Singapore SPV.

 The two SPVs will be responsible for repaying the debt from
the cash flows of the African business. But Bharti will have
to step in if there is a default.
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.37 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.

Is the transaction expensive for Bharti Airtel?

Bharti Airtel is paying Zain an enterprise value of USD 10.7
billion10 which is 10 times the enterprise value (EV) to
Earnings Before Interest, Taxes, Depreciation and Amortization
(EBIDTA) multiple for Zain.
Zain Africa has made a net loss of USD 112 million in the nine
months to September 2009
Seven of Zains African units are loss-making, including its
highest revenue earner, the Nigerian arm, Zain Nigeria.

 It will be a major challenge for the Indian telecom giant to turn

around Zain Africas operations in these seven African regions,
which are currently reeling under losses.
The turnaround would be tougher in loss-making regions
including Nigeria, Kenya, and Ghana where Zain plays second
fiddle to market leaders MTN, and Safaricom.
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.

 Views about whether Bharti is overpaying for Zain depend on

peoples assessments about the growth potential of Africas
mobile telecom market.

Bharti will be paying Zain US$252 per subscriber. In

September 2009, when Bharti was trying to strike a deal with
MTN, the two sides had valued each customer of the South
African firm at US$394.

The ARPU(Average Revenue per User), a frequently used

yardstick in the telecom industry, is an average of US$6 for
Zains African operations against US$5 for Bharti in India.
In the long run, the strategy of getting its footprint across the 15
African countries is definitely a great value proposition.

CURRENT ONGOING CASE

$85 million tax dispute between Uganda Revenue Authority

and Zain International BV of Kuwait.
The appeal arises out of an earlier High Court ruling that
struck down the capital gains tax case on a technicality and
effectively left Zain the winner.
It is a capital gains tax from Zain Internationals sale of its
pan-African mobile telephone business to Airtel in 2010 for
$10.7 billion.
Zain International argues that URA does not have jurisdiction
over it for purposes of charging capital gains tax as it is
registered and incorporated in the Netherlands.

Zain International owned Zain Africa BV, which had equity in

26 companies all registered in the Netherlands, but effectively
owning the telephone operator business in as many African
countries..
One of them, Celtel Uganda Holding BV, owned 99.99 per
cent of the Kampala-registered Celtel Uganda Limited.
The disposal of Zain Africa BV comprised of the disposal of
indirectly held interests in the assets of Celtel Uganda Limited,
a company resident in Uganda.
The shares disposed were held indirectly by Zain International
in Celtel Uganda Ltd and consist primarily of immovable
property.
Out of a total capital gain of $7.339 billion, URA argued that
Zain Ugandas contribution was $302.3 million, of which 30
per cent was due as capital gains tax.

 Zain International declined to pay and contested the claim.

PricewaterHouseCoopers Uganda, the telecom companys tax
advisors, also argued that URA had no jurisdiction to levy tax on
Zain Africa BV because it was resident in the Netherlands and did
not source the income from Uganda.