Bharti throws price gauntlet at Africa

MUMBAI: Bharti's agreement with the Zain group to acquire the latter's Africa operations could well set the cat among the pigeons. Incumbent African operators MTN and Globacom are scrambling for cover, revving up their investments in Africa to counter the imminent threat posed by Bharti Airtel's low-cost model -- soon to be unleashed on the market after the Zain buyout.While Globacom, which owns a submarine cable that connects Nigeria to the UK, Spain, Portugal and the rest of west Africa, is set to increase investments considerably, MTN is reportedly planning a Rand 6 billion investment in Nigeria.
MTN is targeting an additional 6 million users in 2010, in a bid to raise its subscriber base to 36.8 million. Though MTN claims that it is not concerned about Bharti's arrival, the Zain acquisition will see Bharti and MTN competing in four countries, including Nigeria, the largest mobile subscriber market in the continent.
To push its foray in the dark continent, CEO Manoj Kohli has been given the onerous task of turning around the Nigerian network, which is Zain's biggest African asset. Sources indicated that "the regulatory approvals for Nigeria would be the first off the block."
When contacted by TOI, Kohli said. "Two acquisitions in three months -- Bangladesh's Warid on January 13 and now Zain -- speaks volumes of the entrepreneurial aspects of Bharti."
Interestingly, Zain Nigeria, which began operation as Econet Nigeria in 2001, has already changed hands four times. The telecommunications company, which is Nigeria's second largest carrier, has traded under various names and has seen itself in various avatars like Vee Networks, Vmobile, Celtel and Zain Nigeria.
At the start of 2010, Kohli was mandated to head a new team to acquire companies outside the country. As Sunil Mittal had said then: "The next phase of our journey is set to be another game changer, requiring superior thrust and focused leadership."
Though Kohli is a major strength, the path ahead is not strewn with roses. Though Bharti's tariffs are "10 times lower" than African markets, it is set to inherit a market significantly smaller than India, which poses challenges in replicating its low-cost model. The growth momentum in the African markets also appears to be slowing down, with wireless population penetration already close to 36%.
According to analysts who spoke to the TOI, the business risk of Zain Africa is immense. "Zain Africa is a loss-making unit despite the 35% penetration reached in those service areas," an analyst said.
In addition to Zain Nigeria, 7 of the 15 Zain units in sub-Saharan Africa made a net loss of $111 million in 2009. Zain Nigeria recorded EBITDA of $331 million till the third quarter of 2009, but made a net loss of $88 million. "The level of competition is increasing rapidly and profitability is bound to be under even greater pressure in the months ahead," he added.
Some analysts stated that 40% of Zain's assets are intangible, making it very difficult to put them to any productive use. "Such assets created out of M&A activity usually increase the size of the acquirer's balance sheet while contributing little to business growth," another analyst said.
Moreover, if one takes into consideration similar population service areas, "the population density of countries where Zain has operations is just 5-20% of Indian circles, which will lead to 3 -5 times of capex".
Analysts add that the business will increasingly require capex investments over the next 12 months and that capex as a percentage of revenue for the African operations is expected to increase to 60%, "due to significant investments needed for capacity increase".
In the past year, the Zain management has pruned capex as the company was in the middle of M&A activities.
Bharti's victory in its bid for Zain's African assets "would be no cake walk, but clearly, to the victor go the spoils," an analyst signed off.
"It is a matter of great pride for the corporate India and we should all stand up and salute the achievement," said RPG Enterprises vice-chairman Sanjiv Goenka.