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7/21/2019 Bharti Acquires Zain
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AV GhoshGarg Rihana
Group 1SIX SAMURAI
Merger and Acquisition Analysis
ZAIN BHARTI
7/21/2019 Bharti Acquires Zain
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Group company of Bharti Enterprises Indias largest telecom service provider
137 million customers across India, Sri
and Bangladesh Valued at US $8.15 billion
Premerger Analysis: Bharti Airt
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Subsidiary of Zain Group (MTN) Valued at US $4.14 billion
Lowest net profit margins in Africa of 5
7/15 loss making units in Africa Lower than 50% penetration rate
Customer base of about 41.9 Million
Premerger Analysis: Zain Afric
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat ofSubstitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat ofSubstitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
High market concentrationmore thaplayers
ARPU around Rs. 115
Expanding marketing networksemi-
rural High future prospects for all the p Easy regulations on inter and intra circ
High
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat ofSubstitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
Buyers price sensitivity high
Product differentiationhigh Size and concentration of buyers relative to p
Buyers switching cost low
Buyers information high Buyers ability to integrate backward -
High High
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat ofSubstitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
Mobile Tower Companies SIM Card Manufacturers Mobile Ph
Product differentiationlow
Competition between suppliershigh
Size and concentration of buyers relativproductslow
Buyers switching cost low
Buyers ability to integrate forward - low
High High Low
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat ofSubstitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
Emerging substitutes
IP TelephonySkype, Hangout
Instant MessagingGtalk, Yahoo, Facebook
o Buyers Propensity to substituteModerate
o Relative PricesHigh
o Performance of substitutemoderate to hi
High High Low Mod
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
Leasing of towershigh
Declining ARPUlow
Access to Optical Fibre Networklow
Government barriersmoderate
High High Low Mod
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Competitive
Rivalry
Buyer Power
Supplier
Power
Threat of
Substitution
Threat of
New Entry
Porters Five Forces in the Indian Teleco
High Low Mod High
Moderately unattractive Industry quickly reaching its
maturity stage
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Growth Strategies
Intensive Growth Integrative Growth Diversifica
Session 3
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Growth Strategies
Intensive Growth Integrative Growth Diversifica
Session 3
MarketPenetration
ProductDevelopment
MarketDevelopment
Diversification
Current Products New Products
Current Markets
New Markets
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Growth Strategies
Intensive Growth Integrative Growth Diversifica
Session 3
MarketPenetration
ProductDevelopment
MarketDevelopment
Diversification
Current Products New Products
Current Markets
New Markets
Af d
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African Opportunities: Expected Sy
Low mobile phone penetration in Africa 8 of 15 countri
operating at sub-35% teledensity
Zain Africasrelatively lower EBITDA margins*
Zainspresence: 15 African countries, overall subscriber base o
Scope to become world's fifth largest wireless company with a
base of around 180 million (131+49)
Zains50% higher average ARPU than BhartisIndia ARPU
*S&Ps credit analyst Mehul Sukkawala
Af O E d S
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High growth African market and Economies of Scale
Lower competitive intensity in Africa
Scope for OpEx rationalisation for Zain
To emulate BhartisIndian minutes factory model by lowering
spur usage and improve market share and profitability
Material synergies arising via OpEx/CapEx efficiencies post inteZain
Global brand image
African Opportunities: Expected Sy
F Aff i h A i i i
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Factors Affecting the Acquisitiession 7
Synergy Modular Sequential Reciprocal
Nature of Resources Hard Soft
Redundant Resources
* Reserves and SurplusRs. 256, 295, 074 (2009)Rs. 346, 523, 215 (2010),
Annual Report
Market Uncertainty Low Medium High
Competition Low Medium High
Low Medium High
A i i i S
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The possible reason why the Bharti man
considered this acquisition can be explainedDifferential Efficiency Theory:
Create Operating synergieseconomies of scalpricing power, higher growth in new markets
Gain Management efficiencies - take over of managed firm
Sunil MittalsEmpire Building Strategy
Acquisition Strategy
Ti li f A i iti
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Timeline of AcquisitionMay 5,
2008
Bhartiannounces its earlydiscussio
ns withMTN
May 24, 2008
Bharti withdraws
from the talksdue to
unacceptabledemands of MTN
May 26, 2008
Rcom entersinto merger
discussionswith MTN
July 2, 2008
Bharti Airtel
again startstalks with
Zain toacquire its
Africanassets
July 19,
2008
RCom andMTN
formallyend talks
Sep 30, 2009
The proposed
transactionbetween Bhartiand MTN called
off again
February 15,
2010
Bharti Airteland Zain
agree to enterinto exclusive
discussionsagain
V l ti
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The paid sum of $10.7Bn was 10 timesthe Enterprise Value to EBITDA
Bharti paid a premium of 40% to Zain even though RoE and RoCE o
Prior acquisition Zain Africa posted a net loss of US$112 million in
September 2009
The deal proved to be expensive because at that time Bharti itself wa
times EV to EBITDA
The deal carried a huge commercial risk because in order to acq
incurred loans worth US$8.3 billion at an interest rate of 195 basis poi
The analysis of this deal from an EV per subscriber basis point of viewto be as expensive. The enterprise value per subscriber worked out t
is comparable to the prices at which most deals have taken place
taken in Spice telecom by Telecom Malaysia worked out to be US$330
Valuations
Structure of De l nd Fin ncin
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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 Financin
Bharti as an Emerging Giant
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Session 11 Bharti as an Emerging Giant
Product Market
*Based on countries of op
Glocal
Local
Bottom
Global
The Change
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The Change
Stock Market Reactions
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On the day of announcement, Bhartisstock fel
3.77 per cent to Rs 257.80 due to: High price of the deal*
Future profitability doubts
Difficult to implement Bhartisvolume based low
model in Africa*
Small individual markets in Africa
*Telecom industry expert Mahesh Uppal
Stock Market Reactions
Control Mechanism of Bhart
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Session 8 Control Mechanism of Bhart
Organization form to control
cross-border operations
Centralized Hub a Global Fram
Implementing parent company strategies
To obtain global scale efficienciesWith knowledge developed and retained
Post Merger Analysis
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Slowdown in the African economy
Fluctuations of exchange rates
Post Merger Analysis
ExternalFirm-
specific
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&Aexpenses
Forex losses in a few countries and a sharp
mainly caused
Strong growth in 3G and Airtel Mo
Bhartisnet profits declined by 27% from 2009- Declined bottom line at a 5.1% CAGR over
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