Bharti group chairman Sunil Mittal said the proposed deal with Zain, Kuwait’s leading telecoms player, for its African operations, is likely to be closed by May.

Mittal, along with other top officials of Bharti, was speaking at an analysts’ call on Thursday, called primarily to allay their fears.
Bharti is in exclusive talks with Zain to buy a controlling stake in its African assets, valued at $10.7 billion, till March 25.

Zain may not be the largest, but it is clearly the leader in Africa. By buying it, Bharti will be among the top 5 globally (in terms of subscriber numbers) in one year with a client base of 200 million in two continents, Mittal said.

The combined entity of Bharti and Zain is expected to generate revenues of $13 billion and an Ebidta of $5 billion over the next 12 months.

Referring to the valuation of the deal and the recent crash of the Bharti stock, Mittal argued that the deal would have a short- to medium-term impact, “but in the long run, we are looking for a growth story in this. And therefore it is not a cause of worry.”

Mittal said the attractiveness of Zain Africa lies in large aggregate population of 500 million, with low telecom penetration at 36%, low competition and the strong market position of Zain.

Akhil Gupta, the deputy group CEO of Bharti Enterprises, said, “We are aware that there are concerns with regards to the valuation. It is not a distress sale, but a bargain price.” Gupta, who’s seen as the financial brain of the company, also added that there will be no other acquisition for 1-2 years “as we have our hands full in terms of anything large”.

He said the valuation should be seen in the following context: a negative Ebidta in Ghana due to it being a start-up operation distorts the picture.

“Enterprise value/Ebidta should be based on either full Ebidta or proportionate share of $1.7 billion net-debt that Bharti would assume,” he said, adding that Zain deserves a higher multiple on Ebidta due to low effective tax rate in Africa.

“Then there is also the control premium,” he said.

The cumulative actual investment is approximately $9 billion, Gupta said.

“Thus the premium is totally justified looking at the stage of development,” he said.

Mittal said while at present the company was looking at operations in 15 countries, it will later look at more. “Wait until we have taken full charge of the 15 operations,” he said.

Greenfield acquisitions in any part of the world are history, Mittal pointed out. “So, we are doing brownfield acquisitions,” he said, referring to Sri Lanka and Bangladesh assets of Bharti.

Gupta said the company is averse to high debt levels so there is a possibility of raising equity either at Bharti Airtel or at the tower company level.

Manoj Kohli, the current CEO who will take over as the company’s head of international operations, said the Indian efficiencies can be implanted in the continent’s operations using the outsourcing model and rationalisation of overheads.

Zain has racked up losses of $111 million for the nine months and expected $150 million for the year.

“A breakeven can happen in three years. The Bharti stock may touch Rs 500 by then, but it won’t see much movement for the next two years,” said an analyst with a domestic brokerage. “So why should I buy the stock now? I can do so after one and a half years.”
Kohli said, though Zain is not the top performer today, there can be a substantial improvement in the Ebidta margin in 6 months after taking over.

“This move really needs help from investors and principal shareholders,” Kohli said.