<p>Bharti’s management and finances will be stretched. At 10 times enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation), Bharti is paying a rich price for a group of loss-making assets on a continent full of operational challenges, from corruption and political instability to inadequate electricity and theft of equipment.<br />There is no guarantee that Bharti can successfully transplant its low-cost “minutes factory” model to 15 new markets in Africa. “The main challenge is that Zain has been on the back foot in some of its major markets — Nigeria and Kenya — and now needs to solidify its position,” said a telecoms analyst at Africa Analysis in Johannesburg.<br /><br />“In just about all its markets with the exception of Zambia, Zain is a second-fiddle operator, which means that it has to implement solid retention strategies,” he said. Bharti’s foreign exchange risk will be high as it must buy equipment in dollars while revenue is in local currencies. The company is borrowing up to $8.5 billion to pay for the acquisition just as it gears up for third-generation (3G) operations in its home market, which will cost billions in licence fees and equipment. Zain was its second choice after two failed tie-ups with South Africa’s MTN. The financing will lift Bharti’s debt to EBITDA ratio to more than 2 times, from 0.4 times before the deal.<br /><br />Tough markets<br />Bharti is the top player in India, the fastest-growing and arguably the most competitive mobile market, with 14 players locked in a margin-destroying price war. But it can ill-afford any distractions.<br /><br />“Africa will require a lot of focus and India will require a continuous involvement. Nothing is on autopilot,” said an HSBC analyst. Michiel van Voorst, who manages a €600 million ($800 million) Asia-Pacific portfolio for Dutch fund manager Robeco in Hong Kong, once counted Bharti as his biggest India holding. He sold in 2008 as signs grew of fierce competition and sees the Africa venture as an admission of difficulty at home.<br />“They will have their hands full in operating successfully in India and getting through this phase in the market ... and obviously management will now be focused on making the acquisition work,” he said. Bharti uses outsourcing and network-sharing to keep costs low at home and focuses on generating high network usage. Elsewhere, carriers typically look to squeeze more revenue out of each customer. Its bet that people talk more when calls are cheap has worked in India, but usage patterns in Africa are different.<br />Monthly revenue per user on the continent averages $8, compared with $5 in India, according to Ambit Capital in Mumbai. African customers use 100 minutes per month, versus 450 in India.<br /><br />“Historically, the Indian market has shown high elasticity to drops in tariffs. If the African market does not witness similar elasticity ... it would be difficult to achieve revenue growth,” said Ambit analyst. Indian carriers including Bharti have also adopted a “matchbox strategy” of distribution, that essentially means any shop that sells matches should also sell mobile SIM cards and top-up vouchers, helping build a vast dealer network. Nomura said in a report it will take time for Bharti to apply its model across its African markets.<br /><br />Nigeria is the biggest business by far among those Bharti is buying and the operating environment in Africa’s most populous nation gives an idea of what Bharti is up against. Network costs per site per month in Nigeria are $7,500, or 70 percent higher than in some other African markets due to security costs, rents, staff costs and costs of transmission. <br /><br />Operators in Nigeria must generate power and provide security. Fuel is not always easily available to run generators. But he said potential in Nigeria, with more than 140 million consumers, even if most of them live on less than $2 per day, compensates for the challenges in the operating environment. Whatever difficulties It faces in Africa, rivals there including MTN, Vodacom & Millicom have plenty to lose with a stronger new rival in the market. “Grafting the Bharti business model onto the acquired assets would create a major dislocation,” Nomura analysts wrote.</p>
<p>Bharti’s management and finances will be stretched. At 10 times enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation), Bharti is paying a rich price for a group of loss-making assets on a continent full of operational challenges, from corruption and political instability to inadequate electricity and theft of equipment.<br />There is no guarantee that Bharti can successfully transplant its low-cost “minutes factory” model to 15 new markets in Africa. “The main challenge is that Zain has been on the back foot in some of its major markets — Nigeria and Kenya — and now needs to solidify its position,” said a telecoms analyst at Africa Analysis in Johannesburg.<br /><br />“In just about all its markets with the exception of Zambia, Zain is a second-fiddle operator, which means that it has to implement solid retention strategies,” he said. Bharti’s foreign exchange risk will be high as it must buy equipment in dollars while revenue is in local currencies. The company is borrowing up to $8.5 billion to pay for the acquisition just as it gears up for third-generation (3G) operations in its home market, which will cost billions in licence fees and equipment. Zain was its second choice after two failed tie-ups with South Africa’s MTN. The financing will lift Bharti’s debt to EBITDA ratio to more than 2 times, from 0.4 times before the deal.<br /><br />Tough markets<br />Bharti is the top player in India, the fastest-growing and arguably the most competitive mobile market, with 14 players locked in a margin-destroying price war. But it can ill-afford any distractions.<br /><br />“Africa will require a lot of focus and India will require a continuous involvement. Nothing is on autopilot,” said an HSBC analyst. Michiel van Voorst, who manages a €600 million ($800 million) Asia-Pacific portfolio for Dutch fund manager Robeco in Hong Kong, once counted Bharti as his biggest India holding. He sold in 2008 as signs grew of fierce competition and sees the Africa venture as an admission of difficulty at home.<br />“They will have their hands full in operating successfully in India and getting through this phase in the market ... and obviously management will now be focused on making the acquisition work,” he said. Bharti uses outsourcing and network-sharing to keep costs low at home and focuses on generating high network usage. Elsewhere, carriers typically look to squeeze more revenue out of each customer. Its bet that people talk more when calls are cheap has worked in India, but usage patterns in Africa are different.<br />Monthly revenue per user on the continent averages $8, compared with $5 in India, according to Ambit Capital in Mumbai. African customers use 100 minutes per month, versus 450 in India.<br /><br />“Historically, the Indian market has shown high elasticity to drops in tariffs. If the African market does not witness similar elasticity ... it would be difficult to achieve revenue growth,” said Ambit analyst. Indian carriers including Bharti have also adopted a “matchbox strategy” of distribution, that essentially means any shop that sells matches should also sell mobile SIM cards and top-up vouchers, helping build a vast dealer network. Nomura said in a report it will take time for Bharti to apply its model across its African markets.<br /><br />Nigeria is the biggest business by far among those Bharti is buying and the operating environment in Africa’s most populous nation gives an idea of what Bharti is up against. Network costs per site per month in Nigeria are $7,500, or 70 percent higher than in some other African markets due to security costs, rents, staff costs and costs of transmission. <br /><br />Operators in Nigeria must generate power and provide security. Fuel is not always easily available to run generators. But he said potential in Nigeria, with more than 140 million consumers, even if most of them live on less than $2 per day, compensates for the challenges in the operating environment. Whatever difficulties It faces in Africa, rivals there including MTN, Vodacom & Millicom have plenty to lose with a stronger new rival in the market. “Grafting the Bharti business model onto the acquired assets would create a major dislocation,” Nomura analysts wrote.</p>