Chillin' out till it needs to be funded
Airtel gets Zain Telecom assets in Africa
At $9 billion and only $1.7 billion the deal is more well priced than any other we have seen from the deal hungry sub continent. The price is right given that we were creatin gthe demand, this being the only winner from India that can probably earnt he ROE required to cross the rubicon and make the merged venture profitable. Also in a great sign of the times, virtually all banks gave the green go ahead to the Barclays / SCB led consortium with even SBI getting to chip in $1 billion for Airtel’s financing requirement for the deal and for the 3G licence.
Analysts have really covered the deal threadbare with the company management sharing a lot of data with the deal signing. Howeve, I find the data has not been used crrectly in that analysis in a bid to be cautious. Airtel is a great India brand, defnitely because of its advertising and branding but also because it is an operational leader and the true Navratna. It is a great purchase for Airtel, with Zain Africa showing profits of $175 m in the last 12 months and a per user value of $8 which is truly behind $13 from leader MTN but is a great place to start for someone who can build in operational efficiencies. New Capital Expenditure will have to be factored in to truly realise Airtel strategy of the mistakenly named “minutes factory”
Bharti’s model is not strictly pricing a minutes factory as half baked reports suggest but the company would make significant investments in infrastructure and use marketing and branding to maintain a premium in brand cognition while maximising capacity utilization. Access to 45% of Africa’s population which is also seeing a surge in development because of its rich OIL deposits would easily lead them to the target of sharing the lead market share with MTN and probably even reach the company’s goal of getting 120 million subscribers in Africa a probable one. Airtel already has 120 million subscribers in India
Great Purchase. $175m and 42 million subscribers. ARPU at $8, MTN ARPU at $13 good target.
3G bids are soon to be opened in India after a rocky trail of denials and postponements. Then there is 4G, the sector is significantly infrastructure intensive and the deal is likely to be expensive in the initial run, but given a pedigree like Airtel, it can manage both markets unlike previous large deals and attempts by Tatas, Ambanis and others for loss making assets and no operational excellence history. Even the Birla Scion has been ble to make a better stab of it at Hindalco where he is able to produce the acquisitions end products , soda cans here in India cost effectively. Airtel’s ticket is its ability to realise a complete infrastructure with a longer term window in each market, their experience in 23 circle in India over just 10 years bearing them out.
There are the challenges that every new market has. Also given that penetration in each of the 15 markets is 15-20% and sometimes more, and the low profitability indicates that the revisited investments would have to be treated critically and undue caution in part to turn around those investments with new Capex would seem to be a fallibility for Airtel that also goes against conventional logic as dished out by the existing analysts in the detailed analysis made available.