Study of Airtel’s Acquisition of Zain in Africa
CH20BTECH11031 - Saumya Mundra
About Airtel
Bharti Airtel Limited is a global telecommunication company. They are the second largest
operator by subscribers in India and third globally. The company is spread worldwide with
services in multiple countries, spanning South Asia, Africa, and the Channel Islands. In the
mobile networking industry in India, they provide 2G, 3G, and 4G wireless services. Besides
mobile networks, they provide services like broadband, fintech, digital television, and banking.
As of June 2022, Airtel had a consumer base of roughly 500 million.
Bharti Airtel : Point of View
Airtel was one of the companies in India that had free cash flows. They could use that cash to
invest in businesses, infrastructure, and other appreciating assets. Unutilized cash flows could be
more practical. One, it may lose its value over time due to inflation. The second reason is that the
company may take advantage of significant opportunities. It is a waste of money as that can be
grown through investments. There are also general expectations by shareholders to receive
higher ROI and not let the company's resources go to waste. Given the reasons above, Airtel had
the option to invest and diversify. Airtel had already invested significant money in India to build
its network infrastructure. The only remaining expenditures by Airtel were to expand its
customer base and innovate its current technology. The capital expenditure or the capex for
Airtel in India was decreasing in India throughout the years, which resulted in even more cash
flow. With a strong base of cash flow at an ever-increasing rate, it only makes sense that Airtel
invests and diversifies.
The Indian market in the mobile network industry was highly saturated in the late 2000s.
Investing more resources in India provided little market growth. The Indian grew from 50
million in 2005 to 400 million subscribers by 2009. By the end of 2009, Airtel was leading the
Indian telecommunications market. However, it had close competition with Reliance Mobile and
Vodafone. Their consumer base also grew by 35 % in 2009, but with the prices becoming too
competitive, Airtel showed a decline in profits by around 33%. At the same time, they had a
debt-to-equity ratio of 0.05. The debt-to-equity ratio is the amount of debt a company has
compared to its equity.
A debt-to-equity ratio of 1 would mean the company has the same debt as equity. Intuitively,
zero debt for a company would be favourable. However, it is generally beneficial for companies
to have lower debt-to-equity ratios rather than being completely debt free. One of the reasons
debt can benefit companies is they would have low or no tax on them as their profit before tax
would lower. They would have higher yields without debt, resulting in higher taxes paid. The
income tax rate in India is roughly 25%, which would cause a vast capital drain from the
company. Also, the dividend it would pay to the shareholder is tax deductible, whereas interest
on debt is not. Next, debt can finance companies to expand their business regarding
infrastructure, region of service, human resources, and assets. There are other types of financing,
such as one done through equity. However, debt is more beneficial than inquiry financing. First,
it can result in the company diluting its control over itself. Second, the shareholders have high
expectations from the company to provide a reasonable ROI of about 12%, whereas, in debt
financing, the interest might be around 8%. Given the benefits of debt financing and the low
debt-to-equity ratio of Airtel, they could incur more debt and invest. Their debt ratio of 0.05 is
virtually zero. Hence, given the saturated market where they were operating, they could support
incurring more debt to invest elsewhere.
Since the market in Africa was building, unlike India, whose mobile network was saturated, the
revenue mobile networking companies gained per consumer was higher in Africa than in India.
There were several more reasons for revenue per customer being higher in Africa. The
infrastructure of the overall telecommunications industry in Africa was poor, and the ones
supplying quality networks charged a reasonable premium. One more reason can be that since
the market population was less, operators used to charge higher fees. From the late 2000s to the
early 2020s, Africa's infrastructure or the overall telecommunications market has improved. The
revenue per customer has also become relatively stable and close to the value in India. Back
then, Airtel noticed this would be an excellent opportunity to diversify its service region, as it
could get a reasonable return on investment. Expanding would reduce Airtel’s dependence on the
oversaturated Indian market.
Economies of scale is a practice that can benefit companies. It means that by increasing the
production or sale of their products, the fixed costs involved in the show, such as infrastructure,
machinery, properties, etc., become less per product, providing a more significant profit margin.
Airtel found the potential to do so in Africa. They already had the technology in India in the
form of human resources, which could be used in Africa. They believe they could set a strong
foothold in Africa using their economies of scale as they had a strong global footprint. In reality,
however, India was still using a lot of Airtel's resources, and the growth in Africa was different
from what was expected.
Some of the issues faced by the Indian operators was the decrease in revenue through voice. To
expand the business in the Indian market, Airtel would have to invest heavily in data
infrastructure. During the same time, in 2009, the Indian Government was auctioning the licenses
of the 3G data spectrum. There were, however, risks to whoever won the auction. This is because
of the heavy investment they have to pursue to make such an advanced infrastructure. Only 5%
of Airtel users in 2009 owned a smartphone. So there were concerns about whether expanding
into the 3G data spectrum would bring in desired returns. These reasons forced Airtel to venture
internationally into Africa.
African Market : Point of View
We will now analyse the state of the African Market in the communications industry in the late
2000s. We will reason the favourable and unfavourable factors for Airtel to invest in the African
market.
In the early 2000s, Africa only accounted for 2% of the telephone lines in the whole world. At
the time of Airtel's interest in Africa, the penetration level in the continent was low, at around
37% in 2009, and was expected to grow to 60% in 2012. The tariffs were high, and the service
usage was relatively low. The average cost per minute in Africa was around 15-20 cents
compared to India's 0.44 cents. This provided a direct opportunity to increase revenue for
companies if they held a large market share in Africa. The average minute usage in India was
roughly ten times as compared to Africa. The operators could operate in Africa using the high
volume low tariff module. A high-volume standard tariff module is a pricing strategy in which
the product is provided by the company at a low price, expecting a high volume of consumers to
purchase it. For example, the operator could provide lots of data or voice credits to the consumer
at a low price. This would help build a consumer base in price-sensitive regions such as Africa.
Given Africa's huge population and market potential, Airtel was confident they could apply the
above pricing strategy to operate in Africa. A similar pricing strategy was used by Airtel in the
Indian Market as well. Despite their low tariffs and lower ARPU, Airtel and the operating leaders
in India used to post high EBITDA margins, precisely 40% for Airtel in 2009. Airtel had
mastered the low cost high volume strategy in India. In fact, the fact that it was successful in
India gave airtel the confidence to invest in Africa. They invested under the assumption that the
African market will have similar sensitivity to the Indian market on lowering tariffs. They also
believed that the matchbox strategy they implemented in India would be helpful in Africa.
Basically matchbox strategy implies that the product of a company should be supplied well
enough to even be available at retailers not primarily involved in selling the product. For
example, small neighbourhood shops can provide recharge options or vouchers of the product as
a side product for the shop. This way a consumer would not face the inconvenience of searching
for the smallest services.
We will analyse the state of operators in Africa back in 2009. There were four major operators in
Africa - MTN, Orange, Zain Vodacom, and Safaricom, in decreasing order of subscribers.
Despite the stiff competition provided by the operators above, Airtel was planning to set a strong
foothold by tariff cuts or by using low-cost models as mentioned above.
Zain and MTN were one of the largest operators in Africa, with MTN having operations in over
21 countries, whereas Zain had a spread over 15 countries. MTN was natively African, whereas
Zain Africa was a Zain Group division, Vodacom was a Vodafone subsidiary, and Orange was a
French company. Airtel planned to enter the African market through MTN as they were the
largest operator in Africa. However, the deal between Airtel and MTN could not go through as
the South African Government demanded a dual listing of shares. Dual listing of shares means
the company's stock is listed in two countries and can be traded in either location. The Indian
Government notified that policies regarding dual listing must be carefully modified and can't be
done hastily. Due to this, Bharti Airtel shifted its attention to Zain.
Why Zain?
During the timeline of Airtel's acquisition in Africa, Zain was the market leader in Congo,
Zambia, Malawi, Niger, etc., and had a strong presence in Ghana, Kenya, and Sierra Leone. It
had around 40-m million subscribers in Africa. It had a clear strategy known as 'ACE,' which
meant it wanted to accelerate growth, consolidate assets and expand into various African
markets. With a vital mission and presence, they were a favourable company to enter Africa
through. In the late 2000s, Zain was scouting for investors and acquirers for its African assets.
This is because they were still loss-making after tax deductions, and a strategic partnership with
companies should help their cause in Africa. The Zain Group, the parent company of Zain
Africa, only reported a 15 % profit through Africa even though more than half of their consumer
base was in Africa. The main attracting factor for Zain was their consumer base and hence the
interest from global companies for acquisition. The parent company of Vodafone also pursued
them; however, the deal did not go through. Due to Zain’s customer base, Airtel became the fifth
largest mobile network operator in the world upon acquisition.
During the timeline of Airtel's acquisition, the Government in many countries had favourable
FDI regulations. They wanted an influx of foreign technology to improve their countries'
infrastructure. The liberalisation in Africa as a whole was pretty late, in the late 1990’s. As an
external business with resources, it is an excellent investment opportunity as the markets in
Africa were becoming more reasonably competitive.
Threats
We will also examine the threat Airtel had when it was entering Africa. We will see which of
those have high barriers. If the threats have low barriers, then Airtel has one more reason to
invest in AFRICA.
The first threat Airtel might face would be the entrance of similar companies attracted by the
potential market in Africa. And looking at the pros we have mentioned above, it is
understandable to consider this a threat. However, considering the infrastructure of Africa, it
would require huge capital to set up an industry like telecommunications. With the potential
penetration of the market to increase in a few years, the infrastructure to be set up by any
incoming operator would have to be robust and stand the test of time. Airtel is one of the biggest
telecommunications companies in the world and has the capital, expertise, experience, and a
fixed cost infra to enter the market. So the barrier, the threat of new incomers to Airtel, was low.
Another threat that Airtel could have faced while entering a new market is the bargaining by the
customers for lower prices. For any operator to enter the mobile network market in India, they
would have to face the expectation of lower prices from the customers. Companies as big as
Vodafone faced issues as they had to compete with companies like Airtel and Jio, which are
resource-rich. This threat in Africa was less when Airtel decided to enter the continent. This is
because there were few prominent competitors in the industry. Telecommunication in the current
age is an essential commodity, whereas in Africa back then, it was scarce compared to recent
times. Hence, any form of reliable service operator had the upper edge. Thus the barrier provided
by price competitiveness was low.
Another threat Airtel could have faced while entering Africa would be the threat due to newer
technologies. The technology that Airtel would facilitate in Africa would be communication over
typical circuit lines. A more recent technology to standard transmission is voice over internet
protocol. It helps in transmitting voice over a data network using IP. Today, the same technology
is used in India, such as 4G VoLTE. It currently provides calling services at a much lower cost
and improved quality. This threat of new technologies is also a common barrier threat as Airtel
themselves were at the cutting edge of the mobile networking industry and certainly had the R &
D teams creating such technologies. No other operator in Africa at the time was comparable to
Airtel's worth, with Airtel itself being in the top five mobile network operators in the world.
Another threat that Airtel could face is the bargaining power of suppliers. Given Africa's poor
infrastructure in 2010 throughout all the countries, the suppliers can gain a monopoly in their
regions for supplying raw materials, networking equipment, customer service centers, etc. The
countries have a limited pool of elite talent and resources which can place companies in a weak
position to hire. The suppliers are an external factor that strongly affects customer satisfaction
and loyalty to a particular operator. For example, if a supplier does not provide efficient service
to the operator, which somehow affects the operator's service, the customer would not hesitate to
switch service to a competitor.
A real-world example can be when an operator cannot provide enough coverage for various
regions, and consumers in those regions switch their operators. Therefore, companies depend a
lot on suppliers providing quality materials, and quality comes at a premium. The barrier here is
high; however, Airtel, a large operator, was willing to take risks and model its services in the
same way as it does in India. For example, it outsources its IT service to IBM, which it could
also do in Africa. However, it may need help with issues pertaining to domestic operations such
as logistics, a risk Airtel would be willing to take based on the funding they receive.
In this study, we have analysed the reasons that would drive Airtel to internationalise. As a result
of the above reasons, Airtel went ahead by acquiring Zain Africa. The acquisition was done for
around 10 billion dollars which included 700 million dollars of debt that had to be paid off.
Bharti Airtel had taken debt from multiple sources including State Bank of India, Standard
Chartered Bank, Barclays, Bank of America etc.
References
1. Bharti-Zain-2010-Case-Study-June-7-2010-Revision-March222015 by Johnson
Cornell University
2. M&A LAB - Bharti Zain Deal Dissection
3. https://www.livemint.com/Companies/3CC9449nUjj0jPwAy8VlhO/Bharti-Airtel-net
works-with-rural-retailers-to-increase-cove.html
4. Bharti
Airtel
and
Zain:
A
Journey
into
New
Territories
DOI:10.1177/0972150916660647
5. https://en.wikipedia.org/wiki/Airtel_Africa