The board of Kuwait's Mobile Telecommunications Co. approved the sale of most of the company's African assets to India's Bharti Airtel Ltd., India's largest mobile phone company by subscribers, for $10.7 billion, according to two people familiar with the deal.
Bharti declined to comment Sunday. The Indian company is increasingly pursuing growth overseas in the face of price wars and regulatory challenges in the Indian cellular market.
Bharti's bid for most of the Africa assets of the Kuwait company, known as Zain, which has over 70 million customers spread across Africa and the Middle East, comes after its talks with South Africa's MTN Group Ltd. for a deal valued at $24 billion fell through last year.
A Zain spokesperson declined to comment. Zain said in an earlier statement that it is evaluating an offer for its Africa assets, excluding Morocco and Sudan, but didn't name the potential buyer.
Bharti, which has nearly 120 million subscribers, has been gearing up for a major expansion into emerging markets. Last month, it created a special international division to scout assets abroad and completed one major deal, agreeing to buy a 70% stake in Bangladesh's Warid Telecom for an initial investment of $300 million.
Rate slashing and new competition from startups have been hurting profits in India's telecom industry. While the country's operators continue to add more than 10 million subscribers collectively each month, they're making less money on each new user after a round of steep cuts to calling and text-messaging rates.
“Growth is getting flattened,” in India, said Jigar Shah, senior vice president Kim Eng Securities India Pvt. in Mumbai. “They want to have a footprint outside which will accelerate their growth in the revenues and earnings.”
Bharti's profit rose only 2.4% in the three months ended Dec. 31, anemic compared to recent years. It only eked out that much growth because of favorable currency-exchange rates. Its net profit for the quarter rose to 22.10 billion rupees ($476 million) from 21.59 billion rupees a year earlier.
Bharti faces other problems on its home turf. In coming months the government plans to allow users to switch their existing cellphone numbers to other carriers, offering upstarts a good chance to poach subscribers from incumbents like Bharti.
Meanwhile, bickering among carriers has delayed the government's auction of radio spectrum for third-generation wireless services such as Internet access.
Zain has operations in 17 African countries, including Morocco and Nigeria, the most populous nation on the continent.
Global telecom operators are increasingly looking to Africa as one of the few regions in the world offering growth. Mobile penetration remains low in most countries. At the same time, advances in mobile-phone technology are driving down prices within reach of many African consumers, and many of the continent's biggest economies are seeing periods of relative political stability conducive to faster growth.
As India's economy rebounds from the downturn and corporate balance sheets strengthen, companies in sectors ranging from energy to tech to telecom are dusting off plans for major international acquisitions. Reliance Industries Ltd., the largest Indian company by market capitalization, bid roughly $12 billion last year for a controlling stake in bankrupt petrochemical firm LyondellBasell Industries, though so far it hasn't struck a deal.
A big cross-border transaction would represent another step up in the international profile of Bharti Group's Chairman Sunil Bharti Mittal. Mr. Mittal began his career making bicycle parts in the 1970s and is now one of India's richest men and most prominent business leaders. In addition to Airtel, his businesses include Bharti Wal-Mart, a retail joint venture with Wal-Mart Stores Inc., and Bharti AXA, a financial-services joint venture with AXA of France.
Analysts say Bharti's expertise at wringing profits out of its cellular business in a country where users, on average, spend only a few dollars per month on service, would be valuable in other developing markets such as those Zain operates in.
Still, the plans could hurt Bharti's shares in the short run. Indian investors have become less forgiving of telecommunications companies generally because of the profit pressures on the industry.
As with all deals, market reaction will depend on the details, particularly which assets Bharti would get for what price as well as how much debt it will have to take on to finance it.
“The market is currently punishing any company that does anything value destructive, even in the short term,” said Kim Eng Securities' Mr. Shah.
Source: WSJ