Why would Bharti Airtel pay USD10.7 billion to acquire a loss making entity?

Bharti Airtel (BHARTI IN), plans to add 45 million to its 120 million subscribers by their recent acquisition plans. Bharti believes that they can successfully run a company with small ARPUs (Average Revenue Per User) in a low margin industry by using the same strategy they use in India, the “Indian Model”. This model is applied by outsourcing most of the operating activities, including IT, network operations and more. They see that this model can be applied in Africa as well, hence turning the losses into profits.

Bharti sees itself as a “minute factory”; where they can extract high revenues, even though the ARPUs are low, by producing more minutes. To better understand this model, imagine telecom networks as factories producing minutes, whereby they try to maximize network utilization by maximizing the minute of usage per subscriber (MOUs). MOUs are a function of tariffs, so by gradually reducing the tariffs the consumption of minutes increase.

The USD10.7 billion offer disappointed Bharti’s shareholders and the share price fell after the announcement. Bharti defended their decision by stating that they are seeking less competitive markets than India, higher ARPUs and lower penetrations.

Although the penetration rate in India is 45% and the penetration in Africa is 36%, there is more room for growth in India as 650 million Indians are non-mobile users, as compares to 300 million in Africa only.

Given the profile and track record of Bharti, they me be able to do a better job than Zain; but is it worth USD10.7 billion? We just have to wait and see…

Broadway introduces its latest play “mo ZAIN* Sale.” The play is directed by award-winning Al-Khair Entertainment, starring Bollywood celebrities BSNL, MTNL, and Vavasi, and is written by the mute Bukhary. Cosmetics and costumes done by global icon Barrak MTC.

There is widespread disbelief in the Zain sale and I think it is indeed warranted. I personally don’t believe there is a pending sale. So, what is going on? Is it simply a “Play”?

Well, lets start-off with a flashback on how everything initially started. Zain was trading below 700 fils and trailed the Kuwait Stock Exchange’s rally from its lows. Rumors of an imminent sale of Zain’s African unit increased the stock price to above KD 1.000. Alpha Dinar posted an article declaring the Vivendi deal as a mission impossible. A week later, Zain presumably rejected Vivendi’s offer. We doubted Zain rejected Vivendi, and Zain sells-off from around KD 1.400 back to KD 1.000. Rumors of a majority sale of Zain emerged, and the stock rallied back to the KD 1.400 levels. We recommended that minority shareholders SELL Zain. On September 7th, Zain’s proposed sale was reported to the Kuwait Stock Exchange.

So why do I think this is no more than a Broadyway show? Here you go:

1. Subprime Buyers:

Are we supposed to believe that a couple of Indian state-owned companies, Vavasi- another Indian company with no credibility, and Malaysian Bukhary Group will fetch $14 billions for Zain? I don’t. The companies haven’t even started financing talks with banks while we are being told that the sale is a done deal. Again, this is not true. According to official statements from MTNL and BSNL, “MTNL and BSNL would like to clarify that no view has been taken regarding participation in the said consortium.” Malaysia’s Bukhary Group have said nothing since the announcement and Vavasi Group has a major credibility issue. According to thenational.ae, “Issues have been raised about the lead member of the consortium, India’s Vavasi Group, by a Bahraini government minister and a respected leader of India’s technology industry.”

2. African Taboo:

Isn’t it downright suspicious that we stopped hearing about a Zain Africa sale right after the Zain majority sale news emerged? Mr. Al-Barrak used to continuously update us on how various parties are interested in Zain’s African operations. Why did he just STOP?

The Conspiracy Theory:

So the question is, what are The Owners doing? I have a theory and it goes like this:

The Owners were caught in the subprime mess just like everyone else. The only problem is that they’re a HEAVY weight which entails extraordinary debt balances. These balances were secured by a collateral mainly comprised of stocks: Zain and its siblings. As you know, Zain slumped by nearly 70% to 650 fils while the value of their other shares got hosed. Banks started calling as The Owners started to break loan covenants and the collateral wasn’t enought. The Owners were in a desperate corner. Desperate times call for desperate measures and the rescue plan was to bid up their shares. How?

Entertain bidders for Zain Africa. The bidders, just like “khatateeb” (Arabic for the plural of fiance), formed a long line outside Zain’s offices bidding for the potentially lucrative African business. This helped assauge shareholder fears as far as the quality of those assets and entertained a viable solution for paying down Zain’s debt. The stock goes to above KD 1.000.  Consequently, The Owners other shares all go up with Zain and the value of the collateral on loans The Owners took  significantly increases. Unfortunately, this was a temporary fix as Vivendi pulled out of the Zain negotiations and the stock started to sell-off. How can they hold it up?

Spread rumors of a potential buyer. This worked for the short-term, but in the end someone had to really come and present an offer. If ADIA or Etisalat were the bidders, I’d say wow and good for them. However, a bunch of subprime buyers doesn’t cut it for me. The Owners say it would take four months to close the deal. The current float of Zain shares is a mere 20% only (The Owners holds 46%, Zain has 10% treasury stocks, and KIA has a 24% stake). This ensures the stability of the stock for four months while  The Owners get a much needed break. Banks are kept off the fence as they are thrilled The Owners are allegedly selling for KD2.000. The Owners use this time to sort out their problems and maybe land a real buyer.

I say NO DEAL.

*mo means not. Zain means good/beautiful. Thus, mo Zain means not good.