In search of wisdom...

One of the best penetrating opportunities for the global telecom players is the telecom market in Africa. In Asia, Europe, North America, the telecom sector is approaching a saturation point. The growth in these areas will be comparatively slower. The companies always look for the maximization of profit, whether it may be through cutting down of cost or increasing the sales. If the market reaches a saturation point then there is no opportunity to increase the sale. And if the company cannot decrease the cost then it will try either to diversify or to expand it grip in the global market. If the areas like North America, Asia and Europe are already in a saturation point then the next growing market for the global player will be Africa continent. Some of the major players in the telecom sectors of Africa are MTN, Safaricom, Zain, Vodacom, STC etc.

Since the processes of liberalization and privatization have been taken into consideration by African countries such as Uganda, Tanzania, Nigeria, The Sudan, South Africa and Kenya, their telecommunication infrastructures have improved drastically. Many African governments have developed their telecommunication infrastructure by privatizing their former state-owned enterprises. So these open up the stage for global players to perform in it. Africa has become the fastest growing mobile-network market during last five years. The mobile user base has increased to more than 82 million in Africa. A survey by Ernst & Young shows that between 2002-07, the industry grew by 49.3 percent as opposed to Asia which recorded a 27.4 percent growth. This report’s estimate growth of the industry almost doubles that of Brazil which stood at 28 percent in the same period and is almost seven times the growth of France which grew at 7.5 percent over the same time. Even there was a report by The World Bank in which it mentioned that Afro-nations like Kenya have 95% of mobile network penetration and coverage gap of only 5%. Thus making it an attractive market to lure some of the major player from the world. Let’s think a bit over this scenario. Why the Afro mobile market is developing so late and faster than any area that used to be at the same period of time. In 2004, only 6% of the African citizen owned mobile. The supply side was much higher than the demand side. And the prices dropped, but made the African mobile network market a huge potential market for the global players. They produced low cost and user-friendly phones and network plans to attract more and more customer so that the company can increase its customer base. But there some other criteria or which we also call as external environment of a company which affects a company to operate in that area. The Law of Land also affects the company to design its operation in a country. They may be the tax-policy, the FDI policy of the government, the policy regarding and regulating the telecom sectors etc. Because of these regulations, there are many Afro-nations like South Africa which hold a huge potential market. In South Africa, there are only three players in telecom network market.

The heavy tax burden on both the operator and consumer is the major challenge for the industry, with an average taxation on the operator’s profits standing at 30%. For example, in Kenya, people pay tax of 26% on mobile communication and the operator pay the remaining 4%. The total tax paid is 30%. But still the government of these nations opines that the industry is highly profitable, despite of the fact that return on investment could be delayed due to poor infrastructure. The Afro-nation doesn’t have the apt infrastructure or the geographical hindrances as well as the population is scattered. The main problem lies with the electric infrastructure. The company has to keep more than 2000 standby generators because of frequent power failure. On of the company operating in Kenya, Safaricom spends over KShs 171 million on diesels due to lack of power supply. This makes the cost of investment much high in comparison to the other area. The operating cost of the company is high in this area because of frequent power cut and even the tax rate is also high, thus bringing down the profit of the company. But it may be the future scenario of these countries which lures the global players. The company may sustain the loss in the short-run but it may earn profit in the long-run. Because the economy of Afro-nations are growing at a remarkable rate and the infrastructure are also gradually increasing. So it may in the long-run be aptly developed so as to favor the network industry. Moreover this is the entry level of the network sector in Africa as it is developing but once it get saturated the threat to entrants decreases because if they enter in to the segment, they will not find any extras to lure the customers.

Bharti-Zain Deal

“Zain’s profitability is lower than Bharti despite average higher spending by its users. However, as per an estimate only one in two Africans holds mobile phone and with Zain having a strong presence in most of the countries in Africa, Bharti is well set to dream big in terms of global ambitions.”

On 11th February, 2010, Sunil Bharti Mittal, on behalf of the management of Bharti, confirmed that it is in an exclusive talk with Zain Telecom for buying the African asset of Zain (excluding Sudan and Morocco) for $10.7 billion. He declared that the company is going to raise a debt of $9 billion to finance its acquisition of Zain’s Africa operations. And the rest amount of $1.7 billion would be met from the cash reserves of the Bharti. The share price of Bharti- Airtel was Rs.311.85 on 11th February, 2010 on the date of declaration of this deal. The investor became pessimistic on this deal and with the bearish mood they sold out their holding shares. This behavior pushed the price of the Bharti-Airtel down to Rs. 272.8 in the first week of March. When asked by a Media Person about this reaction of shareholders, Mr. Mittal replied that it is obvious that when a company makes an acquisition, the share price of that company falls who acquire and the share price of that company rise which is acquired. Now let us analyze this behavior of share-holders. The company when acquire another company, it not only become the owner of the assets of the company but also he become liable to pay-off the debt or the liability of the company. So the acquiring company has to pay the liability from his own pocket and thereby decreasing the Profit and the EPS. So the share holders feel insecure of their holdings of shares and they try to sell out their holdings. Whereas on the counterpart when a company is acquired, the shareholder feel secured that the outstanding liability would paid off, a new and better management is going to run the company and bring it back to track. The company will earn profit in the hand of new management and give a better return on the investment. So the shareholders show a characteristic of bearish on the shares of acquired company. For this reason the share holder are bullish on the acquired company and bearish on the acquiring company.

After the declaration by the company of this deal, there were many rumors that rolled in the market and the printing media as well as the electronic media. Many analysts termed it as a forced marriage or this deal has black futures etc. They were of this view because they felt that the Bharti- Airtel is paying much higher than the actual value. Even the S&P revised its rating on the Bharti- Airtel share price. Some of their views were:

• It felt that there is higher rate of business risk on the Zain Deal which Bharti may have to bear.
• It revised the ranking of Bharti share and rated as negative credit watch.
• With the product portfolio of Safaricom, Zain is bound to make losses in the longer run.
  

The impact of this rating by S&P on the share price of Bharti would that the rate on borrowing by the Bharti Airtel may increase. But after the rating provided by the S&P, Anand Sharma, Minister for Trade and Commerce, on behalf of Government of India said that if an Indian Company is trying to take the essence of Indian Trade to world market then GOI would back such acquisition. Coming back to the point that whether the Bharti groups is over-paying for Zain deal? And because of this will the stock come under more pressure?