After twice failing to merge with MTN, Bharti (32% owned by SingTel) has finally found a way into Africa: by buying the African assets of Zain.
At US$10.7bn in cash, this is not cheap. Zain’s African businesses are expected to earn US$1.3bn this year before interest, tax, depreciation and amortisation; Bharti has offered about eight times that. Vodafone paid a similar multiple for South Africa’s Vodacom. Eight times EBITA seems to be the norm where telco services are underdeveloped but with potential: Vivendi paid this multiple for a stake in a Brazilian telco last year.
Why buy? Africa is undeveloped and poor: Bharti knows how to run a low-cost, high-growth business. More importantly, India’s biggest mobile phone operator needs a new driver for earnings: in India, it has 11 competitors and price wars.
So why is Zain a seller? The usual reasons that allow a deal to be made
Some of Zain’s shareholders need the money.
The Kuwaiti company cannot make serious wagga in Africa. Africa generated about 45% of group revenues in the first nine months of last year but only 10% of net profits.
Bharti’s shareholders are nervous, with prices falling 9% on Monday, afraid that despite its experience in India, Bharti will fail in Africa.
But for SingTel, it will have via Bharti a presence in Africa: a place with potential for explosive growth.