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…
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