Zain Sale: Remember That It’s Only an “Offer”

* username: rupertbu

After almost a year-long effort to sell the company as a whole or in parts comes the determined Sunil Mittal of Bharti Airtel Ltd with his deep pockets and ambitious plans to finally capture Africa. It’s a nice story that all we beaten down investors want to believe, for sure there’s the unquestionable interest, but what assurance do we have that it will go through? Sadly none.

Kuwait’s Mobile Telecommunications Co., or Zain, and India’s Bharti are set to hold exclusive negotiations until March 25th and by then the final decision will be made. There’s no guarantee the transaction will be consummated, as it remains subject to due diligence and regulatory approval.

It’s worth mentioning that the unsuccessful fate of the Bharti-MTN deal was a result of regulatory hurdles set by the South African government’s treasury. According to sources, the South African government’s pension fund, Public Investment Corp, holds a 21% stake in MTN and the government were under intense pressure to not give a go-ahead to the deal on concerns that MTN’s South African identity, post the deal, would be lost. The treasury insisted that for the deal to go through, the potential merged company should remain domiciled in South Africa and should be listed in both companies, something that was not a possibility under existing Indian laws.

While there seems to be no regulatory threats in Kuwait, shareholder concerns at both Bharti and Zain create obstacles and could yet stop the deal. In India, there is the concern of overpaying as Bharti’s stock price plunged in the last trading sessions breaking support levels. In Kuwait, there is the notion of strategic divergence and the threat of unattractive growth going forward. Not to mention the Zain-Nigeria controversy following the announcement of Econet’s CEO Strive Masiyiwa that Bharti Airtel’s acquisition of Zain’s African assets must exclude the Nigerian unit until an ownership dispute with Econet Wireless Holdings Ltd. is resolved. Zain-Nigeria is an important part of the deal, as it accounted for 16% of group revenues in the nine months to 31 September 2010.

The promising and attractively low penetration levels across Africa (30-50%) might make the deal for Bharti a value trap as Zain has been struggling to deliver value to its shareholders with a 65 million subscriber base that only contributed 15% to the groups net profit. Africa still needs a lot of capital investment as competition intensifies and the average revenue per user (ARPU) has been falling. For example, Nigeria saw ARPU fall by one-third, while revenue and EBITDA drop 17% on a year-on-year basis. Similarly, DRCongo saw ARPU fall from $11 to $8 as a result of higher usage tax and a local recession, with revenues and EBITDA falling 13% and 14% respectively.END