Record Overseas Acquisition Spree Will Test Mittal's Bharti `to the Hilt'

Bharti Airtel Ltd., India’s largest mobile-phone company, said its record overseas acquisition spree will test the operator “to the hilt” as it expands in 17 nations while earnings decline at home.

“All of us at Bharti are acutely aware that the challenges are immense,” Akhil Gupta, deputy chief executive officer of parent Bharti Enterprises Ltd., told reporters in New Delhi yesterday. “To make inroads in Bangladesh, Sri Lanka and 15 countries in Africa would test all our experience and learnings of the past 15 years to the hilt.”

Billionaire chairman Sunil Mittal is attempting the second- biggest overseas acquisition by an Indian company with a $9 billion purchase of Zain’s African assets. Bharti’s profit declined last quarter as it added users at the slowest pace among India’s seven-largest operators.

“It’s a long-term play for Bharti,” said Girish Raj Sankunny, an analyst with IFCI Financial Services Ltd. in Mumbai. “The African market hasn’t seen the kind of explosion India and China have seen in the last few years, but whatever benefits are going to come from the deal, Bharti’s going to be negative on the net income part of the balance sheet for two years.”

The carrier based in New Delhi yesterday reported fourth- quarter profit fell 8 percent to 20.6 billion rupees ($461 million) after the nation’s phone companies cut prices to compete in the world’s second-largest wireless market. Sales rose 2.3 percent to 100.6 billion rupees.

‘Toughest Quarter’

“This industry has always been tough, and will always be tough,” Gupta said. “Very clearly, though, this last quarter, in terms of the intensity and the irrationality, has perhaps been the toughest.”

In Bangladesh, where Bharti paid $300 million in January for a 70 percent stake in Abu-Dhabi based Warid Telecom Group’s local operations, Bharti has 3 million subscribers and ranks fourth compared with market leader Grameenphone Ltd.’s 24 million, according to the Bangladesh Telecommunication Regulatory Commission.

To win more customers, Bharti will expand coverage from less than a third of the country’s population by signing new network capacity contracts, Chief Executive Officer Sanjay Kapoor said.

Bharti fell 1.5 percent to 293.80 rupees in Mumbai yesterday, while the benchmark Sensitive Index lost 1.8 percent. The stock is the third-worst performer in the past 12 months in the 87-company Bloomberg World Telecommunications Index, which has gained 17 percent in the period.

Africa Competition

The purchase of Zain’s African assets will pit Bharti against Vodafone Group Plc, the world’s biggest carrier, and MTN Group Ltd., the continent’s largest operator. Bharti and MTN failed for a second time last year to complete a $23 billion merger. The two companies will compete in five countries, including Nigeria, the largest African nation by population and mobile phone subscribers.

Bharti is working as quickly as it can toward completing the acquisition of Zain’s operations, which would make Bharti the world’s fifth-largest wireless company by customers, Mittal said in a statement.

“These African operations are not startups, it’s not that we are taking on something which is a greenfield,” said Gupta, who estimated annual capital expenditure in Africa to be at least $800 million. “I do expect there is a tremendous scope for optimization of costs, and operational efficiencies. Give us some time.”

Congo, Gabon

Bharti must negotiate with regulators in all 15 countries where Zain has operations before taking them over. The company plans to rebrand the businesses and locate its headquarters in Nairobi, Kenya, Gupta said.

The Republic of Congo’s telecommunications ministry said April 13 that it may block the transaction because Zain did not provide adequate advance notification about the deal. The government of Gabon said March 29 that it disapproved of the transaction, without providing more information. Zain is yet to resolve a lawsuit involving an ownership dispute about its operations in Nigeria.

“We don’t see Nigeria as a serious matter, and in any case, we have in our legal documents enough indemnities and warranties,” Gupta said.

The takeover is the largest by an Indian company since Tata Steel Ltd. paid $12.9 billion for Corus Group Plc in 2007.

To contact the reporters on this story: Ketaki Gokhale in Mumbai kgokhale@bloomberg.net; Mehul Srivastava in New Delhi at o msrivastava6@bloomberg.net.

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