March 31, 2010 / 3:39 AM / 7 years ago

Bharti in $9 billion deal for Zain Africa operations

NEW DELHI/LONDON (Reuters) - Bharti Airtel Ltd (BRTI.BO) clinched a deal on Tuesday to buy most of the African operations of Kuwait's Zain (ZAIN.KW) for $9 billion, making it the No.2 cellular company on the African continent and setting India's biggest carrier a tough financial and management challenge.

The two companies, which entered exclusive talks in mid-February, signed a legally binding definitive agreement in Amsterdam, where Zain's Africa subsidiary is based, Bharti said in a statement.

Bharti said the acquisition -- the second biggest overseas purchase by an Indian company after Tata Steel Ltd's (TISC.BO) $13 billion purchase of Corus in 2007 -- would make it the world's fifth-largest wireless company, with operations across 18 countries and with a total of about 179 million customers.

"This has been an opportunity that we have been waiting for," Bharti Chairman Sunil Mittal told Reuters after signing the agreement in Amsterdam. "This is a landmark deal, a transformational deal, is to my mind a game changing deal between India and Africa."

Zain said in a separate statement that it intended to distribute a large proportion of the upfront net proceeds from the deal to shareholders in the form of dividends, subject to approval and the repayment of its $4 billion revolving credit facility.

"The transaction allows Zain to focus on its highly cash generative operations in the Middle East and to substantially improve its balance sheet," said Zain Chief Executive Nabeel Bin Salamah.

CHALLENGES TO FACE

Bharti, which is 32 percent owned by Singapore Telecommunications Ltd (STEL.SI), selected Zain as its second choice for building a major presence in Africa after it twice failed to finalize tie-ups with South Africa's MTN Group Ltd (MTNJ.J), the continent's biggest operator.

The Indian company is facing ferocious competition at home and betting opportunities in Africa are worth the risks of operating there. As a cost of entry, it is paying what many regard as a full price -- 10 times enterprise value to earnings before interest, tax, depreciation and amortization (EBITDA).

The deal will give Bharti 42 million subscribers in 15 African countries, but must still be cleared by regulators.

In a sign of the challenges Bharti may face, the government of the small central African nation of Gabon weighed in on Monday against the deal, saying Zain Gabon had not complied with regulations and that it reserved the right to take "all necessary measures."

Bharti's Sunil Mittal told India's CNBC TV18 in an interview over the phone from Amsterdam that he did not see any issue with Gabon.

"Not only Gabon, every other country ... I have no doubt there will be tremendous support," Mittal said, adding only a few countries will require specific approvals, which will be filed "in the coming days."

Minority ownership of Zain's operations in Nigeria, the biggest market in the deal, is also in dispute.

South Africa-based Econet Wireless Holdings, which owns 5 percent of Zain's Nigerian assets, is seeking to overturn a 2006 deal by Zain -- then called Celltel -- in which it bought a majority stake in Nigerian mobile operator Vee Networks Ltd, now called Zain Nigeria.

"We're happy to work with our local Nigerian partners. In the coming weeks we'll sit with them and assure them of our strategy for Nigeria," Mittal said in the TV interview.

Bharti director Akhil Gupta told the channel that "sufficient indemnities" were in place in the event of any problems with the transaction.

Bharti was advised by Standard Chartered and Barclays Capital. Zain was advised by UBS and BNP Paribas.

Additional reporting by Svebor Kranjc in Amsterdam and Diana Elias in Kuwait; editing by Ian Geoghegan, Jon Loades-Carter, Sharon Lindores and Andre Grenon

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