The world's No. 3 single-country mobile operator, India's Bharti, is already the biggest player in its home country. But further expansion there is problematic: India's mobile market is heavily competitive, and profit margins are slim. So for its next major growth opportunity, Bharti has been looking overseas to the emerging markets of Africa. The company spent two years trying to buy MTN, a major mobile provider in South Africa, but the deal fell through last fall when regulators blocked its $24 billion bid.So when Zain's African mobile operation came up for sale, Bharti acted swiftly; this week has offered a $10.7 billion buyout bid (the deal excludes the assets in Morocco and Sudan). Zain is the Kuwaiti telecom group, which has operations in 23 countries.
With $14 billion in the bank, Bharti has the resources to pull off the deal and make the necessary investments. But there will definitely be challenges.
Turning the Outsourcing Model Upside-Down
In 2003, Bharti had a modest lead in India's mobile market, but its prospects for staying ahead looked dim, especially in light of its well-capitalized competitors like Tata and Reliance. To compete, the company pursued an unconventional growth strategy (at least for India): It relied on partners. Bharti outsourced its network infrastructure to Nokia-Siemens and Ericsson (ERIC); entered a major partnership with IBM (IBM) for information technology services; it even took strategic investments from SingTel and Vodafone (VOD).
The strategy worked incredibly well: Bharti was able to scale its growth and focus its energies on marketing and branding. It now serves, 122.8 million customers, up 38% over the past year, according to its investor presentation. And in the most recent quarter, the company posted $2 billion in revenues and sported juicy EBITDA margins of roughly 40%.
While Bharti's success should continue, there are serious obstacles on the horizon. The unsaturated markets for new mobile customers in India are mostly in rural areas that have much less profit potential. At the same time, competition there continues to heat up -- especially from NTT DoCoMo and Norway's Telenor -- which has led to price wars. The Indian government also plans to allow existing users to switch cell numbers to other carriers.
To deal with these concerns, Bharti has made moves to leverage its massive platform. For example, the company teamed up with Axa to provide financial services and there is a big deal with Wal-Mart (WMT) to roll out retail operations across India.
Despite all this, Bharti is still mostly a mobile company. This is why Africa is so attractive. Its population is large and growing, political stability is generally increasing, and there is a willingness to allow capitalism to flourish.
Is Zain the Right Choice?
Over the past five years, Kuwaiti telecom Zain has been aggressive in building its mobile footprint, spending more than $12 billion on acquisitions and infrastructure. Yet even with a customer base of 40 million, Zain's African operations have been problematic. Competition is some markets such as Kenya and Nigeria has been has been fierce. But EBITDA margins have been in the 30% range.
Then again, the Zain purchase is an opportunity for Bharti to leverage its outsourcing model, which should help improve results by lowering equipment and administrative costs. The company also will bring its marketing know-how to bear in the African markets.
No doubt, there are many risk factors; it's never easy to move into a competitive foreign market. But Bharti got to the top of the Indian mobile market and stayed there because it was willing to take big bets. If it wants to continue its growth path, a deal for Zain's African assets seems ripe to make it happen.
Forex for Beginners
Learn about trading currencies and foreign exchange transactionsView Course »