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February 24, 2010
Bharti's announced takeover of Zain's African operations for $10.7bn appears to be a solid investment from a business point of view. The transaction is largely driven by the combination of Zain's potential to generate revenue and growth in key national markets in Africa, and by Bharti's ability to improve operational efficiencies and generate profits. Whether that translates into a clear and decisive victory for Bharti remains to be seen.
On the positive side, Zain Africa's assets include operations in 15 mostly densely populated and under-penetrated sub-Saharan countries, translating into an immediate potential for tremendous growth. As of Q3 2009, all but two of Zain's operations in the region were in countries with a mobile penetration of less than 50%, and six of these countries had a mobile penetration rate of less than 25%.
Nigeria stands as the biggest prize in Zain's portfolio. In the first nine months of 2009, the country contributed 33% of Zain Africa's 41.9m subscriptions and 35% of the company's $2.8bn revenue in the region (See Exhibits 2 and 3).
Exhibit 1: Zain Africa revenue breakdown by country for first nine months of 2009
Total= $2.8bn
Source: Pyramid Research, Zain
Exhibit 2: Zain Africa subscription breakdown by country for first nine months of 2009
Total = 41.9m
Source: Pyramid Research, Zain
In some critical ways, Nigeria will present a tough challenge for Bharti, which is counting on its proven cost-cutting abilities to make the Zain acquisition a profitable one. Zain Nigeria already is a low-cost operation - it already outsources many of its functions, it has negotiated favorable terms with vendors, and it has already reorganized its distribution and slimmed down its workforce. Finding additional cost savings could prove difficult for Bharti.
Cost savings aside, Bharti also will have to contend with some negative issues regarding market perception of its new property. Zain Nigeria has not yet recovered from a string of rebrandings, strategic misfortunes and network capacity issues, and will still be facing these challenges in the immediate and medium-term future.
The key to Bharti's success in Nigeria will not lie in cutting costs; instead, the operator will have to support existing efforts to expand its network in rural areas to generate subscription growth, roll out targeted services across segments to retain and attract clients, target the youth and enterprise segments to generate value, and develop data services to mitigate the decline in voice revenue. These tough challenges will ultimately determine just how wise Bharti's African investment turns out to be.
— Badii Kechiche, Associate Manager
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