You are on page 1of 5

LONDON (MarketWatch) -- The majority of Nigerians don't own a mobile phone.

Yet it is in
that country that the fate of Indian mobile giant Bharti Airtel's $10.7 billion African adventure
will play out.

Bharti, an Indian conglomerate with interests ranging from telecommunications to insurance, last
month bought the African operations of Zain, a Middle East-based cell phone company that is the
second-largest player in Africa. The deal gives Bharti, an operator with no meaningful assets and
little operational experience outside of India, 42 million new subscribers in 15 countries and catapults
it to the fifth position worldwide right from the start. It also gives them entrée into markets with nearly
half a billion potential customers.

The purchase is the Indian company's ticket to one of the telecoms world's last unconquered
territories, as only a third of Africans own a mobile phone and large swathes of the continent remain
without network coverage. The timing is right, too. Just as Bharti is struggling with increased
competition and weakening margins at home, access to Africa is a chance to ride another wave of
exploding subscriber growth.

At least that's the optimistic view. The Zain deal is also a gamble fraught with regulatory, political,
financial and operational risk. Each of the 15 markets Bharti is entering will present its own particular
challenges. Having to handle them all at once will make managing the acquisition even more
difficult.

These markets are not, however, all equal. Industry observers said Bharti's success or failure in
Nigeria, the continent's most populous country, would likely be the make or break of its African
adventure.

Reuters

"Nigeria is clearly the most valuable asset they're acquiring because of the size of the population
and the low penetration rate. It's the only market where Bharti can start to imagine the kind of growth
they're used to in their home market," said Nick Jotischky, principal analyst at Informa Telecoms.

"So it is crucial they succeed there."


Nigeria: a test for Bharti's business model

In Nigeria, however, Bharti won't enjoy the leading position it's used to back home.

In fact, with a market share of 20%, according to Informa, it will be the country's third-largest player,
behind South Africa's MTN Group (ZA:MTN 11,999, +304.00, +2.60%) and West African specialist
Globacom. It will also need to fend off a bevy of smaller players, for Nigeria has a total of 11
operators currently battling it out for the 55% of the population -- roughly 68 million people -- who still
don't own a mobile phone.

Not only is Nigeria a crowded market, but it is also already causing regulatory headaches for Bharti
because of a dispute over the minority ownership of the Zain assets it's acquired there.

Once regulatory issues have been ironed out, however, Bharti has several key cards to play in
Nigeria, analysts said.

Its most powerful, they explained, is a business model -- honed over years of operations in India --
that allows it to make a profit from customers spending as little as $5 a month, and based on two
main principles: outsourcing of all activities except sales and marketing and network sharing.

"Bharti's business model in India is high volume low cost," explained Gartner's Mumbai-based
Kamlesh Bhatia. "They have outsourced most operations, including IT and network management
and they share infrastructure, like towers, with other operators. They will seek similar economies of
scale with vendors in Africa"

Infrastructure sharing, widespread in India, could quickly take off in Africa, too, where the cost of
expanding cellular coverage through an often rough and sparsely-populated landscape has left
many rural areas isolated.

Overall Bharti's business model will likely need only minor tweaks in Africa, said Bhavya Khanna, a
Singapore-based analyst with ABI Research, noting that it shares many features with India, including
a similar income profile, a largely rural population with concentrations around some urban
megacities and an overwhelming preference for prepaid mobile access.

And where the tweaks are needed, it's likely they will be identified quickly. Bharti is used to operating
in a complex environment thanks to its experience dealing with India's 22 different telecom circles, or
regions, with very different characteristics.
"Bharti comes with 10 years of experience of delivering a single service across fragmented cultural
and geographic boundaries; an experience that many other single nation operators may not
possess," Khanna said.

At the end of the third quarter, Bharti, headed by Indian billionaire Sunil Bharti Mittal, had a total of
122 million subscribers in India, spending, on average, $4.90 a month. Bharti also operates in Sri
Lanka and has recently acquired operations in Bangladesh.

Lower prices, new services

Perhaps the biggest advantage of Bharti's low-cost model is that it allows it to wage a price war on
its competitors, should it decide to.

"I would suspect that Bharti will think there's room to lower prices. Prices are generally higher in
Africa than they are in India. I would expect them to be aggressive there," said Informa's Jotischky.

Network reliability, branding and customer service, the three key attributes of Bharti in India, are
likely to constitute the other branches of its strategy to gain market share.

One of the services it will likely highlight in Nigeria is a mobile banking product that allows
subscribers to transfer money by text message.

Zain's service, which is called Zap and has built up a following in Kenya, will likely be advertised
more heavily and introduced in new markets once Bharti takes over, said Howard Wilcox, a senior
analyst at Juniper Research.
And with a number of new subsea cables connecting the continent soon, Bharti may also decide to
expand from running a mobile operation into data and broadband services, since it has experience in
that business back home, said Said Irfan, analyst at IDC.

Consolidation likely across Africa

Although Nigeria is likely to capture the bulk of Bharti's energies at first, the operator will quickly
need to make decisions about its strategy in its other markets, especially considering seven out of
15 reported losses in the third quarter.

In some, such as the Democratic Republic of Congo, Zambia, Malawi, Niger, Congo, Chad and
Gabon, it is the market leader. In Kenya, Tanzania, Madagascar and Burkina Faso it's no. 2, in
Sierra Leone it ranks third and in Ghana fourth, according to data provided by Informa.

Bharti's position in each market, the profitability of its operations and the number of rivals, will
determine its strategy. But it is likely that in the consolidation game just starting across the continent,
it will try to acquire, but also divest assets.
"I wouldn't expect those 15 markets to look nearly the same come two to three years' time," said
Jotischky, who predicted that the Sierra Leone business could be sold, as well as Gabon, if
regulatory issues there persist.

Finding an acquirer for some of its assets shouldn't be too hard, as many telecom operators,
particularly from India and China, are eager for a piece of the action in Africa. In February, a
consortium involving China Unicom (CHU 13.81, -0.20, -1.43%) bid $2.5 billion for the former state
telecoms monopoly in Nigeria.

Overall, analysts said Bharti probably has two years to sort out the African business, with some
operations, such as Kenya and Uganda, where it's been loss-making for years, requiring urgent
attention.

"I think the focus will be on improving competitive position and operational efficiency in the five
markets, Nigeria, Uganda, Kenya, Ghana and Madagascar, which together account for 60% of the
population of the 15 countries in which it operates but only 39% of earnings before interest taxes
depreciation and amortization," said Piyush Choudhary, analyst at Indiabulls Securities.

But at least after years of trying to gain access to Africa, Bharti has more than a toe in, though Zain
wasn't its first choice.

The Indian group tried twice to tie up with MTN, the continent's biggest player, but the merger failed
over regulatory issues. It preferred MTN because it's much larger, with operations in 21 countries,
and is a leader in five of the meatier markets.

While it was criticized after closing the Zain deal for perhaps paying too much for the assets, industry
experts said it was too early to tell.

"We don't know yet. We will know in three years. It's a number's game. And knowing Bharti, they've
certainly done the math," said Jotischky.

Aude Lagorce is a senior correspondent for MarketWatch in London.

You might also like