Abstract
Case Synopsis
The case focuses on a series of strategic and organizational challenges facing Bharti Airtel for running their newly acquired African operations. 1 Especially, the acquisition and its fate is under question. The main characters responsible for this African deal retrospect on the basic reason for this deal and the way forward.
In the case opening, Sunil Bharti Mittal, the promoter of Bharti Airtel is meeting a member of Bharti Airtel’s top management who is heading the Africa operations. In this meeting, the top management of Bharti Airtel must explore the basic reasons of investing in the African business, the competitive advantage the company may have gained through this deal, the dynamics of a price sensitive market like that of African countries and, finally, must decide the way forward.
The Bharti Airtel-Zain Merger case focuses on a wide range of issues pertaining to international business, international finance and strategy. The case primarily highlights the challenges faced in the event of transnational mergers and acquisition.
The case begins with a brief history of the Bharti Group as a small-town manufacturing and selling unit to importer of generators. It goes on illustrating the company’s gradual shift towards telecommunication sector as manufacturer and importer of push-button phones. The case describes the various strategies that Bharti adopted to sustain the changes in the competitive environment and general environment, yet develop a low-cost model to reach the remote corners of rural India and grow as a market leader in the telecom sector.
In the next section, Bharti’s strategic leap into the international business in search of new and emerging market and in their bid to realize the internationalization dream becomes evident when it ventures to takeover African telecom giant Zain having an operation spread across 15 countries of the continent, including countries like Nigeria, Kenya, Congo and Uganda.
The subsequent section deals with the financial aspects of the deal. The deal, being 100 per cent debt-driven, is a high-risk contract, and is a subject matter of in-depth analysis from the international finance perspective.
The final section of the case talks about the challenges that Bharti encounters in operational, managerial and financial fronts while operating in the 15 different price-sensitive countries with varied regulations, laws, culture and economic status.
The case concludes with Mr. Sunil Mittal reflecting on the options for turning the fortunes on the company in African countries.
Case Use/Teaching Objectives
The case was written to be used in a general management course in international business, and focuses particularly on internationalization of a single-country business. However, it could also be used in courses focusing on strategic management.
Among the key teaching objectives are the following:
to explore the operation and growth of a low-cost model in the telecommunication sector, to illustrate why and how firms internationalize, to understand mergers and acquisitions and taking decisions based on post-merger scenario, to analyze whether it is prudent to finance a takeover through high debt-driven deals. To understand the risks associated with such deals. Are these risks worth taking given the international scenario?
Positioning in the Course
The case is intended for Master of Business Administration (MBA)-level students, though it can be targeted towards undergraduate Bachelor of Business Administration (BBA) students also.
The case is recommended for use in courses on international business or strategic management. Typically, the case would achieve its objectives if it is used after the first half of the course is over.
Relevant Readings
Assignment Questions
The following are potential assignment questions:
What were the reasons for Bharti Airtel to invest in the African market? Has Bharti gained any competitive advantage through this deal? Why did Bharti Airtel move to a price-sensitive market like Africa? Is it because of high internal competition in its domestic market or is it to realize its internationalization dream? Given the circumstances and weak performance, should Bharti Airtel exit Africa or continue to find ways of making the deal work.
Teaching Plan
This is an easy case to teach in an MBA class. The case provides a good context of emerging market economies and price-sensitive markets. I walk into the class with some slides having colour snaps of Bharti Airtel’s products in India and African countries. It provides a great introduction for the class and also helps them understand between telecom as a service compared to bundled phone and service offerings which are in vogue in some countries. My 80-minute class would be structured in the following way:
Case Setup
10 minutes
Understanding Bharti Airtel
10 minutes
Debating reasons to enter Africa
20 minutes
Assessing competitive advantages gained
20 minutes
Exploring pressure in Indian market
10 minutes
Making the deal work and action plan
10 minutes
Giving the students a snapshot of Bharti Airtel, I ask the students that if they were part of the top management in 2010, would they have taken the decision to go into Africa? This warms up the class and students usually split into two groups, one for and one against. At this stage, a voting can be done. Interestingly, in most classes there would be a third large group, who prefer to avoid emerging markets citing the reasons of price sensitivity and customers with very low per capita income. I usually dissuade the third group, highlighting the opportunities that emerging markets present with market size and demographics.
The discussion always boils down to the fact that the entry into African markets presents a very attractive market opportunity but is fraught with challenges and so must be handled carefully.
Case Analysis
This leads to the opening question in the case:
Bharti Airtel was looking forward to internalize mainly for three reasons (Cavusgil, Knight & Riesenberger, 2014):
to gain ownership-specific advantages which include skills, capabilities, knowledge, relationships and physical assets that are a basis for the firm’s competitive advantage, to gain location-specific advantages which involve geographic advantages including population, demographics, natural resources and access to inexpensive capital, to gain internalization advantages which include control derived from internalizing foreign manufacturing, distribution or other value chain activities. Africa’s size excites many investors. It has a population of over 1 billion, like India, but the geographical territory is 10 times larger. That has resulted in very poor spread of networks there. The beauty of Africa is that spectrum is not a problem there. Unlike India, where one is starved for spectrum, there are large spectrum allocations in Africa, which makes a big difference. Second, the penetration remains very low (47 per cent on average in 2008). That is, Africa is still underserved and the pricing is high. However, experts expected the Middle East and African mobile market to grow by 6 per cent year on year in 2009 (in US dollar terms). In 2009–2014, the experts expected the Middle East and Africa (MEA) mobile market to benefit from penetration growth (from 56 per cent in 2009E to 95 per cent by 2014), GDP expansion (the international monetary fund (IMF) expects a per capita US dollar GDP growth Compound annual growth rate (CAGR) of 6.7 per cent in 2009–2014 in the region) and an average 2.4 per cent per annum population increase (IMF). They expect the MEA mobile market value to exceed US$100 billion by the end of 2013.
2
These forecasts indicate huge potential of growth in subscriber base as well as revenue for Bharti Airtel. Third, Bharti Airtel’s success in providing a low-cost model in rural India and spreading very deep and wide networks in very difficult terrain has given it the confidence to venture out to underserved countries of Africa and replicate the India model. Fourth, for Bharti Airtel, net revenue in home country has fallen drastically in spite of huge measures. African market is quite different from India, but huge population and less competitors give Airtel an opportunity to reposition its brand globally and expand its business.
The US$10.7 billion takeover by India’s Bharti Airtel is going to place Bharti strategically above many of its peers in India and abroad. This deal at US$10.7 billion is the second largest acquisition ever by an Indian company. Tata Steel’s takeover of Corus was at US$12.2 billion. Bharti-Zain will have a combined subscriber base of 171 million, making it the seventh largest telecom company in the world. Zain deal also gives Bharti access to 15 African countries. Zain is a market leader in most of its operations, with 50–75 per cent market share in seven countries and 25–50 per cent share in six countries. Bharti Airtel will benefit from the deal by way of diversification of revenues and growth opportunities offered by the under-penetrated African market. The Mergers and Acquisitions (M&A) is likely to help Bharti in a number of ways: First, the 15 countries that Bharti Airtel acquired from Zain in Africa were: Chad, Burkina Faso, Democratic Republic of the Congo, Republic of the Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia. Zain Africa in 2010 had 42 million subscribers and annual revenue of US$3.6 billion. Among all the countries, Malawi had strong market share which gave a huge base for Bharti Airtel to expand its market in various geographies. With huge population base and high average revenue per user (ARPU), Gabon had good market opportunity for Bharti Airtel, both in terms of market share and revenue. Zambia operation had the highest profit after tax (PAT) before the deal and significant market share of 70 per cent, which gave Airtel scope to improve its market. African market is quite different from India, but the huge population and less competitors give Airtel an opportunity to reposition its brand globally and expand its business. Second, the penetration rate and market share might be the two parameters that Airtel will be focusing initially as Zain has good penetration rate in number of countries. With Bharti Airtel, Zain can build a synergy to be number one player in Africa. Once the number of subscribers increases, it will give a significant market share to Bharti Airtel and, then, Airtel can increase the tariff or call charges in its daily usage. With better market share, Airtel has a good opportunity to improve its revenue and reduce its debts of the takeover. To develop the discussion beyond financial issues, which may not be the core focus area of some participants, and to develop a more strategic focus, the following can be discussed as a precursor to the next question. Differentiate between internalization and internationalization: Internalization means the process by which firms acquire and retain one or more value-chain activities inside the firm, especially, retaining control over foreign operations and avoiding the disadvantages of dealing with external partners. The value chain activities are repeated for foreign operations. In case of internationalization, the value-chain activities are spread across different countries.
It is a fact that internal competition was intensifying over time, leading to loss of revenue and market share. Bharti’s plan to expand globally could be a result of the cut-throat completion in the domestic Indian market. So far as the price-sensitive market is concerned, Bharti’s success in India to provide low-cost service as well as generate revenue has given it the confidence to foray into a price-sensitive market. Moreover, Africa is an untapped, underserved and emerging market. Bharti has opportunities to grow. At the same time, it cannot be denied that the acquisition of Zain Africa has transformed the 53-year-old Mittal into a global entrepreneur. It has made Airtel the fifth largest mobile operator in the world, with a footprint in 19 countries. The internationalization dream of Sunil Mittal could have been a major drive behind the global expansion.
Conventional logic dictates that Bharti Airtel should exit the Africa business. However, it is not easy for a company like Bharti Airtel to exit from this debt-financed deal with huge losses. The African venture has been a flagship acquisition for the company and is expected to place the company among the major telecom players in the world. If Bharti Airtel wants to keep the business, it should focus on increasing its operational efficiency and reaching its target. Also, the company should understand that Africa is not homogenous in nature and issues in each country should be addressed differently. The class would be divided between both the views, with their own arguments in favour of them—cutting losses versus internationalization and sustaining it.
What Happened
Five years after the acquisition, in March 2015, Bharti Africa had losses of US$585 million, with a revenue of US$4.2 billion. The subscriber base touched only 76.2 million at the end of March 2015 (Live Mint, 2015).
In early 2016, Bharti Airtel’s Burkina Faso and Sierra Leone segments, with a combined annual revenue of €275 million, were sold to Orange of France (Business Standard,2016). Some analysts expect more segments to be sold, though Sunil Mittal stated that ‘We remain fully committed to Africa and will continue to invest in the growth of our operations’ (The Economic Times (ET) Telecom, 2016).
Manoj Kohli had been quite successful in Africa and he had been promoted to the position of the Managing Director of Bharti Enterprises. He resigned from this position in 2015.