Bharti confirms $10.7 billion bid for Zain Africa assets

NEW DELHI (Reuters) - Bharti Airtel began exclusive $10.7 billion talks to buy most of Kuwaiti telecom Zain's African cellular assets, the Indian firm's third try to gain a foothold in a continent that offers the last opportunity for major subscriber growth.

Bharti, controlled by billionaire chairman Sunil Mittal, said on Monday an agreement for exclusive negotiations with Zain lasts until March 25 and any deal was subject to due diligence and required regulatory approvals.

The move by Bharti, which is 30 percent-owned by Singapore Telecommunications Ltd , follows two failed attempts to agree a $24 billion deal with South Africa's MTN Group .

Bharti has been hunting for emerging market assets as its home turf becomes fiercely competitive. New entrants into the world's fastest-growing mobile market have triggered a vicious price war which has seen some call charges slashed to a fraction of a U.S. cent. Bharti posted its slowest profit growth in more than three years for the December quarter.

"The competitive pressure in the Indian telecoms sector is so high that players such as Bharti will have to redefine themselves and look for overseas expansion," said Rishi Sahai, director at M&A advisory firm Cogence Advisors "Chances of a deal happening this time are very high unless some regulatory issues come up."

Shares in Bharti slumped more than 7 percent, losing around $2 billion of their market value, in a slightly weaker Mumbai market <.BSESN> amid fears the Africa deal may prove expensive.

Africa represents about 62 percent of Zain's 64.7 million customers, but only 15 percent of its group net profit.

"It's going to be a big challenge for Bharti to make money out of Zain's African assets and some may think it's not a value acquisition, but the key factor is there are not enough sellers available in the global telecoms market," said Sahai of Cogence.

Zain's board has approved the sale to Bharti, a person familiar with the issue said on Sunday.

Standard Chartered is among advisers to Bharti, while UBS is advising Zain, sources said.

EMERGING POWERHOUSE

Zain, with its African and Middle East businesses, had been considered a natural target for Bharti, which has thrived in an Indian market with low incomes and tariffs and a heavily rural population -- characteristics shared by African nations.

"In 3-4 years, the Indian operations will be saturated and they need new markets," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi.

Mobile phone penetration in half of Africa's countries was below 40 percent as of August, and a dozen countries had penetration below 30 percent, according to a research report.

Last month, Bharti agreed to buy 70 percent of Bangladesh's Warid Telecom from Abu Dhabi Group for an initial investment of $300 million.

Offloading the African operations, excluding those in Morocco and Sudan, would mark a strategic reversal for Zain, which has spent more than $12 billion expanding in Africa since 2005.

"It's a good deal with a win-win situation for both parties," said Naser al-Nafisi, general manager of Al Joman Center for Economic Consultancy in Kuwait.

"For the Kuwaiti side, it's a company that is reducing its debt and will focus more on the Middle East. Zain is balancing between the interests of their lenders and shareholders."

Zain will use the proceeds to pay back debt and distribute cash dividends to shareholders, Zain Group Chairman Asaad al-Banwan told Kuwaiti daily al-Seyassah on Monday.

Zain pulled back from an expansion spree last year and rejected an offer from France's Vivendi for its African assets.

Bharti put forward the "most compelling offer" for the assets, but there were other suitors who could come back if no deal transpires, the person familiar with the development said.

Indian brokerage Batlivala & Karani Securities said Bharti's move was "directionally positive" due to challenging conditions at home, but the deal's valuation looked expensive.

It said Bharti was valuing the Zain assets at 9 times EV/EBITDA and 13,000 rupees ($280) per subscriber. It also said Zain has net debt of about $5 billion, though it was not clear how much of that would be transferred to Bharti's books.

With 119 million mobile users in India at end-2009, Bharti accounted for 23 percent of the market, but it faces increasing competition from newcomers such as Norway's Telenor and Tata Teleservices, part owned by Japan's NTT DoCoMo <9437.T>.

(Additional reporting by C.J. Kuncheria in NEW DELHI, Ami Shah and Pratish Narayanan in MUMBAI, Sumeet Chatterjee in BANGALORE, Ema Goman in KUWAIT and John Irish in DUBAI)

(Editing by Ian Geoghegan)