Case Study

Bharti Airtel and Zain: A Journey Global Business Review

17(6) 1510–1515
into New Territories © 2016 IMI
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0972150916660643
http://gbr.sagepub.com

Arindam Banik1
Tirthankar Nag2
On the morning of 30 June 2012, two years after the Airtel Zain deal was announced, Mr Sunil Mittal,
the Founder-Chairman Bharti Airtel, was looking forward to the review meeting at their Vasant Kunj
office in Delhi, India with Mr Manoj Kohli, CEO (International) and Joint MD, Bharti Enterprises, who
was in charge of Airtel’s Africa operations.1 Mr Mittal’s long-held dream of foraying into the emerging
market of Africa had finally come true with the acquisition of Zain in early 2010. A journey that began
three years back, went through turbulences and culminated into successful acquisition of Africa’s second
largest telecom company Zain Africa BV’s operations in 15 countries with an enterprise value of US$10.7
billion.2 The 15 countries that Bharti Airtel had acquired from Zain in Africa were: Burkina Faso, Chad,
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 an annual revenue of US$3.6 billion.
Initially, hopes were high with the acquisition. With its billion plus population, vast natural resources
and a tele-density of less than 30 per cent, Africa was expected to be a market for the future and the next
growth engine of the global economy. All Airtel has to do was to establish its brand, execute its business
model and develop its cultural ethos in Africa.
Sunil recalled the long debates that had preceded the decision for acquiring Zain. Everyone
connected with the deal was quite sure that the acquisition would be an efficient means of extending
Airtel’s global footprint and would catapult the company to the league of leading mobile operators
in the world. With a total customer base of more than 185 million, Airtel was within striking distance
to be among the top three operators in the world within next five years’ time from the acquisition, that
is, 2015.
However, even after more than two years of the acquisition, the challenges were many and a decision
needs to be taken on Airtel’s future operations in Africa.
Average revenue per user (ARPU) of African operations decreased by 12 per cent to US$6.5 in
June 2012 quarter compared to that two years back. Per minute revenue also went down by 35 per cent
in the same period leading to 1.70 per cent reduction in operating margin, which was at 25.8 per cent in
the June 2012 quarter. Increasing tariffs were not an option in a highly competitive market. Its upcoming
3G services was yet to contribute significantly to profits and acquiring more 2G circles would lead to
higher debt burden with no promise of quick profitability. The debt to finance the deal was expected

1
Professor and Director, International Management Institute, Alipore, Kolkata, India.
2
Professor (Strategy), International Management Institute, Alipore, Kolkata, India.

Corresponding author:
Arindam Banik, Professor and Director, International Management Institute, Alipore, Kolkata, India.
E-mail: [email protected]
Banik and Nag 1511

to be serviced entirely by its African operations with principal payments also starting to kick in within
a short period of time.
What should Airtel do? Was investment in Africa a well-thought-out decision? Can Airtel compete in
Africa in the long term? These were some of the questions running through Sunil’s mind as he stepped
into the conference room.

The Rise of Bharti Telecom (Mittal, 2008)

In 1976, a young entrepreneur Sunil Mittal had graduated from college in an industrial town called
Ludhiana in India and just started to explore business opportunities. He had a seed capital of `20,000
only. Acutely aware of his financial limitations and, more importantly, the lack of any sort of experience,
he started a small-scale manufacturing and supplying unit for bicycle components. His clientele included
the Hero Group. Within a few years his venture Bharti Enterprises diversified into production of yarn,
stainless steel sheets for surgical utensils. It also began importing and marketing stainless steel products,
brass and plastic products and zip fasteners.
The desire to do something exceptional motivated Sunil to make an attempt to get a Maruti Suzuki
agency for Ludhiana. He failed, but managed to procure a contract from TVS Suzuki for retailing
motorcycles in Ludhiana. His early efforts did not succeed as TVS Suzuki was the right product in the
wrong place. Ludhiana was Hero Honda territory.
Next, he struck upon a novel idea of a portable generator and landed with an agency of Suzuki motor
company to sell their generators in India. By 1984, Bharti was the largest importer of portable generators
in India. The Indian government enforced a ban on import of generators, thereby killing the entire
industry of imported generators.
Following this, Sunil went back to Japan where he had worked earlier. He used to travel widely
searching for inspiration. His inspiration came from an electronics fair at Taipei in Taiwan where he saw
a push-button telephone for the first time. These phones were manufactured by a small company called
Kingtel. He tied up with Kingtel for importing simpler version of those phones into India. That was
how India’s push-button phone industry was born.
A tiny business was then formulated, building and assembling these phones in a garage in Ludhiana.
This business was a reasonable success and Bharti started selling push-button phones replacing the
traditional old rotary phones. There were less than 1 million phones in the entire country. Getting a phone
connection was very tough. The sale volumes were low, but each phone attracted very high margins.
Such phones were a new product in the Indian telecom market and, thus, could sell at a premium.
The phone business lasted for about two years, as the Indian government could now allow a
monopolistic player in the newly founded push-button phone industry. The industry was opened up
to other private sector players. About 57 large business groups, including large companies like the
Tatas, the Birlas, the Thapars, state government undertakings all applied for a licence for this business.
Finally, 20 such business were provided licence to start their phone business in India. To survive
competition, Bharti entered into a technical tie-up with Siemens AG of Germany and became the first
company in India to manufacture electronic push-button telephones in Gurgaon in 1985. It was the
Siemens technology-based Beetel phone.
By 1985, the telecom industry in India had already started on the growth curve. There were many
other small businesses including TVS Suzuki and other agencies. Gearing to face the growing competi-
tion, Bharti started disinvesting all its other businesses and investing into products like answering
1512 Global Business Review 17(6)

machines (tie-up with Takacom Corporation, Japan), cordless phones (tie-up with Lucky Gold Star,
South Korea) and fax machines. By 1991, Bharti Telecom had started shipping its products to interna-
tional markets. The company had signed an Original Equipment Manufacturer (OEM) contract with
Sprint, USA, for manufacture and export of telephone sets.
In 1991, Bharti had `250 million in sales and `50 million in profits. There were other companies
which had started alongside and had started to manufacture switches, EPABX, jelly-filled cables and
electricity transmission. Bharti stayed away from business-to-business products which were sold to only
a few customers and wanted to enter the consumer retail business. But Sunil realized that `250 million
in sales and `50 million in profits was not going to take the company very far.
In January 1992, the Indian government decided to allow private sector to enter the mobile phone
business. In early 1990s this was the period when India was going through the process of economic
reforms. In all, 14 companies got selected in March 1992 and the list included Bharti Telecom to the
surprise of many. The selection was not because Bharti had something innovative, but because of
their technical bid that was considered as one of the most outstanding bids. With very limited capital,
the company had done intensive research and included aerial photography, helicopter photography and
digitized maps of circles in their bid. Sunil had known that this bid was the company’s make or break
moment, so he put in everything. He had taken a leave of absence from business for about six months
and prepared this tender. In 1992, Bharti Cellular Ltd., was incorporated. Bharti formed a consortium
with SFR-France, Emtel-Mauritius and MSI-UK, to bid for mobile service provider licences in Indian
metros. Bharti Airtel was granted licences in all the four metro cities in India—Delhi, Mumbai, Calcutta
and Chennai.
Bharti launched Delhi’s first cellular service under the Airtel brand in 1995, which involved a lot of
effort and investments. The project ended up bringing in revenues of `3 billion against an estimation
of `1 billion. The company, under the leadership of Sunil, had gone all out to provide the best network
services as they were competing with Essar at that time. To grow their customer base, the company had
decided to launch India’s largest single city network with hundred sites which was considered very large
at that time. Thus, Bharti became one of the earlier entrants in this business.
In 1996, Airtel launched mobile services in the state of Himachal Pradesh, the first by any private
telecom company. The real challenge came from the big players. In 2001, BSNL entered, followed
by Reliance and Tata. They came in with all the gusto and changed the scenario. Many of the other
entrepreneurial-led telecom companies collapsed and some were acquired. The rules of the game were
clear: in this business, one has to grow or one gets acquired. There was no space for small companies in
this business and scale is extremely important in telecom, globally.
Bharti made some big bold bets during that time. They outsourced network services and IT. The
choice had sound rationale. They were adding human resources in thousands. The company had
no choice but to deploy new graduates and post them with responsibilities without any training.
Bharti went to IBM and procured IT services from them—right from the notebook on the table to the
most complex piece of IT. The company procured network services from Ericsson, Nokia and Siemens.
These companies were entrusted with the responsibility of managing Bharti’s networks. This left Bharti
free to concentrate solely on customer acquisition, understanding customer requirements, innovation,
delivery of services and developing the brand.
Gradually, the company started gaining customers share, gaining RMS to a point where it garnered
the second-largest market cap in the country in the private sector. From levels of `30, the stock charged
to hit a high of more than `1,000 in 2008. Airtel was able to withstand its profits even in the backdrop of
a pricing war with Reliance since 2003.
Banik and Nag 1513

Bharti Decides to Go Global

The telecom industry in India was displaying the typical characteristics of reaching maturity by 2008.
This was followed by price wars in the telecom sector with the entry of many more private players like
Idea, BPL Mobile, Spice, Aircel and state-run public sector units (PSU) ramping up their capacities in
the maturing telecom market in India.
The impact was clearly reflected on Airtel’s ARPU which registered a decline from `505 in 2005 to
`271 in 2010. The same was the trend in minutes of usage (MOU). Sensing the changing dynamics in
the domestic market, the management at Airtel decided to establish operations abroad.
In January 2009, Airtel launched Airtel Sri Lanka and followed it up by acquiring a 70 per cent
stake in Warid Telecom, Bangladesh.

A Big Gamble?
It was during this expansion mode that Airtel decided to take their bet in the African telecom market.
In May 2008, Airtel began exploring the possibility of acquiring the MTN Group, a South Africa-based
telecom group operating in 21 countries in Africa and the Middle East. Codenamed ‘Project Green’ by
Bharti Airtel and ‘Project Saffron’ by MTN, the two companies and their numerous advisors and bankers
started working on the transaction since the beginning of 2009. After over eight months of discussions
and negotiations, both companies reached an agreement for a US$24 billion alliance to create the world’s
fourth largest telecom company spanning 24 countries and 200 million subscribers.
However, the problem started when the South African government demanded for dual listing of
shares. Prime Minister Manmohan Singh assured South African President Jacob Zuma that the Indian
government would discuss all issues. This was evidently not enough for the South Africans. They refused
to budge from its demand. As the Indian rupee was not fully convertible, it was not possible to go in for
dual listing of shares which allows people to buy shares in the stock exchanges of one country and sell
in the bourses of the other country. But the South Africans wanted assurances for the future, which the
Indian government was not in a position to allow. The Indian government’s stand was that allowing dual
listing needs major amendments to key corporate laws and cannot be done in haste. The deal fell through
after two crucial meetings in South Africa.

A New Beginning in Africa

Sunil Mittal along with his top executive Manoj Kohli, CEO (International) & Joint MD, was determined
to get into the high-potential African market. The next best choice was the Kuwaiti firm, Zain. The nego-
tiations were set in place through 2009 and the deal was finalized in May 2010 with Airtel paying
US$10.7 billion for Zain’s African assets.
The Bharti-Zain deal was not looked at favourably by the government of Congo Republic—they
alleged that the deal broke the local regulations. A dispute about minority ownership of Zain’s operations
in Nigeria also flared up. Nigeria was the biggest market in the deal. Minority shareholder Econet sought
to overturn a 2006 deal by Zain—then called Celtel—in which it bought a majority stake in Nigerian
mobile operator, Vee Networks Ltd., now Zain Nigeria.3 The Nigeria ownership dispute was settled
thereafter.
This time, Airtel got all the necessary approvals from the African governments and Airtel’s vision to
become a global player was set on track.
1514 Global Business Review 17(6)

The Deal Structure

Bharti paid US$8.3 billion upfront and US$700 million after a year. It also took over approximately
US$1.7 billion of Zain’s debts as on 31 December 2009. Of the US$8.3 billion paid to Zain, Bharti had
raised debt from a consortium of foreign banks and State Bank of India with the lead-arranger and lead-
advisor Standard Chartered Bank committing the highest amount—US$1.3 billion, followed by Barclays
at US$900 million. The rest of the co-advisors—ANZ, BNP, Bank of America-Merrill Lynch, Credit
Agricole CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation—
have allocated US$600 million each. State Bank of India had also agreed up to US$1 billion loan in
rupee terms.
The all-in cost for this financing was 195 basis points over LIBOR, which at 2010 LIBOR rates was
approximately 248 basis points. This had led to an annual debt servicing cost of approximately US$200
million, which was expected to be serviced entirely by Bharti’s African operations. No principal repay-
ments were due for the first two and a half years after the deal, that is, till the end of 2012.

Airtel’s Africa Vision

Manoj Kohli was well aware that Bharti cannot treat all 15 countries as a homogenous ‘Africa’. Every
country was different in terms of market dynamics, consumer behaviour, consumer expectation, govern-
ment rules and tax structures. There were 15 countries, and for each country Bharti had to formulate
different strategies, different ways of working towards the customers, simply because customers were
different.
According to Manoj Kohli

In 2010, clearly the number one strategy was RMS (Revenue Market Share) and as Bharti increased revenue
market share, they got more revenues and hence larger share in each country. Concurrently, the company also
focussed on being lean, especially in the areas of network, IT, and BPO. All these efforts were expected
to achieve economies of scale, which would impact margins and improve our EBITDA. We had a goal of
100 million customers by March 2013, $5 billion of revenues and $2 billion EBIDTA.

Penetration rate and market share were the two parameters that Bharti Airtel focused initially. Once
the number of subscribers was expected to increase, it would have provided a significant market share to
Bharti Airtel. Then, the next move for Airtel was to increase the tariff or call charges. In addition, Bharti
Airtel’s decision to expand globally has put the company in huge debt. With the hope of market share
improving, Airtel would get a good opportunity to increase its revenue and reduce its chances of a
takeover.
Bharti Airtel’s success in India can be traced back to its unique business model—a low-cost model
that provided Airtel services to millions of rural customers in India while also making it attractive for the
industry. The challenge that Bharti Airtel faced was how to replicate the low-cost model in Africa. Right
at the beginning of their African journey, Manoj realized that mere duplication of the model may not
yield results. It has to be customized to what individual countries like Nigeria, Zambia, Kenya and
Tanzania required. The objective was to build a superior business model, which could support needs
of African customers.
Bharti Airtel tried to reduce cost by infrastructure duplication or sharing network infrastructure across
service providers. Bharti Airtel’s philosophy had been to share infrastructure even in India. In developing
Banik and Nag 1515

countries like India, it was a waste of resources to have separate towers for different service providers.
In India, they have developed this strategy and have created the largest tower company in the world.
IndusTowers was developed with competitors like Vodafone and Idea. Airtel hoped to follow the same
philosophy in Africa as well. Airtel had sent invites to telcos like Etisalat, Vodacom, Millicom and
Orange to set up a pan-African tower company. Manoj hoped that in times to come they will have very
intensive infrastructure sharing in Africa too.
Bharti Airtel’s entry into the African market has spurred a price war and competition was intense.
By 2012, there was intense pressure on revenues and profitability and efficiency parameters were
all looking down. Ruefully, Manoj still remembered the interview he gave while embarking on their
African project

I don’t think Bharti has come to Africa for a price war. There is no intention like that. Of course we are committed
to affordability. We believe that out of a billion populations here the average tele-density is 20 per cent, which
means 80 per cent people to go for using mobile phone. Many of them are middle-class customers. They are in
the lower income strata of the society. They deserve to get affordable services. Our objective is to put a mobile
phone in the hands of every African. If we have to attain that objective we have to provide affordable services.
While we have no objective of price war, our main focus will be on saving cost. That’s why our infrastructure
sharing idea is very important. I have met the governments in all 16 counties—every government official, every
regulator has welcomed this idea. We will reduce the cost structure of the industry and share that benefit with the
customers. That’s how we will make Africa fully mobile.

With pressure from shareholders and the company being discussed in press frequently, the question
on his mind as he entered the meeting room to face Sunil was ‘What to do with the company’s operations
in Africa?’.

Notes
1. Arindam Banik and Tirthankar Nag wrote this case solely to provide material for class discussion. The authors
do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.
2. US$1 = `44.9550 as on 31 March 2010.
3. Document on Bharti Airtel. Retrieved 9 May 2016, from http://documents.mx/documents/bharti-airtel-
55845644ab21b.html

Reference
Mittal, Sunil Bharti. (2008). Amalgamations MMA Business Leadership Award 2008–09. Chennai. Retrieved
16 May 2016, from http://www.bharti.com/wps/wcm/connect/bhartiportal/bharti/home/about_us/chairmans_
chamber/speeches/amalgamations-mma-business-leadership-award-2008-09