- In 2010, Bharti Airtel entered into a $10.7 billion deal to acquire Zain Telecom’s African operations in 15 nations. It was a bold move but challenges soon cropped up.
Let’s take you back to 2010. The Indian telecom sector was facing its biggest crisis—a corruption scandal in the government over allocation of airwaves for free, one that resulted in a notional loss of ₹1.76 trillion to the exchequer.
It was also a year of great optimism. Bharti Airtel Ltd, India’s largest telecom operator back then by the number of subscribers, became even more ambitious. Cash rich, the company wanted to expand beyond India and set its eyes on Africa, a continent where telecom services were under penetrated.
On 30 March 2010, Bharti Airtel entered into a $10.7 billion (about ₹48,000 crore) deal to acquire Kuwait-based Zain Telecom’s African operations in 15 nations. It was estimated to be the largest ever telecom takeover by an Indian firm at that time, and the second-largest by an Indian entity after Tata Steel’s acquisition of the British-Dutch Corus Group.
Soon, challenges confronted Airtel’s growth safari and the company struggled for the first six to seven years, burdened with both high debt and losses.
By 2013, Airtel Africa—which included the holding companies (Bharti Airtel International (Netherlands) BV and Airtel Africa Plc) and other operational firms—were sitting on a net debt of $10.7 billion. The ambitious targets that the company had initially set, such as 100 million subscribers from 42 million at the time of acquisition, and $5 billion in revenues from $3.6 billion in 2010, had to be reconsidered.
Many concluded that the acquisition, which seemed bold in 2010, was in fact a bad bet. Even Sunil Bharti Mittal, the founder and chairman of Bharti Enterprises (Bharti Airtel is the flagship company of Bharti Enterprises), perhaps thought it was a mistake.
On a December evening in 2017, Mittal poured his heart out to a gathering of entrepreneurs in Delhi.
“We all must have made lots of mistakes…If you pin me down to one, I would say in 2010, our decision to go to Africa was a bit rushed and that has taken six-seven-eight years and a lot of resources and my personal time to fix that,” he told the gathering.
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The Africa operations became positive on a profit before tax level for the first time in 2016-17. And the business only got stronger since.
The holding company’s debt has shrunk to $550 million as of July 2022. Airtel is today the No. 1 telecom service provider in four African countries and No. 2 in nine of the 14 countries where it still operates—MTN Group Ltd is Africa’s largest mobile network operator. Airtel Africa is a profit-generating multi-billion-dollar business, which is listed on the London Stock Exchange and is part of the Financial Times Stock Exchange 100 Index (FTSE 100).
“My goal is to be No. 1 in as many markets as possible,” said Olusegun Ogunsanya, managing director and chief executive officer (CEO) of Airtel Africa, who took on the role in October 2021. “We intend not to take on any further debt at the holding company level and pay off the remaining debt of $550 million before March 2024 and take on local currency debt,” he added.
So, how did the company turn around? There’s no one reason and like Mittal said, took dogged efforts—not just from him, but from many executives.
But first, let’s take a peek into the complex African market and why Airtel struggled for these many years.
Many markets
The African customer base was far lower than that of India. However, they were spread across multiple times India’s geographic territory.
With large distances between settlements, the urban areas were more congested and rural areas were thinly populated, leading to skewed deployment of networks, so much so that tower infrastructure was absent in some rural areas.
Not only were the markets culturally different from India, the African countries were different from each other as well. Political instability of governments in some countries and instances of insurgency contributed to the problems. Besides, inflationary and regulatory headwinds in other countries created another set of challenges.
“Africa wasn’t just one market—it was 15 countries, each with its own regulatory regime, own currency, market evolution and dynamics. Clearly, India or any one model was not going to work there,” said Raghunath Mandava, the former CEO of Airtel Africa who was at the helm between January 2017 and October 2021.
Airtel’s initial strategy was to drop voice tariffs to net more consumers. It didn’t move the needle. While the company increased capex to build towers to improve service coverage, revenues remained low.
Redesign thinking
The fix began with a strategy re-think.
Mandava parked himself in each of the 15 countries for a week before taking on the CEO’s role.
“In 2016, we took a pause. We froze the capex for a year, redesigned the network for each country with 4G in mind, and then swapped the entire network with single RAN technology which allowed us to give 2G, 3G and 4G through software upgrades,” he recollected. “The initial investment was higher but we knew it was foolproof for the next five to seven years.”
RAN is short for Radio Access Network—the technology connects individual devices such as mobile phones to other parts of a network through radio connections.
The distribution model for selling SIM cards changed, too, from large distributors who needed high capital to smaller franchisees.
While the network redesign provided huge incremental capacities with low marginal costs, thereby helping grow revenue and profitability, the distribution model created young entrepreneurs who helped proliferate the company’s reach.
Meanwhile, the service and distribution costs reduced with rising use of digital channels for recharges and mobile money. The tariff plans also changed. Customers could get multiple times their data quantity by paying about 50% more and the plans were adopted readily, thereby increasing the average revenue per user (ARPU).
On the management side, cultural integration became a priority; local hiring was ramped up.
“I wouldn’t even meet a few of them (other executives) for a drink unless it was a multicultural team. So, integration and respect were key and no one felt they are isolated,” Mandava said.
As of June 2022, the Africa business had 3,700 full-time permanent employees encompassing 35 nationalities.
“The Board backed us completely. With 4G across the network, we were far ahead of the competition. We became a big data brand and the customers started coming in,” Mandava said.
Between 2016-17 and 2021-22, the number of 4G sites as a percentage of total sites increased from 1% to 88%—in absolute numbers, from 217 sites to over 25,215 sites. The customer base shot up from 77 million to 128 million in the same period.
With more customers, data and voice usage increased; revenues rose. So did earnings before interest, tax, depreciation and amortization (EBITDA).
The company’s efforts at cost reduction across operations and increasing efficiencies also started to show results.
Like we mentioned earlier, the Africa operations turned positive at the profit before tax level in 2016-17. The year signalled the beginning of the turnaround.
Incidentally, this was also a year of great disruption in India’s telecom market. Billionaire Mukesh Ambani launched Reliance Jio with free voice and bundled data services.
“At the corporate and strategic level, we were looking at India and Africa with equal concern and equal attention,” Akhil Gupta, vice chairman of Bharti Enterprises, recollected. “While we did lean on India to benefit from its experience, Africa was run quite independently. In fact, this was when the golden period started in Africa,” he added.
The debt job
Around 2016-17, Airtel Africa’s net debt stood at $7.5 billion. While the holding company held $5.9 billion in debt, the operating companies held just $224 million. Additionally, lease liabilities totalled another $1.2 billion.
How did Airtel Africa reduce its debt?
The majority of the debt being parked at the holding company meant that the holding company was taking the brunt of high leverage. Airtel’s management decided to sell its towers across all African countries and lease them back to reduce costs. Airtel also decided to move out of two markets—Burkina Faso and Sierra Leone—by selling them to the competition for about $800 million. This led to a debt reduction of over $3.1 billion.
“When we saw things improving on a sustainable basis, we felt that Africa had to stand on its own. Hence, we decided to list it,” Gupta said.
Airtel Africa Plc was listed on the London Stock Exchange on 29 June 2019. Pre-IPO investments into the Africa operations of over $1.45 billion and IPO proceeds of $680 million were again channeled towards reducing debt. The proceeds also gave the India operations the much-needed arsenal to fight stiff competition from Reliance Jio.
Net debt fell to $2.9 billion by March 2022, while the holding company reduced debt to about $1 billion.
“We paid off $450 million in July 22, against the outstanding bond of $1 billion, payable in 2024. Our endeavour will be to look for opportunity to further reduce the debt, as and when possible,” said Jaideep Paul, chief financial officer at Airtel Africa.
Airtel Africa CEO Ogunsanya said that the company intends to take on local currency debt in the operating companies across countries and repatriate the money in dollar currency to the holding company to reduce the risk of devaluation. High inflation in top African markets such as Nigeria, Zambia and Malawi have forced governments to devalue currencies to curtail the impact of inflation.
Airtel Africa has continued reporting encouraging results this year. In the quarter ended June 2022, it reported a $178 million profit after tax, a 25.3% jump from $142 million during the same quarter last year. Revenues grew 13% to $1.2 billion. The carrier’s free cash flow rose by 10.3% to $473 million. Its customer base stands at 131.6 million.
Mobile money & more
The turnaround firmly in place, Airtel Africa is ambitious again.
“We don’t want to be No. 2 forever,” declared Ogunsanya. “We’ve developed a clear strategy that is working on six pillars—network, distribution, data, money, cost reduction and people,” he added.
Plans are now afoot to list the mobile money business in the next three years, which Airtel Africa operates under Airtel Mobile Commerce BV. This is the company’s financial services arm and includes a network of Airtel Money kiosks— customers get assured money anytime.
The company has a tie up with Western Union so that money remitted from overseas reaches consumers directly through the branch. In the process, the carrier created a massive network of 16,000 branches and 53,000 kiosks as of March, 2022. The network handled transactions worth $18.9 billion as of the quarter ended June 2022.
Mobile money active customer base rose three times to 27.6 million as of June 2022, generating revenues of $160 million.
In 2021, Airtel Mobile Commerce raised over $550 million by selling minority stakes to investment firm TPG’s The Rise Fund, Qatar Investment Authority, Mastercard and Chimera Investment LLC.
The company has now secured a payment service bank licence in Nigeria—this allows the carrier to ramp up offerings around current and savings accounts, payment services, as well as debit and prepayment cards, Ogunsanya said.
A third line of business is data centres, expected to come up in some countries. Meanwhile, Airtel Africa also plans to monetize 65,000 kilometers of fibre it has deployed across the continent—spare capacities could be leased to third parties.
In short, Airtel’s Africa story may just get more interesting from now on. While India has many more subscribers and higher revenues, Africa has less competition. Cut-throat pricing wars leave behind deep scars in India. They won’t in Africa.
The growth safari, for now, may continue because of newer services.
“I believe we can dig deeper into the 14 countries with many digital properties which we can introduce. And 5G will come—it’s just a matter of time,” vice-chairman Gupta said.
Elsewhere in Mint
Vidya Mahambare & Praveen Kumar explain why feelings of prosperity are likely to be the highest in Gujarat. Dhruv Garg writes on the conundrum Indian online gaming firms face. Kirit P. Solanki & Sumit Kaushik tell what can speed up India’s Amrit Kaal journey.
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