Corporate Control, Mergers and Acquisitions

ProjectDate of Submission :

Group Number: Group Members:1. Name Roll No. SignatureNoopur Shah

Contents1.Company Profile3A.Business Description3B.Positioning in world and India3C.Product Offerings3D.Share Value4E.Continued Strong Performance 4F.Growth strategies and plans42.Rationale for choosing Telecom industry:53.Rationale for choosing the company54.Acquisition Strategy65.SWOT Analysis76.Rationale behind choosing Idea Cellular87.Synergies expected out of this acquisition98.Synopsis of the Deal109.Structuring the Deal10A.Objective of the Acquirer:10B.Objective of the Target:11C.Sharing of risks11D.Acquisition Vehicle:11E.Post-Closing organisations:11F.Purchase considerations (Form, Amount &Timing of payment):11G.Form of Acquisition:12H.Legal form of selling the entity12I.Tax Considerations12J.Accounting Considerations13K.Representations & Warranties13L.Closing Conditions13M.Common linkages within the deal structuring process:1410.Key Challenges post acquisitions1511.References15

1. Company Profile

A. Business Description

Bharti Airtel Limited is a leading global telecommunications company with operations in 20 countries across Asia and Africa. It was established on July 07,1995. Headquartered in New Delhi, India, the company ranks amongst the top 4 mobile service providers globally in terms of subscribers. Its Chairman is Sunil Bharti Mittal and MD & CEO of India and South Asia is Gopal Vittal. BAL is part of the Bharti conglomerate with businesses in telecom, agriculture, insurance, mutual funds and retail space.The company is structured into five strategic business unitsMobile, Telemedia, Airtel Business, Tower infrastructure services and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh.

B. Positioning in world and India

3rd largest in country wireless operator in the world Largest telecom company in India by number of Subscribers 4th Largest Mobile telecom operator in the world

C. Product Offerings

B2CB2B

Mobile ServicesTelemedia ServicesDigital TV ServicesAirtel BusinessTower Infrastucture services

Cellular mobile service across 20 countries Indian customer and revenue market leader Approx. 251 m wireless subscribers Offers fixed telephony and broadband internet (DSL + IPTV) Customer base of 3.3 m Services provided in 87 cities Pan India DTH operations 7.9 mn customers Coverage across 632 districts Serves as single POC for all telecom Covers 50 countries across 5 continents Owns 42% stake in Indus Towers 11,240 towers across 15 circles

D. Share Value

Bharti Airtel Ltd.As ofSep 09, 2014 3:45PM IST

ExchangeCurrentPrev CloseTodays HighTodays Low52 Week High52 Week LowVolume

BSE1406.05403.20410.80399.95410.80282.10367,889

NSE2406.10403.75410.95399.70410.95281.903,554,074

(Source: Airtel website)Market capitalization is approx. Rs.1,623 billion as on Sep 09, 2014.E. Continued Strong Performance ParticularsComposition

Wireless CMS 21.4%

Wireless RMS31.0%

Total minutes on network carried in Qtr, net of Eliminations284 bn

AssetsRs. 1709 bn

Net DebtRs. 643 bn

Net Debt to EBITDA2.55 times

F. Growth strategies and plans1. Identifying new revenue streams Changing face of growth through M-Com, M-entertainment & 3G.2. Maximizing Usage Increasing the usage through urban & rural drive and by wallet share.3. Expanding customer base- This will be driven by rural strategy.2. Rationale for choosing Telecom industry:Telecom industry in India is the most competitive market in the world which has led to tariff wars among the present 8 operators. As a result of intense competition, revenue growth of operators has been impacted significantly. Highly fragmented industry as shown in below graph has made new customer acquisitions difficult and has increased the cost of acquiring new customers. Thus, if telecom operators plan to roll out their services in new geography, time-to-market will be a critical success factor. One of the ways in which operators can expand their tower portfolio faster is to acquire smaller tower companies that have a small presence in new geographic areas. Even though some form of consolidation has already taken place (see below table) but ICRA expects the trend of consolidation to continue keeping in mind the market conditions.

3. Rationale for choosing the company

Bharti Airtel Limited is one of the leading global telecommunications companies. It is the largest company in India according to its subscribers. The number of subscribers that Bharti Airtel has is only slightly greater than the number of subscribers that its competitors like Reliance and Vodafone each has. This poses a threat for Bharti Airtel to lose its number one position in the country.Also, Bharti Airtel is in number of services, it provides a large range of services. To continuously improve its services and maintain its position in India as well as worldwide, it has recently acquired Zain Africa. According, there is a lot of space for Bharti Airtel to bring in financial as well as operational synergies into its company by either merging or acquiring the companies and maintain its top position.

4. Acquisition Strategy Main goal of Bharti Airtel is to expand their business by introducing new revenue streams, expanding customer base by penetrating into rural areas and increasing the productivity of the capex. Since the revenue of the company has become stable and its is a mature market, the company should now aim for the inorganic growth by going for mergers and acquisitions. Nature of Resources: In telecom industry, in order to cater to new markets, you bound to have proper infrastructure in that market. Hence, such acquisition will involve hard resources. So acquisition of the target firm will be the right strategy. Market conditions: In this case, the potential partners will be rivals. The acquirer already has a widespread infrastructure network and the target will also have its own infrastructure. There are high chances that there will be redundancy of hard resources. Level of Competition: Telecom is a highly competitive industry. From the above observation, the right strategy will be to go for acquisition.

5. SWOT Analysis

Bharti Airtel

Strengths

Biggest mobile service provider in worlds second largest telecom market Airtel has 22.2% market share. Has well-established nationwide infrastructure. Has towers and backhaul all over the country. High brand equity, most visible brand. Superior network quality and reliability.Weakness

High competition in the telecom market- extreme price competition. ARPU had been decreasing. Very high financing cost, Airtel is burdened by $9.7 billion in net debt. Failure of Airtels acquisition of Zain Africa business. Late adoption of 3G and advanced wireless technologies. 3G services were launched by Airtel only in early 2011. The company lacks nationwide 3G license with spectrum in 13 out of 22 telecom service areas. Airtels LTE network for mobile broadband is still confined to only 4 cities in India

Opportunities Untapped voice market 3G and data revenue Airtels 3G subscribers constitute less than 5% of its total subscriber base and hence there is immense room for growth within its existing customers. The whole wireless world is moving towards LTE. LTE for mobile broadband can be a good solution for India where fixed broadband penetration is otherwise low. Immense scope for M&A by companies with less than 50% market share.Threats Hostile and unstable regulatory scenario. This has adversely affected the industry sentiment and the wireless service providers. Spectrum Auctions and Refarming Government of India and TRAI kept a high reserve price for 3G, BWA and the recent 1800 MHz auction. Low tariffs The larger incumbent operators are losing millions of customers to the newer players who attract these customers with their freebies and innovative offers, Mobile number portability.

Idea Cellular

Strengths Strong mgmt team Worldwide service Big image Good network and customer support Latest Technology Cost advantage

Weakness High roaming charges for other network Lack of integrated operations

Opportunities Mergers and Acquisitions Product and Services expansion Untrapped market Cloud computing

Threats Competition with other cellular network providers New small players External chages like Govt. policies, politices, taxes etc Entry of foreign players Mature categories of products

6. Rationale behind choosing Idea Cellular

(Source: Airtel website)As evident from the above charts, we can see that Airtel was facing a severe competition from the other players in the market in terms of number of subscribers and customer market share.For sustain growth and existence in the market, Idea cellular was chosen as the target company to get acquired by Airtel.Idea Cellular has across India wireless operator providing GSM based mobile services. The company had won 3G spectrum in 11 services areas and currently provides 3G services in 20 service areas. The company holds licenses for ILD, ISP and NLD services. Its fibre cable transmission network expanded to 74,000 kms. The company is in the planning stage to implement wireless network and data centres in order to have global presence and make India a new technological arena.

Product Offerings:

1. High-speed mobile broadbrand devices like Android 3G smartphones2. Data services like Idea TV, games, social networking3. Voice Based Services Idea Conferencing Solutions Hosted IVR Toll Free Solutions4. Connectivity Based Services Field Force Automation Solution I-Safe5. Location Based Services

7. Synergies expected out of this acquisition

Airtel wanted to boost its efficiency throughout its operations to stay competitive. Its gowth strategies included introducing new revenue streams, penetration in rural market and maximizing its capex productivity. The combined firm will be able to attain certain operational synergies. These are listed below:1. New revenue streams: a. Airtel 3G smartphones: As Idea was into making Android 3G smartphones, this new revenue source will help Airtel boost its revenue.b. Connectivity Based Services: Field force Automation Solution and I-Safe would act as a new revenue stream.2. Economies of scale: The combined firm will be able to attain economies of scale in the field of networking, games and business services.3. Large customer base and market share: The two companies together would share a high market share and a huge customer base if combined together.

8. Synopsis of the Deal

Acquirer:Acquirer Group:Target:Target Group:Type of Acquisition:

Min Offer Price:Max Offer Price:Exchange Ratio:Post-Merger EPS:Bharti Airtel Ltd. Bharti GroupIdea Cellular Ltd.Aditya Birla GroupAcquisition of Idea Cellular Ltd. which is a subsidiary ofAditya Birla Group on a Stock for Stock BasisRs. 27.13 Rs. 74.30 0.43

9. Structuring the Deal

Postclosing Organisation

Acquisition Vehicle

Legal Form of selling entity

Form, Amount and Timing of paymentKey Deal structural Questions

Accounting Considerations

Form of Acquisition

Tax Considerations

A. Objective of the Acquirer:

Bharti Airtel Ltd. has its growth strategies and plans in place which includes introducing new revenue streams, expanding the customer base by penetrating into rural areas and increasing the productivity of its capex.B. Objective of the Target:

Idea cellular Ltd. has a very little market share in the telecom industry. It wants to increase its market share. Also, the network and infrastructure of Idea cellular is not well spread. The sector offers growth opportunities in both voice and data. Its main goal is to attain first position in Indian market in terms of number of subscribers and customer base.C. Sharing of risks

Risks to Acquirer: Acquirer wants to penetrate into a new market. By combining with the potential partner, the risk of failure will be shared by the partner and acquirer.

Risk to the Target: Targets risk will get mitigated by getting combined with the acquirer as there is a great possibility of threat to it from its competitors due to its low market share and limited presence.

D. Acquisition Vehicle:

It is the legal entity which is required to acquire the target. The various options available are to form a corporate shell, Holding company, Joint Venture, Partnership, LLP, ESOP etc.

On the basis of the our strategy which is to maximise the control and facilitate the postclosing integration, we will form a corporate or divisional structure.

E. Post-Closing organisations:

Organization or legal framework used to manage the combined businesses following the consummation of the transaction (e.g., corporation in our case)It depends on our strategy:Since we intend to integrate with target immediately, following closing implies a corporate or divisional structure.

F. Purchase considerations (Form, Amount &Timing of payment):

CashCash or marketable securities

Non cash forms of paymentCommon equity--Preferred equity--Convertible preferred stock--Debt--Real property

Closing the gap on price--Balance sheet adjustments--Earn-outs or contingent payments--Rights, royalties, and fees

For our acquisition deal, I would like to go for stock payment (stock for stock acquisition) in order to purchase the stock of the target. The advantage of using stock or common equity to purchase is that it will eliminate the need for the target shareholders vote, tax attributes, licenses and may insulate the company from the subsidiary creditors.

G. Form of Acquisition:

Form of acquisition means the way by which the ownership will be transferred. This can take the form of Assets purchase, Stock purchase or compulsory Merger & Acquisition.

We would like to go for Stock purchase as in this the acquirer buys from the Targets stockholders all of the outstanding shares of the Targets stock in exchange of its own shares resulting in the Target becoming a subsidiary of the Buyer. Unlike an asset purchase, the stock purchase structure leaves the existing target and its assets in place, so it is considered to be a change of control rather than an assignment.

For this we will use, B TYPE REORGANISATION

Advantages of choosing Stock for Stock purchase are:

Tax free to the seller Buyer shielded from acquiring targets liabilities No addition of debt on buyers balance sheet No decline in credit rating due to addition of debt

H. Legal form of selling the entity

Legal form of selling the entity will affect the form of the payment and the tax structure. Whether the seller will care about the form of the transaction (i.e., whether stock or assets are sold) may depend on whether the seller is a limited liability company, or a corporation. Since we are acquiring a Corporation and the purchase is the stock purchase so corporations shareholders will be happy as they will be able to get benefit of double tax avoidance.

I. Tax Considerations

Tax impact in M&A transactions is often a zero sum game, where a deal structure that will be tax-beneficial to the Buyer will be tax-adverse to the Targets stockholders.

It determines whether transaction will be taxable to target firms shareholders and how the owners of the combined businesses will be taxed subsequent to closing.Form of acquisition used for acquiring the target is Stock purchase, it will help the seller to avoid the transactions tax applicable.Since there is no tax applicable to seller in our case, there will be no increase in the purchase price offered to them as there will be no need for any compensation.J. Accounting Considerations

The various accounting considerations to be kept in mind during the deal process are:1. The earnings impact of updated contingent pay-out.2. Valuation based on closing date rather than on announcement date3. Goodwill impairment reissues

K. Representations & Warranties

The purchase agreement will usually include ten to twenty pages of detailed statements about the targets business i.e. Idea Cellulers business that will cover all the areas that could potentially create liability for the acquirer Airtel or otherwise reduce the value of targets business. These statements are called representations and warranties and are phrased to require the potential target to describe on disclosure schedules that it prepares and supplies to the Buyer any instances in which the Ideas business deviates from fulfilling its commitments.

Representations and warranties serve the following important functions:

Due Diligence Certainty of closing De Facto Purchase Price adjustment Qualifiers and Carve Outs.

L. Closing Conditions

Most merger and acquisition transactions involve a series of events in which two parties negotiate and sign the purchase agreement which contains pre-closing time period in which the parties gather all of the third party consents and other item necessary to close and once those items are obtained, the money changes hands and the transaction closes.Closing conditions that Airtel should include obtaining employee retention and noncompete agreements. Sellers, who also are publicly traded companies, commonly are driven to maximize purchase price. However, their desire to maximize price may be tempered by other considerations, such as the perceived ease of doing the deal or a desire to obtain a tax-free transaction. Private or family-owned firms may be less motivated by price than by other factors, such as protecting the firms future reputation and current employees, as well as obtaining rights to license patents or utilize other valuable assets. Additional closing conditions subject to negotiation by the parties sometimes include: (1) The occurrence of a Material Adverse Effect to the Target business, (2) The Buyer having received the financing necessary to be able to pay the purchase price (a financing contingency), (3) The Target having received all consents triggered by the deal under its contracts with customers, suppliers and other third parties, and (4) Receipt by the parties of all governmental approvals triggered by the deal.10. Key Challenges post acquisitions

1. Synergies are not attained: As from the Microsoft and Nokia case, it might happen that the synergies that were expected were not attained and then the two companies get compelled to de-merge.

2. Cultural Differences: The different culture of the two companies may pose hindrance.

3. Loss of clients and stakeholders: Due to lack of trust and disbelief, the combined firm might lose its clients and stakeholders hence leading to the decline in its growth.

4. Clashes between employees: It might happen that clashes between the employees of two firms crop up, employees of one firm refuse to work with the others, get reluctant to work under the manager who is from the other organisation.

5. Organisation Structure: After the acquisition, there will be only one CEO, one Chairman, one manager for a project, it will be difficult to decide who will assume the positions.

6. Decline in stakeholders value: It might happen that there the shareholders values get declined after the acquisition.

11. References

http://www.airtel.in/about-bharti/about-bharti-airtelhttp://wirelesstelecom.wordpress.com/2013/11/11/swot-analysis-of-indias-largest-mobile-telecom-operator-bharti-airtel/www.ideacellular.com