Airtel's Africa foray becomes uphill battle

Airtel Africa has experienced a bumpy ride since it acquired Zain’s African assets for $10.7 billion (€8.1 billion) in 2010.

 

Upon entering the market, the operator sought to cut prices and costs in an effort to increase its market share and compete with the established players. However, Airtel has encountered a number of setbacks, including the recent legal victory by Econet Wireless in Nigeria and a significant decline in its market share in Kenya, which could turn its African expedition into a nightmare.

 

A recent ruling by the Nigerian High Court found that Bharti Airtel’s ownership of Zain’s Nigerian operation was null and void because Econet Wireless was not consulted on the sale. As a result, Airtel Nigeria must change its name and reinstate Econet’s 5% shareholding in the operator.

 

In response to the decision, Econet has announced…a $3.1 billion damages claim against Airtel. This threat will place a dampener on Airtel’s expansion initiatives in Africa, and could affect Bharti Airtel as a whole as its Nigerian operation accounts for 9% of the company’s consolidated profits.

 

Airtel Africa can’t get distracted by legal battles, and must keep its focus on its core business of maintaining and growing its African operations. However, the possibility that it will have to pay $3.1 billion in damages to Econet will seriously affect its network rollout plans in Africa.

 

There is already evidence of this happening, with Airtel reporting that its African capex fell by 14% year-on-year in 3Q11. In addition, media reports have indicated that Airtel’s Kenyan operation is 12 months behind schedule on its 3G rollout plans and coverage goals, and it is experiencing similar delays in its Ugandan operation. Airtel has offered no explanation for these delays.

 

Airtel is also coming under pressure from the Nigerian regulator, which has ruled that network operators must improve the quality of their service or they will be prevented from signing up new subscribers. Airtel’s main competitor in Nigeria, MTN, has responded to this ruling by announcing that it will invest $1.4 billion over the next year to expand its network.

 

 

 

In Kenya, Airtel’s market share fell to 14% as the operator lost 202,970 subscribers between 1Q11 and 2Q11. In Nigeria, Airtel experienced a similar setback, with its subscriber base falling by 145,000 over the same period.

 

Despite these setbacks, Airtel’s revenues from its African operations increased by 16% year-on-year to reach $1bn at the end of 2011. Over the same period, the operator’s ebitda increased by 62%, and its ebitda margin increased from 19.1% in 2010 to 26.7% in 2011.

 

Airtel’s varying experiences in Africa demonstrate that emerging markets provide considerable rewards for operators, but also come with significant risks. When looking to enter these markets, operators and investors need to be aware of the risks involved, and must make contingency plans in the event that they become a reality.

 

Operators’ contingency plans should include crisis containment strategies, which need to ensure that significant setbacks do not cause investors and consumers to lose confidence in the operator. If this occurs, it can cause a downward spiral that is difficult for operators to break out of.

 

Before acquiring an existing operation or entering a new market, every operator conducts a market assessment study and goes through a rigorous due diligence process. However, it is often the small issues that become a crisis. As a result, operators need to carefully assess the risk factors that they could potentially encounter in a market, and evaluate and manage the risks accordingly.

 

Airtel was obviously aware of the legal battle that it inherited when it acquired its Nigerian operation, but it failed to recognize that the matter could become a major issue.

 

The ruling by the Nigerian High Court against Airtel shows that emerging markets are developing, and that the rule of law and ownership of investors is being protected. Econet Wireless was long regarded as the minnow in the legal battle with Airtel, and was fighting over a clause in the original shareholder agreement that gave it the option of first refusal for the remaining equity held by local investors.

 

Another example that could result in a similar reversal and restoration of ownership comes from Libya, where LAP Green is seeking to have its 75% stake in Zambian national network, Zamtel, restored after having it forcibly removed by the government amid allegations of irregularities and corruption during the sale. LAP Green has indicated that it will take the matter to the international court in The Hague.

 

When looking to enter emerging markets, operators and investors must proceed with caution and ensure that all eventualities and risks have been identified and assessed. Airtel’s issues in Nigeria highlight that the operator may not have been as thorough in its due diligence as it could have been when it acquired Zain’s African assets.