Local hirings may be key to smooth Zain takeover

Bharti Airtel can successfully integrate Zain Telecom’s Africa operations with itself if it minimises the number of expatriates in top positions and taps local talent instead, according to an official who was earlier the chief strategy officer of Zain and the co-founder of Celtel International, the erstwhile avatar of Zain’s Africa business.

India’s largest telecom company by revenues and number of subscribers will also have to work hard to cut Zain’s costs because power shortage and poor infrastructure make it costlier to run telecom operations in Africa compared to India, the official, Terry Rhodes, said in a meeting with HSBC Securities and Capital Markets.

“To operate successfully, it is important to understand the dynamics of each country (in Africa), including differences in culture, language and especially regulations. Bharti would do well to put in place as few expatriates as possible and have most of its top management from Africa,” he was quoted as saying in a report by the broking firm.

Bharti is in negotiations to buy the Africa assets of Kuwait’s Zain. The two companies are widely expected to make an announcement this week, possibly as early as Wednesday, after the Kuwaiti company holds a board meeting. Bharti Airtel announced on Sunday that it has arranged $8.5 billion from the State Bank of India and a group of foreign banks for funding the proposed acquisition.

“For a continent that is known for multiculturalism and wide ethnic and linguistic heterogeneity, a CEO with local roots will help navigate relationships with external stakeholders and remain culturally sensitive to employees. On the other hand, Bharti Airtel can transfer key employees from their Indian business for operational responsibilities with the agenda to transplant Bharti’s best practices to Zain operations,” said Alok Shende, Ascentius Consulting’s principal analyst.

Mr Rhodes, who was Zain’s chief strategy officer earlier, believes that Zain Africa’s operating strategy needs to undergo a transformation to ensure better returns. “A change in management approach at Zain from growth and spending to growth and cost control could work positively for Bharti,” he said. A spokesman for Bharti Airtel said he did not wish to comment for the story.

According to an analyst closely tracking the Zain-Airtel discussions, Airtel can bring down operating expenses at the telco by $500 million annually once the deal is through. Zain Africa’s EBITDA for 2009 was $1.1 billion with revenues of $3.6 billion. “If Airtel transports its minute factory model and enters into aggressive outsourcing tie-ups as it has done in India, it can improve EBITDA by $500 million,” he said on condition of anonymity. The minute factory model attempts to maximise network utilisation. To achieve this, service providers reduce call rates to benefit from higher usage.

It’s a strategy that Bharti Airtel has faithfully followed in the hyper-competitive telecom market. “While Bharti has mastered this (minute factory) model, pricing usage structures tend to be driven by industry dynamics rather than operator-specific strategies. Initially, we believe that it is unlikely that Zain’s African operations will replicate the model completely, opting instead for gradual adoption,” HSBC analyst Rajiv Sharma, who authored the report, said.

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