Will Bharti get along well in Africa?

In many ways, Bharti's repeated attempts to make a large overseas acquisition were looking almost desperate. It tried to acquire MTN, the largest telecom group in Africa in 2008, but the deal fell through. It tried again the next year and came up with a very complicated merger proposal which not many understood enough. The deal was almost inked, but the South African government vetoed it. Maybe to bury the disappointment, Bharti went ahead and acquired a majority stake in a puny telecom company in Bangladesh. And finally, with the bid to acquire Zain's African assets, Bharti has a big enough target to satiate its ambition.

Zain's African assets have been on the block for a while now. Bharti overlooked it earlier, probably because it was preoccupied with the bigger MTN. The last known bid for Zain came last year from a Delhi builder nobody had heard about, who claimed they are leading a consortium which included a Malaysian billionaire and the Indian telecom PSUs BSNL and MTNL. This announcement kicked off a media debate about whether the PSUs should sink their cash into Africa. The top management at BSNL and MTNL appeared bewildered for a while, before announcing that they were never even approached for the deal.

Bharti's rationale for the deal is fairly straightforward. It may be the market leader in the second biggest telecom market in the world, by number of subscribers, with good profitability and cash flows. But competition is intensifying, with several new players lowering the call rates dramatically to gain entry.

Entry barriers in the telecom industry have been lowered like never before. Capital equipment is getting cheaper by the day and transmission towers can be leased in a jiffy. There are vendors ready to lease entire networks and maintain them, besides providing all kinds of technology support. These days all a telecom company has to do is to acquire customers and think of ways to encourage them to spend more time talking or doing any of the innumerable stuff now available over the phone. With enough capital and the ability to absorb losses for several years, the new entrants can easily challenge the market leaders.

In the absence of significant product differentiators, Bharti and the other established players will have to depend only on better known brands and superior marketing reach to defend their market share. That is risky. Life will be even more difficult when number portability kicks in, which the minister says will happen by May this year. Bulk of the higher-spending, post-paid customers will be ready to switch to the cheaper operators as the hassle of changing the number will not deter them anymore.

It makes good sense for the likes of Bharti to seek other markets before it gets tougher in the home market. The trouble is, there are not many markets with high growth potential which are open for foreign operators. China, the biggest market, is closed for foreign firms. Even if the country opens up in the future, the top firms are very dominant and it will be tough to challenge them. Markets in the rest of emerging Asia and Latin America also have established players who are unlikely to sell out. That leaves Africa as the only market where there is potential for growth and where established businesses are available for sale.