The Global Economic Impact of Private Equity Report 2008 - World ...

Based on this strong foundation of mutual trust, the investorand the management embarked on a close workingrelationship to position Bharti for accelerated growth andenhanced competitiveness. Among the most importanttasks on the post‐investment agenda were: systematicallybenchmarking the company’s performance against itscompetitors; meeting the listing requirements for an eventualIPO; rationalizing the corporate structure to enhance theefficiency of management decision-making; strengtheningcorporate governance by changing the composition andpractices of the board of directors and attracting additionalinvestors. While differences of opinion inevitably arose duringthe course of this collaboration, both sides remained focusedon the common goal of enhancing shareholder value, whichled to an exceptionally productive relationship.Think big – A pan-India telecoms, rather than Bell NorthBefore Warburg Pincus became involved, Mittal’s visionwas for Bharti to become the “Bell North” of India, i.e., thepremier telecoms company in North India. But WarburgPincus saw this as a sub‐optimal strategy that would limitBharti’s growth to one of India’s poorest regions, and activelypushed Mittal to consider implementing a more ambitiouspan‐India vision. As Pathak recalled: “At the time, a$200 million market capitalization was considered big.It was inconceivable for most entrepreneurs to think ofa billion‐dollar company. We believed that it was right forBharti to aim high.” When asked later in a Wall StreetJournal interview about Warburg Pincus’ role in Bharti’sgrowth, Sunil Mittal said succinctly, “Warburg Pincus letus think big.” 11 The pan‐India vision became the blueprintof the company’s expansion, and was one of the criticaldecisions that shaped Bharti’s destiny as India’s leadingtelecoms service provider.Winning the race – growth by acquisitionAlthough both the investor and the entrepreneur sharedthe same vision on Bharti’s future, they differed on howto achieve the goal of a pan‐Indian telecoms company.Bharti’s management was deeply suspicious of growthby acquisition, and wanted to follow the firm’s historicallysuccessful strategy of building the businesses from theground up. Warburg Pincus, on the other hand, was acutelyaware that the race to become the first pan‐India telecomsfirm was time‐sensitive and victory would only be achievedthrough acquisitions. After considerable discussion, Bhartiproceeded to make a number of acquisitions designed toexpand the company’s geographic footprint while continuingto implement its organic growth strategy.In 1999, Bharti completed its first deal by acquiringJT Mobile’s operations in Karnataka and Andhara Pradesh,two category A circles in South India, and home to numerousinformation technology companies. The following year, inAugust 2000, Bharti acquired Skycell’s mobile operation inChennai, the capital of the southern state of Tamil Nadu,and the fourth largest cellular market in the country. Withthese acquisitions, Bharti more than trebled its number ofsubscribers in a little more than a year. A third acquisition in2001 gave Bharti control of Spice Cell’s network in Kolkata,the capital of the eastern state of West Bengal. With thisacquisition, Bharti had successfully established a strongfoothold in all four corners of India.This rush to complete the acquisitions depended heavilyon Bharti’s access to capital. For the 2001 acquisitions,for example, the company raised an additional $200mfrom Warburg Pincus and an equal amount from SingTel,Singapore’s world-class telecoms provider. “We basicallyprovided Bharti with an equity line of credit,” explainedPrasad. “Having the money ready when I needed it waspriceless,” Mittal added. By the end of 2003, with 43 millionmobile customers all across India and a 23.5% market share,Bharti had become the clear market leader in India’s mobiletelecoms sector. 12 (See Exhibit 4A, 4B for Bharti’s mobilefootprint in 2001 and 2003 respectively.)Rationalizing the corporate structureIn 2000, the corporate structure of Bharti Tele‐Venturescould best be described as disorganized and inefficient.As the holding company for the mobile businesses, BhartiTele‐Ventures comprised four companies that had beenpatched together with little forethought to efficiency. 13 Forexample, Bharti Cellular was the original mobile companythat had the Delhi licence; Bharti Telnet operated a fixed‐linebusiness in Madhaya Pradesh and a mobile business inHimachal Pradesh; Bharti Mobinet operated cellularoperations in Kamataka and Andhra, and Bharti Mobileoperated cellular business in Chennai. This ad hoc structurehad developed as a function of the sequential licensingprocess and acquisitions, rather than with an eye to efficientcorporate decision‐making. The shareholding structure ineach of the four companies also was fragmented to the pointof confusion. For example, Bharti Cellular, the firm’s flagshipDelhi operator, was only 51% held by Bharti Tele‐Ventures;the remaining 49% was held by British Telecom (44%),Telecom Italia (2%), and New York Life (3%). The other threecompanies were held by different sets of strategic investorsalongside Bharti Tele‐Ventures (see Exhibit 5A for BhartiTele‐Ventures corporate structure in 2000).Warburg Pincus made the case to Bharti managementthat this structure was problematic on at least three fronts.First, it was confusing to public investors, which would bedetrimental when the time came to price the anticipatedIPO. Second, the patchwork of companies and multitudeof names undercut Bharti’s objective of establishing uniformbrand recognition. Third, having a large number of strategicinvestors was bound to create conflicts of interest (see nextsection), and at a minimum, balancing the different objectivescould distract management focus from the singular objectiveof growing the business. With these shortcomings in mind,Warburg Pincus strongly urged Bharti to clean up thecorporate structure.11“Heard in Asia: Look beyond its stock price to gauge Bharti’s potential”, The Asian Wall Street Journal, 30 April 2002.12Figure as of 30 June 2007.154 Case studies: Warburg Pincus and Bharti Tele‐VenturesThe Global Economic Impact of Private Equity Report 2008