Bharti Airtel is in exclusive talks to buy for $10.7 billion in cash most of Kuwaiti telecom group Zain's African cellular assets, the Indian firm's third attempt at gaining a foothold in a continent that offers a last opportunity for major subscriber growth.

Bharti, controlled by billionaire chairman Sunil Mittal, [ID:nSGE61E02X] and Zain said on Monday the exclusivity period runs until March 25 and any deal is subject to due diligence and regulatory approvals.

Mohamed Al Kharafi, chairman of Kuwait's Kharafi group, which owns 11.47 percent of Zain through one of its units, told Indian television he was confident a deal would go through and that an all-cash transaction was planned.

The move by Bharti, which is 30 percent-owned by Singapore Telecommunications Ltd , follows two failed attempts to agree a $24 billion deal with South Africa's MTN Group .

Bharti has been hunting for emerging market assets as its home turf becomes fiercely competitive. New entrants into the world's fastest-growing mobile market have triggered a vicious price war which has seen some call charges slashed to a fraction of a U.S. cent. Bharti posted its slowest profit growth in more than three years for the December quarter.

The competitive pressure in the Indian telecoms sector is so high that players such as Bharti will have to redefine themselves and look for overseas expansion, said Rishi Sahai, director at M&A advisory firm Cogence Advisors.

Chances of a deal happening this time are very high unless some regulatory issues come up.

However, Bharti's share price slumped more than 9 percent at the close of the Mumbai market, wiping around $2.4 billion off the firm's market value and marking their biggest daily fall since Oct. 6, amid fears that the Zain deal may prove expensive.

Bharti is offering a high price. Zain's board should bite their hand off, said a London-based telecoms banker, who is not involved in the deal.

They are probably thinking they need to get a deal in Africa before anyone else that has ambitions there.

Kharafi said if the deal goes ahead Bharti aims to pay $10 billion in April for the African assets of Zain, which have $2 billion of debt on its books, and the remaining $700 million by the end of the year.

Africa represents about 62 percent of Zain's 64.7 million customers, but only 15 percent of its group net profit.

Zain's board has approved the sale to Bharti, a person familiar with the issue said on Sunday. [ID:nLDE61D02H]

Standard Chartered and Barclays are advisers to Bharti, while UBS is advising Zain, sources said.

EMERGING POWERHOUSE

Zain, with its African and Middle East businesses had been considered a natural target for Bharti, which has thrived in an Indian market with low incomes and tariffs and a heavily rural population -- characteristics shared by African nations. [ID:nDEL57155]

In three to four years the Indian operations will be saturated and they need new markets, said R.K. Gupta, managing director at Taurus Asset Management in New Delhi.

Mobile phone penetration in half of Africa's countries was below 40 percent as of August and a dozen countries had penetration below 30 percent, according to a research report.

Last month Bharti agreed to buy 70 percent of Bangladesh's Warid Telecom from Abu Dhabi Group for an initial investment of $300 million.

ZAIN TURNS SELLER

Offloading the African operations, excluding those in Morocco and Sudan, would mark a strategic reversal for Zain, which has spent more than $12 billion expanding in Africa since 2005.

It's a good deal with a win-win situation for both parties, said Naser al-Nafisi, general manager of Al Joman Center for Economic Consultancy in Kuwait.

For the Kuwaiti side it's a company that is reducing its debt and will focus more on the Middle East. Zain is balancing between the interests of their lenders and shareholders.

Zain will use the proceeds to pay back debt and distribute cash dividends to shareholders, Group Chairman Asaad al-Banwan told Kuwaiti daily al-Seyassah on Monday.

Zain pulled back from an expansion spree last year and rejected an offer from France's Vivendi for its African assets.

Bharti put forward the most compelling offer for the assets, but there were other suitors who could come back if no deal transpires, the person familiar with the development said.

VALUATON

Indian brokerage Batlivala & Karani Securities said Bharti's move was directionally positive due to challenging conditions at home, but the deal's valuation looked expensive.

It said Bharti was valuing the Zain assets at an enterprise value of nine times EBITDA earnings and 13,000 rupees ($280) per subscriber.

With 119 million mobile users in India at end-2009, Bharti accounted for 23 percent of the market, but it faces increasing competition from newcomers such as Norway's Telenor and Tata Teleservices, part owned by Japan's NTT DoCoMo <9437.T>. ($1=46.4 rupees

South Africa Bharti Airtel