NEW DELHI/LONDON- Bharti Airtel is in exclusive talks to buy most of Kuwaiti telecom group Zain's African business, the firm's third attempt at gaining a foothold in a continent that offers a last opportunity for major subscriber growth.

Under the exclusivity period the companies have until March 25 to seal the $10.7 billion deal -- the second largest in the industry this year after Mexican tycoon Carlos Slim's move to consolidate his telecoms empire.

Bharti, controlled by billionaire Chairman Sunil Mittal and Zain said the deal was still subject to due diligence and regulatory approvals.

But 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 buy South Africa's MTN Group in a $24 billion deal.

Analysts expect Bharti to raise debt to finance the Zain acquisition having last year scrapped a planned $3 billion to $4 billion loan linked to its planned tie-up with MTN.

ANZ, Barclays Capital, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Citigroup, DBS Bank, State Bank of India and Standard Chartered Bank were among the lenders shortlisted for that deal, according to Thomson Reuters LPC.

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.

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.

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.

Offloading the 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, rejecting an offer from France's Vivendi for its African assets.
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.

(Additional reporting by C.J. Kuncheria in New Delhi, Ami Shah and Pratish Narayanan in Mumbai, Sumeet Chatterjee in Bangalore, Ema Goman in Kuwait and John Irish in Dubai; Editing by Ian Geoghegan, Greg Mahlich)

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