Bharti Airtel's bold expansion plans are unlikely to be dimmed by the second breakdown over a $24 billion deal with South Africa's MTN but the Indian firm will have to shift its focus to smaller targets.

With political rather than commercial factors seen as the deal-killer with MTN, the poster boy of Indian telecoms is expected to now take a look at Kuwait's Zain, Sweden's Millicom and Egypt's Orascom, analysts say.

Africa and the Middle East loom as the most likely destinations for Bharti, although there are some possibilities in Asia, bankers and analysts said. Bharti is looking to replicate its staggering growth at home in other emerging markets, where scale is vital and penetration rates are low but rising fast.

The collapse of the MTN talks also leaves Bharti well-placed ahead of India's 3G auctions."To me, their first priority would be the 3G auction. They should look at some small to medium overseas acquisitions in the under $1 billion size to get the experience," said a banking source who was not involved with the MTN deal but has previously worked with Bharti Chairman Sunil Mittal.

"Africa is the best bet for him, but don't rule out Middle East or South Asia."

When calling off the talks with MTN on Wednesday, Bharti said it would keep looking to expand overseas. It declined to comment further on Thursday.

Currently, Bharti has operations in Sri Lanka, and its parent operates mobile firms in Seychelles and British Channel Islands.

Bharti and MTN shares jumped on Thursday as the deal was called off.

Mittal started Bharti from scratch in the 1990s and outpaced big local names to become the country's leading mobile operator. With about 110 million subscribers, it now accounts for nearly a quarter of the world's fastest-growing and the second-largest wireless market which has more than 450 million subcribers.

There was unlikely to be a deal as big as MTN, so bankers said Bharti would have to look at parts of a company's operations or a smaller firm such as Warid Telecom, whose shareholders are Abu Dhabi Group and Bharti partner SingTel, although its Pakistan operations would probably have to be excluded.

Bharti became net cash flow positive in the year to March 2009. With $629 million in net debt, its net debt to EBITDA ratio (earnings before interest, tax, depreciation & amortisation) of 0.25 makes it one of the best-placed Indian telecom firms.

India will auction third-generation spectrum in December and analysts expect winning bids of between $1 billion and $1.5 billion for pan-India spectrum.

Bharti is a positive cash flow firm and will soon start accumulating cash even after spending some on the 3G auction," said a banker who worked on the Bharti-MTN deal.

"They need to deploy that somewhere, and acquisitions are the natural choice."


The obvious acquisition candidate is Kuwait's Zain, after some investors, including one of the main shareholders, Kuwaiti family conglomerate Kharafi Group, put a 46 percent stake in the Arab world's third-largest telecom up for sale.

A consortium of a little-known Indian firm Vavasi and a Malaysian billionaire investor has agreed to buy the stake in a deal valued at around $13.7 billion. But there are some doubts over the deal as two Indian state-run telecoms BSNL and MTNL are yet to decide whether to join the consortium.

"Plan B now, probably Zain," said another banker who also worked with Bharti on the MTN deal.

Zain, which operates in 24 countries including Saudi Arabia and Nigeria and has some 65 million subscribers, brings reasonable scale for Bharti.

"But they are up against a host of telcos looking to buy the company. That is going to be a tough one, though achievable," one source said.

One other possibility could be Millicom, which has operations in 16 countries in Asia, Latin America and Africa, with about 31 million subscribers at end-June. Central and South America are the biggest sources of revenue for the company.

"Bharti has been eyeing Millicom assets especially in Africa, Latin America and Asia. They are interested in the entire firm or some chunks of it," the banking source said.

"This to me looks to be the best bet in the short term."

Egypt's Orascom, which had 84 million subscribers at end-June, could be another good fit for Bharti, the banker said.

Competition in India is intensifying with the entry of international players such as NTT DoCoMo and Telenor in ventures with local firms, and industry growth could slow as the market becomes more saturated.

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