"Ambani vs. Mittal: The battle continues overseas "

Joji Thomas Philip NEW DELHI


ALL determinate situations can be turned to advantage,” explains classical Chinese warrior philosopher Tsun Tzu in his ancient book ‘The Art of War’.

R-ADAG chairman Anil Ambani, a self-avowed practitioner of Tsun Zu’s war strategy has taken a leaf out of the ancient Chinese classic in the MTN saga. Two days after Bharti announced that its negotiations with MTN had failed, Mr Ambani’s Reliance Communications (RCom) on Monday said that it had entered into exclusive talks with South African mobile firm to discuss a “potential combination of their businesses” to “achieve unique global platform for exponential growth”.

Whether RCom entered into negotiations with MTN once talks with Bharti had failed or whether it was its eagerness to explore all options with MTN which resulted in the South African company refusing to budge from its position that Bharti Airtel become a subsidiary, thereby resulting in the collapse of talks between the two is a matter of conjecture. But one thing is clear. The battle between the India’s two largest private mobile operators has spread from the corridors of Sanchar Bhawan to the domestic market place to foreign shores as well.

If RCom were to pull off a merger with MTN, it would create a global telecom giant with close to 120 million subscribers that has a footprint stretching from the Cape of Good Hope to the Himalayas across 23 countries and covering a population of two billion, a third of the world. Besides, an RCom-MTN combine will have the largest WiMax footprint globally covering 50% of the world’s population. The combine will also command a market cap of over $65 billion, have revenues to the tune of $14.4 b, an operating profit of over $6 b and assets worth $26.8 b, and emerge as the second most profitable operator in emerging markets after China Mobile. This will more than dwarf Bharti which currently has a market cap of a little over $40 b with 65 million subscribers with no major presence outside India.

Round One was won by RCom

The RCom vs. Bharti battle is nearly a decade old — while Mittal was earlier pitted against Mukesh Ambani for the last three years, he has been fighting the younger brother Anil on the telecom front. While Bharti Airtel is currently miles ahead of over all its rivals, including RCom, the tables had turned only two years ago. In 2005, RCom (then called Reliance Infocomm) not only managed to dislodge Bharti from its market leadership position, but nearly pushed Mr Mittal to the edge. So much so that even Mr Mittal admitted at the height of the WLL crisis in 2002, Battleship Bharti was a “machine that was creaking”. Infocomm’s entry forced Mr Mittal to invest beyond his company’s means, and the policy googly from the government, which allowed players such as Reliance which held WLL licences to offer full-fledged mobile telephony left Bharti a tad vulnerable, financially and strategically. The pace of Infocomm’s national rollout, coupled with cheaper tariffs and handsets saw the company shoot past Bharti in subscriber numbers.

Round Two went to Bharti

Trade analysts predicted that Bharti would fold up as it could not match Infocomm in either subscriber numbers or tariffs. Instead, Bharti recorded its first quarterly profit of Rs 23 crore in March 2003 and its first full year profit in FY04. Bharti reduced tariffs gradually, harped on the superior quality of services, roped in SingTel as an investor, and launched its now famous outsourcing model. Network management went to Nokia Siemens and Ericsson, IT to IBM and call customer related activities were outsourced to global BPO majors.

Infocomm, on the other hand, was plagued by glitches in its first 24 months of operations. From widespread billing problems leading to customer dissatisfaction, to trouble with the law for illegal routing of international calls and a down market image, Infocomm’s first two years were mired by problems of various hues, which played into Bharti’s hands.

And so, after being behind in the race for subscriber numbers for nearly three years, Bharti drew level to Reliance. The figures explain better: In Q3, FY 06, Bharti had 16.3 m against Reliance’s 17 m; and in Q4 of FY 06, Bharti had 19.6 m against Reliance’s 20.2 m. However, in Q1, FY 07, Bharti raced to the lead with 23.1 m wireless users compared with Reliance’s 22.5 m base. Since then Bharti has pulled ahead month-after-month to command a towering lead — it currently has a subscriber base of about 65 m which is 17 m ahead of Reliance Communication’s CDMA and GSM arms combined.

RCom comes back fighting

But RCom under Mr Ambani, with a change in management and a new brand identity quickly sorted out all problems that plagued the company and quickly reemerged as the primary competitor to Bharti. If the company had bagged Hutch in February 2007, the CDMA major would have had over 50 m subscribers and close to a 40% market share, way ahead of Bharti with 30 million subscribers. Mr Mittal played his part in providing the no-objection certificate to Vodafone, which enabled the UK-based telco to outbid RCom and gain a controlling stake in Hutchison Essar.

Spectrum wars

Mr Ambani and RCom hit back hard again late last year. Catching the GSM industry off guard, the department of telecom approved the use of dual technology where telcos can offer both GSM and CDMA services under the same licence. Even before the policy became public, RCom got the DoT nod to offer GSM services based on its applications it had filed in GSM licence in February 2006. GSM operators led by Bharti went all out to defend their turf and said that RCom’s applications for GSM were invalid. But their lobbying and legal challenges failed to yield the desired results.

At the same time, Mr Ambani accused GSM players of trying to hoard spectrum and limit new competition, in addition to resorting to anti-consumer practices, such as cartelisation and price fixation. Even as GSM operators were engaged in proving that they were entitled to spectrum 6.2 MHz, the impasse allowed Mr Ambani to open a third front in the battle for airwaves. RCom along with the Tatas campaigned for enforcing a Telecom Engineering Centre’s recommendation which said that GSM players should increase their subscriber base between 6 to 15 times before they are given additional spectrum. All of Mr Mittal’s efforts to get the DoT to roll back the stringent spectrum allocation norms came to naught. While Bharti and other GSM players were fighting numerous court battles, RCom used this break to plan its GSM rollout. RCom emerged victorious with a pan-India GSM licence and start-up GSM spectrum.

Bharti refuses to bailout RCom

Both companies were involved in another standoff recently when three undersea cables — FLAG and FALCON, owned by RCom, and the Se-Me-We-4 cable on which both Bharti and VSNL have capacity — were damaged near West Asia. Bharti and VSNL were able to minimise the impact and route traffic within a few hours through their other cables — Bharti through i2i and VSNL through the Tata Indicom cable and Se-Me-We-3 cables. RCom, the worst affected had alleged Bharti and VSNL had failed to provide it with additional capacity. Bharti and VSNL had refused to budge despite RCom running to the government and the regulator. Instead, Bharti sources said that RCom was attempting to cover up its poor planning and unwillingness to pay a commercial price for its mistakes by making this a national issue. While Bharti’s move to buy capacities on many different cables paid off, RCom stood exposed.

"FRESH START EXCLUSIVE TALKS HAVE BEGUN"

MTN may’ve to make open offer to RCom investors

Kausik Datta & Bodhisatva Ganguli MUMBAI

THE proposed deal between Reliance Communications (RCom) and MTN may involve an open offer by the South African telco to the shareholders of RCom. The broad contours of the deal, on which both the parties began exclusive talks on Monday, may result in the transfer of Anil Ambani’s two-third equity stake in RCom to MTN’s shareholders against his acquisition of around one-third equity in the foreign company. Under Indian law, any acquisition above 15% triggers a mandatory open offer for a further 20% stake for minority shareholders.

In the two-step structure being discussed, MTN will become the holding company of RCom. But Mr Ambani will, in turn, have a direct one-third equity stake in MTN and an indirect holding of nearly 20% in RCom.

In effect, the Anil Dhirubhai Ambani Group (ADAG) will become the largest shareholder of the combined entity, which is likely to be christened MTN Reliance. His holding in RCom will marginally go up if the follow-on open offer succeeds, said sources. The proposed transaction between ADAG and MTN will be a share swap while the offer to minority shareholders will be obviously in cash. There is however no certainty regarding any of this given the regulatory complexities involved.

The deal would need approval from the Indian and South African authorities as well as from 21 other counties where MTN is present.

RCom on Monday announced before the Indian markets opened that it has begun ‘exclusive’ talks with MTN in what could result in the creation of the world’s fourth largest wireless telephone operator with a subscriber base of over 116 million in 23 countries. MTN also separately confirmed the development, barely two days after the country’s largest telco Bharti Airtel withdrew from similar negotiations with MTN, blaming the latter’s management for not honouring its initial agreement. ET had reported on Monday (26 May) that a formal announcement was likely on that day.

Considering RCom’s market capitalisation of $28 billion, a twothird stake would cost around $18 billion, while one-third of MTN’s equity is valued at $12 billion. However these calculations are at current levels of market capitalisation. In reality, Mr Ambani is likely to ask for a substantial premium for his stake. MTN in turn will surely seek a premium in return for ADAG becoming the single largest shareholder with management rights. It is also not clear if ADAG will transfer its entire 66% stake to MTN or a large chunk of it. Sources close to the transaction say that no debt is involved. The uncertainty in all this is whether Mr Ambani will eventually agree to a structure that Sunil Mittal’s Bharti Airtel turned down. Mr Ambani is on a holiday with his family, coincidentally in South Africa, and may meet MTN’s top-brass shortly. RCom faces uncertainties with MTN deal

“HE LEFT for South Africa on Saturday and is likely to be back this weekend,” sources said. A senior ADAG official was in London last week where he is believed to have met MTN representatives.

The other major source of uncertainty is that Mr Ambani’s control over the proposed combined entity will be eventually dependent on an entity that is listed on the Johannesburg Stock Exchange. That would expose ADAG to South African political risk. Though this does not impact RCom’s minority shareholders, Mr Ambani will have to take a call if he is comfortable with this situation. Further, MTN is present in Iran and Sudan, countries that the US does not view with favour. It’s not clear if this issue will be a deterrent for RCom which has operations in the US.

Mr Ambani & Co have to woo the MTN chairman Cyril Ramaphosa and its CEO Phuthuma Nhelo, in addition to Azmi Mikati, a prominent shareholder, to tweak the deal in his favour before the exclusive agreement expires in 45 days. So it’s expected that a series of meeting between them will take place shortly.

Another problem that RCom may face is that MTN will ask for a premium over the price quoted by Bharti. Also it’s not clear if becoming the single largest shareholding will translate into management control or whether that will have to be shared with MTN’s current management. “Bharti has already set the benchmark on issues like pricing, representation on the board, chairman and CEOship etc. Now MTN will ask for something more,” he said. MTN has already set the tone by informing the Johannesburg stock exchange that “it was approached by RCom”, an unusual revelation at this stage of the transaction. It said there is no certainty that the discussion with RCom will result in a transaction.

Mr Ambani, in a press statement, said on Monday: “We are delighted to be engaged in exclusive negotiations with MTN to achieve a partnership, which would provide investors customers and the people of both companies a unique and global platform for exponential growth, creating substantial long term shareholder value.” The exclusive arrangement means MTN will not talk to any other suitor in the next 45 days.

RCom’s stock on Monday slipped 5.1% to close at Rs 543.20 on fears of that it will be an expensive deal for the company. Bharti stock recovered 3.25% to close at Rs 863.15. If the deal goes through, it will create the world’s fourth largest telco after China Mobile, Vodafone and China Unicom. It will cover 23 countries with 183 million subscribers.

"Now, RCom & MTN may talk alliance"

R-ADAG Likely To Become Largest Shareholder In Combined Entity
Joji Philip Thomas, Javed Sayed & Rashmi Pratap
DELHI/MUMBAI


EXIT Bharti Airtel. Enter Reliance Communications. South Africa’s MTN and Anil Ambani-owned RCom may shortly announce that they are in exploratory talks for an alliance. According to banking sources, discussions between the two began late last week. MTN has offered RCom a structure similar to the one that Bharti turned down. It is believed that one of the proposals under consideration is for the RADAG group to transfer its 66% shareholding in RCom to MTN and in exchange become the largest shareholder in MTN with a 34% stake. This scenario will also involve making RCom a subsidiary of MTN. In the case of the now aborted Bharti-MTN deal, the Mittal family and SingTel had been offered a 51% stake in MTN for exchange of their shares to MTN as Bharti’s market capitalisation is larger than RCom’s.

When contacted, an RCom spokesperson declined comment. A source familiar with the group said reports about concrete discussions on any particular structure were premature. “Till late last week, MTN and Bharti were engaged in talks. Even though the R-ADAG group is known for its dealmaking capabilities, even by their standards this will be very fast,” he said.

Nevertheless, some industry sources say some kind of announcement is imminent and indeed it may happen as early as on Monday. “MTN would like to make an announcement soon as it would not like its stock price to fall following the collapse of its discussions with Bharti,” said a source. An MTN spokesperson on Saturday said his company would update shareholders as the market opens on Monday morning. The market, in this case, being the Johannesburg Stock Exchange. It remains to be seen whether the RCom management will agree to make their company a subsidiary of MTN in exchange for becoming the largest shareholder in the South African company.

While Bharti has denied that India’s FDI regulations were a stumbling block in their discussions with MTN, sources say the 74% FDI sectoral cap would have made it difficult for MTN to merge into Bharti. “Unlike Bharti, where direct and indirect foreign holding is around 74%, foreign shareholding in RCom is just over 10%. This gives RCom much more leeway to explore merger-related structures,” said a source.
Of course, RCom may not be the only suitor for MTN. It has been reported earlier that Russian telco Vimpel Communications, European major Deutsche Telecom and UAE’s Etisalaat may also be in the race.

RCom is India’s largest CDMA operator with a subscriber base of over 40 million. While its presence in the GSM space so far is confined to only eight circles with just a over seven million subscribers, it has ambitions of aggressively expanding in the GSM segment and has secured licence to roll out GSM operations on a pan-India basis. It had last year made a bid to buy Hutchison’s stake in Hutchison Essar but had lost out to Vodafone.

Analysts feel that synergies between RCom and MTN may not be as strong as it was between Bharti and MTN, given that RCom is still a relatively small player in the Indian GSM space.

"What went wrong with Bharti’s S African trip"

Joji Thomas Philip & Javed Sayed NEW DELHI


IT WAS supposed to be a done deal. The Bharti Airtel board was to meet on May 25 in London to ratify the merger of MTN with itself, thereby creating the world’s sixth largest telecom company. It had been decided that a formal announcement would be jointly made on May 27 (Tuesday) as Monday is a bank holiday in London. The champagne was on the ice.

But the script went awry on May 21(last Wednesday) when instead of approving the merger, the MTN board came back with a counter-proposal, which would have resulted in the Indian company becoming a subsidiary of MTN. The South African company’s board had also demanded that its shareholders be given the majority shares of Bharti Airtel held by the Bharti family and SingTel in exchange for a controlling stake in MTN. These terms were unacceptable to Bharti and while negotiations continued till the early hours of Saturday, the deal could not be salvaged. So, what went wrong? Why did the MTN board reject a proposal that its management had earlier agreed and when a term sheet had already been signed? While there is no official confirmation, a source close to the discussion says that it was largely the reluctance of MTN chairman Cyril Ramaphosa to give his approval to the merger, which resulted in the board rejecting the proposal.

Besides being a successful businessman, Mr Ramaphosa is a prominent South African political figure. There has been speculation that he may emerge as a compromise presidential candidate when president Thabo Mbeki’s terms ends in 2009. While Jacob Zuma, South Africa’s most controversial politician, is slated to succeed Mr Mbeki, many political watchers believe Mr Ramaphosa may emerge as a consensus candidate, given the reservations about Mr Zuma in various circles.

“Mr Ramaphosa was uncomfortable with a merger that would have resulted in MTN getting folded in Bharti. He does not mind if the ownership of MTN changes but for political reasons, he wants the company to continue to exist,” said the source. Another factor that may have gone against Bharti is the emergence of other suitors including its bitter local rival Reliance Communications. Even as Bharti was turning down MTN’s offer to become its subsidiary, MTN’s financial advisors Merrill Lynch and Deutsche Bank are learnt to have approached RCOM who expressed its interests in discussions. This may have given MTN the impression that it has options apart from Bharti.

RCOM apart, it has been reported that Germany’s Deutsche Telekom, Russia’s VimpelCom, China Mobile and the Emirates Telecommunications Corporation (known as Etisalat) were also charting plans for a possible bid, a move that could have raised the valuations of the company significantly. A bidding war can push MTN’s valuations to close to R180-R200 per share, which raises its market cap to $50 billion. This is a more lucrative option since discussions between Bharti and MTN had begun in March where a reference price of around 160 rand per share (the then market price of MTN was less than 130 rand) was agreed upon. In addition, there are other factors that may have contributed to the collapse of the talks.

According to industry sources, a Bharti-MTN merger would have faced a major regulatory hurdles on the FDI front. “The merger would have meant that foreign holding in Bharti Airtel would have reached around 85%. While Bharti executives had told MTN that they would be able to get the FDI sectoral cap waived, the feedback that the MTN directors were independently receiving was that it would be difficult for the sectoral cap to be relaxed,” said an industry source. Bharti, on its part, maintains that it had enough leeway to give MTN shareholders equity in Bharti within the 74% limit.

Another factor that is being cited is that important shareholders such as SingTel and Temasek were not happy with the arrangement. But a source close to the discussion says the SingTel board was scheduled to discuss and approve the merger before the MTN board meeting threw the spanner in the works.

So far, MTN has not spoken about why discussions fell through. While it has said it will make a statement on Monday, industry sources say Bharti issued a statement on Saturday as it wanted to make its position public. Whatever may be the reason, the fact remains that collapse of the talks must be hard news for the Bharti management to accept.

"Crank CALL"

Crank CALL

The Bharti-MTN deal may be off, but it has pitchforked the Indian telecom giant into the big league, says Mansi Tiwari


OOPS they did it again! The promiscuous South African telecom major MTN has called off merger talks, if India’s telecom giant Bharti Airtel’s reported version on the deal is to be believed. Interestingly, what would have been the biggest telecom deal ever was reportedly “broken over the phone”.

To any casual observer, this sudden weekend development would come as no surprise. At least four times in the past three years, MTN was believed to be in talks with a potential overseas partner. MTN confirmed the talks publicly on two occasions. While no deal took place, the MTN stock zoomed and smart investors made a killing.

In fact, talks of a possible sellout of its stake have been making news since 2005. In the past few years, the South African telecom giant has declared talks with various companies. And every time the company claimed to be in talks for a deal, the company’s valuation rose sharply. In October 2005, MTN announced that it was in the middle of a deal that would have a big impact on its share price. Though the buyer was not disclosed, the shares gained 23% during October-November 2005. Again in November 2006, it was reported that China’s state-owned operator, China Mobile, was negotiating with it for a deal. The Chinese company denied any such negotiations, but MTN share prices rose again, this time by 6%. In March, 2008, there was news that British telecom giant Vodafone was looking for a stake in the company and the share prices reacted once more in favour of MTN. Since the news about the current talks with Bharti came out, the share price of MTN has gained by 20%, adding close to $10 billion to the company’s market value.

SAFARI DREAMS INTERRUPTED

Bharti’s statement, dated May 24, has held MTN responsible for the collapsed deal. “An in-principle agreement was reached on May 16 and a term sheet was initiated between the two lead bankers. This agreed term sheet was presented to the MTN Board on Wednesday, the 21st of May. MTN has now presented a completely different structure, from what was agreed,” the statement explains. This new structure would have meant Bharti Airtel becoming a subsidiary of MTN and exchange of majority shares of Bharti Airtel held by the Bharti family and SingTel, in exchange for a controlling stake in MTN.

Bharti has made its global expansions plan, either organically or through acquisitions, well-known for a long time now and it has participated in auctions for bidding for telecom licenses in countries like Kenya, but eventually lost out to global competition. Earlier, it was in talks with the Gabonese government to acquire a stake in the country’s national operator. The zest to fan out continued and the bid for MTN was one step forward in that direction, even if it would have meant a burden on its finances — Bharti could have ended up paying up to $20 billion, half its size of $40 billion. Bharti’s statement makes it clear that the company is still keen on international expansion.

“Everyone sees some value in expansion. The company either expands geography or product portfolio. Though there is a lot happening in India right now, Bharti has saturated its market. It already has a slew of products in its offering and it makes complete sense to tap the emerging market of Africa,” says an official from a rival firm.

In fact, Bharti was almost ready with the possible funding options. In terms of subscriber base, the two companies are almost the same size, but revenue-wise, MTN is 48% higher, given its significantly higher ARPUs or average revenues per user, which stands at $16 as against Bharti’s $8.9. However, it is the South African and Nigerian markets which enjoy ARPUs of $23 and $15.6, respectively, which accounted for a majority of MTN’s revenues and Bharti was looking at hitting this segment. Interestingly, according to a May 6 Angel Broking report, for 19 out of the 21 markets in which MTN operates, the ARPUs are $12.1, higher by around 35% compared to Bharti.

From a pure business perspective, the breakthrough of the deal would have brought about a double bonanza for a company like Bharti. It is common knowledge that India offers huge opportunities for telecom companies. A 2007 Ficci study by PricewaterhouseCoopers (PwC) for the ministry of communications and information technology noted, “The tele density of India at about 23 coupled with its billion-plus population offers immense growth potential for the telecom services sector in the coming years when compared with growth expectations from most developed markets with a teledensity of over 70-80.”

With countries and regions such as the US, Canada, Europe and Latin America stagnating in terms of growth potential — they contribute nearly 65% to the global telecom services revenues marketshare — it is only natural for companies like Bharti to woo partners which can open new vistas. Other than the Asia-Pacific region, notes the PwC report, “Middle East and Africa are also expected to grow significantly due to increasing demand arising out of their under developed telecom infrastructure.”

The script of Bharti looked like a well thought out one. For good reason, as well. A small note at the MTN website says, “MTN is a growing multinational company that is seeking to expand its African footprint and expand into the Middle East.” For the record, MTN divides its operation into three major regions, all of which are among the fastest growing: South and East Africa (SEA), West and Central Africa (WECA) and Middle East and North America (MENA). With a subscriber base of 68 million plus — 6 million more than Bharti’s — and footprints in 21 countries — far more (19) than Bharti’s — MTN became Bharti’s natural choice.

KEEP CALLING

Despite the collapse of the deal, the acquisition move by the promoters of India’s leading GSM provider has made people sit up and take note. The successful completion of the deal reiterates the message sent out earlier after the acquisition of global steel and auto giants Corus and Jaguar by the Tatas — that the world is no longer the domain of American, Japanese and European multinationals. Indian companies, too, can make giant leaps and this could just be the beginning of a great Indian corporate turnaround story.

Dr Amit Mitra, secretary general of Federation of Indian Chambers of Commerce & Industry (Ficci), says that India Inc should not give up hopes of entering the African market. “For several years now, South Africa has been trying to engage itself with India in the entire spectrum of e-governance using telecom and IT. The Bharti-MTN deal would have been good not just for Bharti as a company but for the entire political and economic relations between India and Africa. However, the Indian companies should not give up their endeavour to enter into the African market as it has huge political-economic spin-offs” he asserts.

That said, most experts feel that Bharti’s bid would have heralded a new era for the Indian telecom story, which has come a long way in the last 15 years, to emerge as world’s third largest telecom market with revenues of over $22 billion. India, like in many other sectors, was a relatively late starter in telecom. In a very short span of time, it, however, did a sprint run and caught up with the rest of the world, with an annual subscriber growth of about 45% and revenue growth of 25%. A global footprint will only catapult the Indian telecom sector to a higher plane and aid in perpetuating, what sociologists choose to call, Indianisation of the globe, contrary to globalisation in India.

“This would have completely changed the way the world looks at the Indian telecom sector. Bharti has already established its clear leadership in India. Had this deal materialised, Bharti would have made significant footprints outside India. However, the initiative has created an aura around Bharti that here is an Indian telco that has the audacity to think of acquiring a multi-billion dollar company,” says Sudershan Banerjee, former Hutchison CEO and currently the cofounder and MD, India Market Business Advisory.

IS IT GAINS FOR INVESTORS?

For shareholders, this was supposed be the tip of the iceberg. Initial reactions varied in India and South Africa, MTN’s parent country. While MTN’s stock prices showed positive trends till now, Dalal Street exhibited signs of nervousness, plummeting Bharti’s stock prices. On the Bombay Stock Exchange, Bharti’s share price dipped by 2.28% to Rs 836.80 since the day (April 24) news broke out of a possible takeover of MTN. However, as is natural, this was more owing to the vagueness and uncertainty that shrouded the “exploratory talks” than anything else.

Analysts, too, had suggested caution before arriving at any conclusion for the deal. Sudip Bandyopadhyay, CEO of Reliance Money, feels that with the deal not going through, Bharti should receive a positive reaction from the bourse. “The company would have got overleveraged if they had consumed MTN. The initial reaction on Dalal Street when it opens up for trading may be a knee-jerk one but it would surely gain as the day will progress,” he says. However, if the deal had been clinched, investors could have lost out on returns in the short to medium term. As analysts had noted, the shareholders of Bharti would have had to wait for 12-18 months to reap the benefits.

They further say that had the deal gone through, Bharti would have begun focusing more on its overseas markets, given the challenges involved, which in turn would have meant loss of focus on the burgeoning Indian telecom market.

But all said and done, had the deal come through, it would have brought laurels to the country and the Indian telecom sector. The shareholders could have benefited later.

CROSS Connection

M-Cell was incorporated in South Africa in 1994 and owned 25% of MTN Holdings
In 1995-96, M-Cell was converted into a public co with investments that include a 25% shareholding in MTN Holdings and a 60% shareholding in M-Tel (now MTN Service Provider)

In 1997-99, MTN Intl expanded into Africa, acquiring licences in Uganda, Rwanda and Swaziland. M-Cell also hiked its stake in MTN Holdings to 72%
M-Cell renamed MTN Group Ltd in 2002 to reinforce African presence and awareness of the brand

In 2006, MTN Group acquired Investcom LLC for $5.526 billion (Rs 33.5 billion). This transaction created a pre-eminent mobile operator in the emerging markets such as Africa and West Asia (With inputs from Rashmi Pratap in Mumbai and Aman Dhall in New Delhi)

"FLIRTING WITH SUITORS"

With operations in 21 countries across Africa and Middle East, MTN is one of the largest telecom players in Africa
Mansi Tiwari

A SOUTH Africa-based company, MTN is communication service provider offering cellularbased services and business solutions. With operations in 21 countries across Africa and the Middle East, it is one of the largest emerging market mobile operators globally. Founded in 1994, the company at the end of March 2008 had a total of 68.2 million mobile subscribers.

The operations of the company are broadly divided into three major regions — South & East Africa (SEA), West and Central Africa (WECA) and Middle East and North Africa (MENA). Being among the top two operators in most of its market, MTN enjoys a dominant share in the market.

The company’s widespread geographical operations and rapid expansion for the past few years has led to a significant increase in the addressable population size from just 41 million in 1997 (only South African presence) to 274 million in 2005 (several African countries) to nearly 511 million at the end of 2007, with a presence across North, South, East, West and Central Africa as well as in the Middle East region.

The MTN Group operates in Botswana, Cameroon, Côte d’Ivoire, Nigeria, Republic of Congo (Congo-Brazzaville), Rwanda, South Africa, Swaziland, Uganda, Zambia, Iran, Afghanistan, Benin, Cyprus, Ghana, Guinea Bissau, Guinea Republic, Liberia, Sudan, Syria and Yemen.

In the past this South African giant has reportedly declared talks for deals with various companies. But the interesting point to note is that everytime it has happened, the price of MTN’s stock have risen dramatically.

"EVEN AS THE DEAL COLLAPSES, THERE’RE POSITIVES TO TAKE HOME BONUS POINTS"

Bharti shares may get a fillip
Our Bureau MUMBAI


BHARTI Airtel’s decision to call off negotiations to buy out South African telecom service provider MTN is likely to provide a temporary fillip to the Indian telecom major’s shares. Already, the market appears to have had a whiff of the development on Friday, as Bharti Airtel shares rallied 2.5% in a weak market to close at Rs 836.80. The stock has shed roughly 7% since the company announced on May 6 that it had initiated talks with MTN for acquiring a stake in that company.

Telecom analysts feel that Bharti Airtel shares may gain further on Monday as the concerns about any potential financial burden due to a possible takeover of MTN have subsided. “The markets are likely to react positively to Bharti’s decision as short terms concerns relating to financing the acquisition no longer remain. Of course, the development would affect Bharti’s plan to have an international presence, which could weigh on the stock in the longer term,” says Harit Shah, research analyst, Angel Broking.

Telecom analysts say Bharti would soon be on the look out for an alternative target in some other developing market. These could be any company in Latin America, Africa or South Asia, as part of the company’s plan to have a global footprint. “Past incidents have shown MTN’s inconsistency and this was once again proved. Even as MTN’s reputation would take a setback, it would not affect Bharti’s brand value,” adds Mr Shah.

"potential bidder for MTN"

RCOM emerges

potential bidder

RELIANCE Communications is also believed to be in talks with MTN for a possible deal, reports Our Mumbai Bureau. Media reports on Saturday said RCOM has been in discussion with MTN officials since Thursday night. RCOM, however, declined to comment. This is the second time that RCOM's name has surfaced as a possible bidder for MTN. Early this month too, the CDMA major was said to be interested in the South African co. CALL DROP Blame it on FDI cap

THIS agreed term sheet was presented to the MTN board on May 21. It is learnt that the MTN board expressed its displeasure with some aspects of the Bharti proposal. According to sources, MTN’s independent directors were believed to be concerned about how the structure proposed by Bharti will get around India’s FDI restriction of 74% foreign ownership. The directors expressed doubts over Bharti’s proposed solution and were unwilling to commit themselves. Secondly, the directors were not happy with the amount of debt that is being loaded on to the books of the combined entity. About $20 bn of debt would have been taken on by the combined entity, as per Bharti’s proposal. The directors felt that such a large leverage would put a leash on the entity’s plans and prevent it from pushing ahead with its expansions. But this could not be confirmed.

Sources say India’s 74% FDI sectoral cap turned out to be significant obstacle in the negotiations. It is learnt that Bharti executives had sounded off government officials about the possibility of waiving off the 74% cap for this transaction but did not get a favourable response.

While questions have been raised about Bharti’s ability to raise the funds required to fund the acquisition or the cash-cum-stock merger, the company has said it arranged letters of credit to the tune of $60 billion from banks in the US and Europe. At the same time, Bharti also clarified that it would not engage in a bidding war for MTN. Bharti would have required anywhere between $40 billion to $50 billion for a 100% acquisition.

The Bharti stock has fallen by over 12% from over Rs 900/share from late last month when news about a it being in discussions with MTN first became public. On Friday, Bharti shares closed at at Rs 836.80.

"LOG BOOK "

LOG BOOK

Feb: Bharti & MTN begin talks
April: News first breaks that Bharti is eyeing MTN
April 25: Bharti management denies MTN bid
May 2: Sunil Mittal says MTN has not even invited Bharti for talks
May 5: Bharti takes a U-turn, says it is in exploratory talk with MTN
May 6: Bharti says it hasn’t made offer for MTN
May 13: Bharti says talks with MTN aimed at combining the strengths of the two
May 16: Bharti- MTN reach ‘in-principle’ agreement and a term sheet initialled between two lead bankers
May 21: MTN board meets to consider term sheet. MTN proposes alternate model where Bharti becomes its subsidiary
May 24: ET first reports that talks have reached a stalemate
May 24: Bharti announces that talks with MTN have been called off
MTN’s been flirting with suitors

THE promiscuous South African telecom major MTN has called off merger talks, if Bharti Airtel’s reported version on the deal is to be believed. But this not new for MTN. At least four times in the last three years, MTN was in talks with potential overseas partner. While no deal took place, the MTN stock zoomed and smart investors made a killing, says Mansi Tiwari.

Booster dose for
Bharti shares
BHARTI Airtel’s decision to call off talks to buy out MTN is likely to provide a temporary fillip to the Indian telecom major’s shares, reports Our Mumbai Bureau. The market appears to have had a whiff of the development on Friday itself as Bharti Airtel shares rallied 2.5% in a weak market to close at Rs 836.80. The stock has shed roughly 7% since the company announced on May 6 that it had initiated talks with MTN.

"INDIAN PRIDE COMES FIRST"

Bharti ends MTN call

South African telecom major accused of trying to push a structure wherein the Indian company would have become an arm of MTN

Our Bureau NEW DELHI

IT TURNED out to be a dropped call in the end. After almost four months of discussions, Bharti Airtel called off merger talks with South Africa’s MTN on Friday night, accusing it of deviating from agreed terms and of trying to push a structure which would have resulted in the Indian company becoming a subsidiary of MTN. The South African company also wanted majority shares of Bharti Airtel held by the Bharti family and Singtel in exchange for a controlling stake in MTN. This too was unacceptable to the Indian company.

“Bharti believes that this convoluted way of getting an indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity,’’ said a company statement. In an attempt to link the discussions with MTN to national pride, the statement adds: “Further and more importantly, Bharti’s vision of transforming itself from a home-grown Indian company to a true Indian multinational telecom giant, symbolising the pride of India, would have been severely compromised and this was completely unacceptable to Bharti.”

MTN, on its part, has promised to disclose it side of the story on Monday. “We will update our shareholders as the market opens on Monday morning,” MTN spokeswoman Nozipho January-Bardill told an international news agency.

The collapse of the merger talks means that the largest takeover attempt by an Indian company has ended in failure. ET had on May 24 reported that discussions between the two had reached a stalemate and that an announcement regarding the postponement of talks was expected shortly.

While Bharti has stated that “it wishes MTN all the best,” its unhappiness with the South African telco is evident. A successful merger would have led to the formation of the world’s sixth largest telecom company with a presence in 23 countries covering the African continent, Central and Western Asia and the Indian sub continent. At current valuations, the Bharti-MTN would have a m- cap of over $80 billion and a subscriber base of 130 million. And while Bharti has asserted that it remains keen to expand in the global arena, it is yet to be seen whether it can succesfully target a company of MTN’s scale and with which there is an equivalent synergystic fit. The breakdown of talks will also constitute a personal setback for Bharti Airtel chairman Sunil Mittal who was spearheading the negotiations and till a few days ago was pretty confident about the deal going through.

Discussions between Bharti and MTN are said to have begun in February and at that time a reference price of around 160 Rand per share (the then market price of MTN was less than 130 Rand) was agreed upon.

Subsequently, a number of structures were discussed and evaluated between the lead bankers on both sides. An in-principle agreement was reached on May 16 and a term sheet was initialled between the two lead bankers.

"Stalemate: Bharti accuses MTN of deviating from agreed terms"

India's largest private telecom company Bharti Airtel on Saturday pulled out of negotiation for acquiring an estimated 45-50 billion dollar MTN, saying the South African telecom entity deviated from agreed terms.

"An in-principle agreement was reached on 16th May and a term sheet was initialled between two lead bankers... MTN has now presented a completely different structure, from what was agreed," Bharti said in a statement.

The new structure envisaged Bharti Airtel becoming a subsidiary of MTN and exchange of majority shares of Indian company held by Sunil Mittal, promoter of Bharti, family and its foreign partner Singtel, in exchange for a controlling stake in MTN.

"Bharti believes that this convoluted way of getting an indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity," the company said.

Both (Bharti and MTN) had initiated talks about three weeks ago and talks were cordial through out this period and conducted in good faith.

Bharti also claimed that over a dozen internationally reputed bankers from the US and Europe of having pledged funds of over 60 billion dollars for the acquisition.

The reference point at which MTN shares were to be transacted was agreed and frozen at the point of starting the discussion and Bharti would like to confirm that there was no further discussion on the share price of MTN, at any point.

"Speculation rife that Bharti, MTN talks deadlocked"

EVEN as Bharti Airtel maintained that talks with South Africa’s MTN were still continuing, speculation was rife in Delhi that talks between both companies had reached a stalemate. While ET has not been able to verify the authencity, unconfirmed rumours doing the rounds in Delhi late on Friday night, said that both companies were expected to make an announcement shortly that talks were being postponed to a later date.

Both companies would use the interim period to address the regulatory and legal hurdles that confronts the deal, industry sources here said. Industry sources in Delhi also quoted bankers in London who are close to the developments as admitting that whether it be a buyout or merger, Bharti would first have to workout the corproate structure of the combined entity in such a way that it confirms to the existing regulations in both countries. They also quoted bankers as saying that both companies had not called off talks, but had decided to put them backburner in order to give Bharti time to work address all hurdles.

However, when contacted, the Bharti spokesperson rubbished these rumours and said that talks between both companies ‘were still on’, while adding that the company (Bharti) had nothing further to state. It must be pointed out that ET has not been able to establish if these rumours are true. Besides, ET also categorically states that industry sources here who tipped the paper of this development are not associated with Bharti Airtel. It must also be clarified that ET has not been able to reach any of Bharti’s top management to verify if these rumours are true.

"MTN to buy back share, AGM on Jun 19"

MTN, which is in merger talks Bharti Airtel, has decided to buy back 10% of its share capital. The South African telco will move a special resolution at its annual general meeting on June 19.

The Johannesburg-based company will also seek shareholders’ permission to authorise its board to sell 10% of its unissued share capital at a price to be determined by its board. It had passed an ordinary resolution to this effect at the last AGM. In the absence of any move in this direction, the authority given to the board is slated to lapse at the next AGM. The company now proposes to extend it for another year.

While the rationale for the proposed capital decisions is unclear, companies abroad often buy back shares to hold these as treasury stock instead of cancelling the shares as Indian companies are required to do. After the scrip gets repriced in the market following the buyback, these shares are sold at a higher price.

Industry sources said the proposed restructuring of share capital is linked to the company’s plans to merge with Bharti Airtel.

"Now, MTN chief hints at an European bidder"

But Analysts Say It Could Be A Tactic To Press Bharti For Better Price


THE South African telco MTN, which is discussing a merger with Bharti Airtel, is tempted by opportunities in Asia and wants to play a larger role in the mergers and acquisitions of the Asian telcos without ruling out the possibility of a third bidder, mainly a European one, joining the fray. In an exclusive interview to Wirtschaftswoche, a German magazine, MTN CEO Phuthuma Nhleko said: “We are open to opportunities in Asia. I predict more mergers in future in those countries. And we want at this stage (to) play a role.”

Asked whether any other company, in addition to Bharti, will launch a takeover bid, he did not completely rule out the possibility. He said, “European telecom companies in Africa have a general interest. I, therefore, cannot exclude in the future renowned telecom companies expressing an interest. We are a public company. And there is always the possibility that the shareholders (get) a lucrative takeover bid, without the involvement of the senior management.”

So far, only Etisalat has said it was evaluating a possible bid for MTN. China Mobile had said it was interested in the South African market, but not weighing the option of bidding for MTN. Many analysts said French Telecom could be an interested party. In a recent research report, JPMorgan observed that Saudi Telecom would not let “MTN go without taking a look at the company.” The report said another potential bidder could be Orascom Telecom. The rationale for Orascom is to acquire growth in Africa and re-establish a presence in the Middle-East, it said.

The interview of Mr Nhelko, who has been instrumental in expanding MTN’s operations in 21 countries with 68 million subscribers, was published on Saturday, barely a few days after he had second round of discussions with the top management of Bharti.

He met the Bharti top brass around May 7-8 in London, after both the firms announced that they were in “exploratory talks.” Bharti took this a bit ahead on May 13, saying “the discussions being held are aimed at combining the strengths of the two leading emerging markets players and, accordingly, veering towards possible structures to achieve this objective.” Bharti, however, put the cautionary disclaimer: these discussions may or may not lead to any transaction.

However, a section of analysts felt that Nhleko’s ambitions in Asia and his anticipation of an European company bidding for MTN might not gel well. “It could be a tactic to press his asking price through the Bharti management,” said a veteran investment banker.

"A LOOK AT THE BIG THREE BEHIND BHARTI’S DARING MTN BID"

LUDHIANA TO LONDON
MAKIN’ IMPOSSIBLE POSSIBLE
ET TAKES A LOOK AT THE BIG THREE BEHIND BHARTI’S DARING MTN BID

Joji Thomas Philip, Rashmi Pratap & Kausik Datta NEW DELHI/MUMBAI

ABOUT 32 years ago, in 1976, a young 18-year-old from Ludhiana in Punjab, was pondering over his career options. He had just graduated from Punjab University and wanted to get into business, build a corporate empire that would rival the Tatas and the Birlas. There was only problem. The environment was daunting.

The country was under Emergency and businessmen were treated with scant contempt by a bureaucratic and political elite steeped in socialism and public sector pre-eminence. Controls were stifling and corruption rampant. A fresh-faced graduate from small-town Ludhiana was to find the going next to impossible.

He borrowed $1,500 from his father and started his first factory. It produced crankshafts for local bicycle makers. During the next four years, he built two more, but it was not enough. The size of his operations was too small and Ludhiana, though an important industrial town, was not the centre of Indian business.

The young man then did the next best thing. He sold his factories and went to Bombay (as it was called at that time), the Mecca of Indian corporatedom. It was a decision that proved fateful in the career of Sunil Bharti Mittal, the owner of Bharti Airtel, India’s biggest mobile company, and the man at the centre of India Inc’s biggest ever cross-border deal today.

It set him on a journey that would breed success, power, and fame as he created a successful mobile phone company virtually from nowhere. During the next decade or so after landing in Mumbai, Mittal operated in four different businesses, each one different from the other. Mittal reinvented himself & his strategy each time
He reinvented himself and his strategy each time, whether it was selling generators to powerstarved north Indian consumers or selling mobile phone service to millions of urban and rural consumers.

Mr Mittal today, is the public face of Bharti Airtel. He is known as the man who created the hugely successful mobile company, which boasts of a $40 billion market cap, an Ebitda that is likely to top $2.5 billion by 2009 and a mobile subscriber base that is miles ahead of competition. But very few people also know that the success story almost never happened. Twice, in the life of Bharti Airtel, there were developments that forced people to write off Mittal’s chances. The first was in the 1990s, when Mr Mittal’s fledgling business was in danger of being swamped by family-run conglomerates and multinationals with deep pockets. Bharti had Delhi as the only major circle, where it was pitted against the Essar group. “People told me this was a business for companies with deep pockets. Had we known how deep, we’d never have tried it. We begged, we borrowed, we stole, but we put the project together fast,” Mr Mittal said in an interview to a foreign magazine years later.

The second time was in 2002, when the limited mobility row was raging fiercely. Sunil Mittal along with Akhil Gupta, the firm’s managing director, steered the company out of the turbulence. Mr Mittal recalled later that it was a harrowing experience and called it a scary 12 months. Bharti, even by its founder’s admission, was a “machine that was creaking.” He had earlier told ET that Bharti had come incredibly close to losing the battle. “It could have gone either way. Everybody expected the other side to win. We were losing people. We were very clear that exit was not an option. We knew we had to make history or we would be dead,” he had said.

Six years later, Mr Mittal is set to make history once again. His deal with MTN, if and when concluded, will create the world’s sixth-largest telco with a subscriber base of over 130 million. It will have major operations in Asia and Africa and the Middle-East, three of the fastest growing areas of the world. It will also be India’s largest cross-border acquisition, dwarfing Tata Steel’s takeover of Corus one year ago.

Even as this copy is being written, Bharti and MTN executives are locked in talks in London on the structure of the transaction. At this stage, it looks as if Bharti would buy 100% of MTN, paying $45-50 billion in stock and cash. Bharti officials are examining various options including a possible listing in Johannesburg, South Africa, of Bharti shares, which can then be offered to MTN shareholders. Bharti will also offer cash to MTN shareholders.

Another option being examined is to buy most of MTN’s public shareholders by offering cash. The key institutional shareholders can then be offered Bharti stock in India. This will prevent the need for a listing in Joburg and the extent of equity dilution can also be kept down. Also, in the case of a 100% listing, debt can be loaded on to MTN’s books. Bharti is looking to do that in order to share the costs and keep its own borrowing down.

Whatever structure is adopted, it is clear that Mr Mittal has opened up a new growth opportunity for many Indian telecom companies. The Indian market is growing, but that growth is attracted many players, adding to competitive pressures. By combining with MTN to form the world’s sixthlargest telco with subscriber base spanning two continents, Mr Mittal is showing what chutzpah and out-of-the box thinking can do.

Friends of Mr Mittal are not surprised. Years ago, when India liberalised telephony and allowed mobile services, Mittal, whose company was selling phone instruments and fax machines, was quick to spot an opportunity. He realised that mobile phones, with its image of a status symbol and its ability to provide quick connectivity, would be a hit with consumers.

Years earlier, when his plan to import true-tone phone instruments into India met with a government roadblock, Mittal decided to break them down and import them separately into the country where they were later assembled in Ludhiana.
Restless energy, combined ambition and a keen sense of what consumers wan are traits that Mittal is known for both within and outside the country.

Dalip Pathak, the former Warburg Pincus & Co Asia MD, explains another aspect of Mr Mittal’s personality. He played a key role in the negotiations that ended in Warburg’s first investment in Bharti. “We met many people in this sector at that time, but in Bharti, we found a business model that was well thought-through. They had the only realistic assessment of the regulatory environment
in a difficult market,” Mr Pathak said in an earlier interview. “Between the time we made our first contact to the time we made our first investment, there was a gap of nearly a year. That was because Sunil told us that he would take our money only when he had clarity on new regulations and after finding out if he could bid for new licences. That evoked huge respect towards Bharti from our side,” he says. That respect took on a new sheen many years later when Warburg decided to exit. Warburg had invested Rs 1,300 crore in 1999 in Bharti. At the time of the final exit in 2005, it had made a phenomenal Rs 8,496 crore or $1.9 billion, more than six times its original investment.

When the news of the MTN talks broke, even those who knew Sunil Mittal closely for over a decade were ‘surprised’, admits a top industry executive.

“MTN was a ‘surprise’,” said a leading industry executive. “This is a company of Bharti’s scale, operates across continents and did not fit the books in terms of an acquisition,” he added. About a week ago, senior executives in Bharti pointed out that that Mittal was keeping his cards close to the chest. “With the exception of Akhil Gupta, all the other senior executives have been kept out of the loop,” he added. In Mr Gupta, the 52-year-old managing director of Bharti Airtel, Mr Mittal seems to have found a soul mate, a man he can trust and rely on for all important transactions.

Mr Gupta started his career as an independent practitioner in the early eighties. A chartered accountant by training, he set up an electronics business in partnership with a friend a few years later. When Bharti was formed, he got involved with the company. From the beginning, Akhil has been closely associated with Bharti in almost every aspect. He led Bharti’s alliance with leading international operators like British Telecom, Singapore Telecom (SingTel) and Vodafone and brought in financial investors such as Warburg Pincus, Asia Infrastructure Fund and New York Life. “He’s very quick with figures and is open to ideas on how to keep low working capital for the group. Bharti has been very efficient in capital management. Despite not giving dividends till date, the stock price keeps rising. Banks too have a lot of faith in the company and it has never been difficult to raise debt, even when we were small,” said a colleague of Mr Gupta.

Mr Gupta was the brain behind Bharti’s pathbreaking outsourcing deals with IBM for IT, with Ericsson and Nokia for managed network services and with Nortel, Hinduja TMT, IBM-Daksh, Mphasis and Teletech Services for customer services. When Bharti signed up IBM for IT outsourcing in a 10-year, $750 million deal, questions were asked as to why they chose IBM over Indian vendors. They were criticised for doing the opposite when the entire world was outsourcing to India. “And our answer to that was, first, we don’t treat IBM as a pure US company. IBM, with 10,000-plus people in India, is as much as an Indian company. After all, when they are expanding in India, they are employing Indians. Two, we have gone for what meets the necessity and the needs of our company. And if that is IBM, so be it,” Mr Gupta had said at that time. And he was right. Three years later, Bharti’s rivals Idea Cellular and Vodafone Essar inked similar pacts, preferring IBM over domestic players.

Any model tried and tested by Bharti is replicated by others. Operators are now outsourcing their networks management and call centre operations too on the lines of Bharti.

“Working for Sunil is like working for me. I never felt I was running somebody else’s company. This assurance has been crucial for my personal and professional success,” Mr Gupta said sometime back. Mr Gupta had also designed Bharti’s asset-light model wherein Bharti Infratel was created after hiving off nearly 40,000 telecom towers. Every single operator in India is doing it now. He, however, remains best known as the “dealmaker” in the Bharti group.

Mr Mittal and Mr Gupta were the successful duo who scripted Bharti’s various acquisitions, helping it become India’s largest telco. In 1999, Bharti made its first buyout — JJ Mobiles and followed it up with Skycell in the same year. Then came Spicecell in 2001, Hexacom in 2004 and Comsat Max in 2005.

But size alone is not the issue here. Mr Mittal’s decision to seek out MTN and cajole them into doing the deal is not just rooted in a desire to become bigger. Over the years, Bharti Airtel has created a unique business model based on increasing penetration through absurdly cheap tariffs. Bharti’s operating margins and profit have been steadily rising despite the falling tariffs and Mr Mittal is quite confident that this model can be replicated in similar markets in Africa and the Middle-East.

With Airtel’s Indian operations now being run with the current CEO Manoj Kohli, MTN could perhaps be the fitting platform for Mr Mittal’s return for an active role in the company. It is also possible that with Bharti’s retail business failing to make a mark on the national stage yet, Mr Mittal has set his sights on expanding the business that he and his flagship company Airtel understand the best.

Another concrete reason could do with Mittal’s and Gupta’s understanding of how the Indian market will unfold in the immediate future — the entry of several new players into the telecom space coupled with strict M&A norms that does not encourage consolidation, the Indian growth story could taper off. While subscriber additions will continue to grow, the pie will however have to be divided amongst a larger number of players.

But even for the likes of Mr Mittal and Mr Gupta, MTN will prove to be a very tough catch. The deal faces several hurdles including financial, regulatory, legal and also that of people management in the combined entity.
Even in the case of a merger this time around, Mr Mittal will have to put all his expertise that he has gained in running partnerships with global giants such as Wal-Mart and AXA, telecom majors such as Singtel, Vodafone and PE players such as Warburg Pincus.

People close to Mr Mittal say that he turns vegetarian whenever his company is engaged in something important and transformational. It happened during the 2002 limited mobility crisis and at the time of signing the JV with Wal-Mart though Mr Mittal prefers to dismiss it as a coincidence. We at ET, don’t know whether it has happened this time around, but Mr Mittal’s chef at his tony residence at Amirta Shergil Marg in Delhi will be able to provide an answer.


StanChart is Bharti’s advisor for MTN deal
MERRILL Lynch and Deutsche Bank are advising MTN, while Standard Chartered Bank is Bharti’s advisor in its quest to strike the country’s most valuable overseas deal. If it goes through, investment bankers anticipate that StanChart will get around $100 million as fees. Also, it will help StanChart gain a few notches in the global pecking order of deal makers. No wonder that a combined team of the bank, comprising its Singapore, London and Mumbai offices, is working over time. In charge of the mission is V Shankar, global head of corporate finance at StanChart. Based in Singapore, Shankar’s overall responsibility includes advisory, mergers and acquisitions, structured finance and principal investments. In his early 50s, Shankar earns the reputation of a shrewd deal maker and a successful administrator. Prior to joining StanChart in 2001, he was Bank of America for nearly 20 years and was based out of Hong Kong. His last assignment there was managing director and head of Asia-Pacific Investment Banking and chief executive officer of BA Asia. Born and brought up in India, Shankar got a bachelor’s degree in Physics from the Loyola College, Chennai, and then completed his Masters in Business Administration from IIM, Bangalore. His deputy on this project is Rahul Goswami, head of strategic client at StanChart in Singapore.

"Sunil Mittal tries to win MTN shareholders"

MUMBAI: Bharti Airtel chairman Sunil Mittal is expected to meet the Beirut, Lebanon-based Mikati family in continuation of the charm offensive to win over prominent MTN shareholders. The Mikati family owns over 11% in MTN.

Sources in the know said Mr Mittal is likely to meet Azmi Mikati, CEO of the family’s investment vehicle M1, shortly. The Mikati brothers founded Investcom, which was taken over by MTN two years ago through a cash-cum-share offer to create the biggest mobile operator in Africa and the Middle East.

However, the exact date and venue of the meeting has not been finalised. Sources said it is common for the acquirer in any negotiated takeover bid to earn the trust and confidence of the prominent shareholders before putting a formal offer on the table.

Mr Mittal has discussed his plans threadbare with MTN CEO Phuthuma Nhleko in London, they said. However, Bharti Airtel spokesperson declined to comment.

Mr Mikati and Mr Nhleko are equally important as far as shareholding of MTN is concerned. The Mikati family’s M1 and Newshelf664, a firm owned by the MTN management, control Alpine Trust, the largest shareholder of MTN with a 23% holding.

M1 and Newshelf664 pooled their shares to form the trust two years ago when MTN took over Investcom. The other major shareholder of the Johannesburg stock exchange-listed MTN is PIC, a S African government-owned pensions fund, which has 13.5%. The remaining shares are widely held.

Sources said Bharti is likely to create a special purpose vehicle to acquire shares of the Alpine Trust. The SPV will also buy shares from some other investors. Under the South African law, the SPV will have to make a mandatory open offer once its holding reaches 35%.

Mr Mittal may sell shares of Bharti to fund the acquisition, which is pegged at $20-24 billion. Bharti is learnt to have commitments of Standard Chartered Bank and Goldman to raise debt of $12 billion.

It is also expected that SingTel, which directly and indirectly holds a 30.5% stake in Bharti, will join Bharti to bid for the South African telecom major MTN. Deutsche Bank and Merrill Lynch are advisors to MTN.

The options being discussed by both the parties include the top management of MTN will acquire Bharti shares and the companies will set up an integrated management committee, combining top brass of both the companies, to monitor their operations. Mr Nhleko may head this committee, if it is put in place.

Analysts said Bharti will not have much difficulty to service a debt of around $12-14 billion. They said the interest outgo will be partially offset by the dividend it is expected to earn from MTN.

Others may also join the race. Saudi Telecom, Etisalat and French Telecom are the possible contenders, analysts said. China Mobile on Thursday said it is not bidding for MTN although it is interested in South Africa.

"Bharti quiet on reports MTN merger talks at crucial stage"

The leading mobile phone group Bharti Airtel declined comment on media reports on Friday that its negotiations to merge with Africa's top cellular player MTN were entering a crucial phase.

Bharti might offer the chairman's post of the proposed merged colossus to South Africa's MTN group chairman M.C. Ramaphosa in a bid to sweeten its overtures, the media reported.

Bharti's billionaire chairman Sunil Mittal would be deputy chairman and group chief executive officer while MTN chief executive officer Phutomo Nhleko would be deputy group CEO, the paper reported, quoting unnamed bankers it said were close to the talks.

"We have no further comment beyond our earlier statement... that discussions being held are aimed at combining the strengths of two players from emerging markets," a Bharti official, who wished to remain unnamed, said. The company has said it is "veering toward possible structures to achieve this objective."

Bharti's run for the South African flagship group were now at a "crucial negotiation phase," the Times of India reported. Mittal has met several times with top MTN officials in London since Bharti announced earlier this month the two companies were in "exploratory talks".

Bharti wants to acquire a 51 percent stake. But MTN, which serves 21 markets across Africa and the Middle East, is pushing Bharti to buy out 100 percent of the company in a transaction that could be portrayed in South Africa as a merger of equals, reports said.

A merged group would create a mobile behemoth with a network of 130 million subscribers 68.2 million from MTN and 62 million from Bharti -- that would dominate two of the world's fastest growing markets India and Africa.

Originally the price tag for MTN was quoted at 40 billion dollars for a 100 percent buyout of MTN but now the figure is up to 50 billion dollars or 25 dollars a share, based on MTN's surging stock price and analyst expectations that Bharti might have to pay a possible 25 percent premium.

Mittal is also seeking an exclusivity agreement with MTN to be signed this week barring MTN from sharing any information for a merger with any other firm, Indian newspapers reported.

But MTN's management is balking, saying it would be "anti-shareholder," the Times of India said. If successful, Bharti's deal would easily eclipse Tata Steel's 13-billion-dollar takeover of Corus Steel last year, India's biggest foreign acquisition so far.

"Bharti may buy MTN by paying cash and equity"

ndia's largest telecom company Airtel hinted at plans to forge a merger with Africa's largest telco, MTN.

In a statement, Bharti said that it has not made any bid for MTN nor is it required to make any bid. “The discussions being held are aimed at combining the strengths of the two leading emerging markets players and accordingly veering towards possible structures to achieve this objective,” the company said.

The statement clears some of the confusion over how the deal could be structured. Though the Bharti statement does not say it in so many words, industry observers and M&A experts feel that the deal could be achieved through a merger. People close to the situation said that Bharti is exploring the possibility of buying 100% of MTN through a ‘scheme of arrangement’. Bharti will compensate MTN shareholders in cash as well as stock.

About $20 billion of the total acquisition value (which is $45 billion) will be in cash, which Bharti will raise through a combination of debt and internal accruals. The remaining amount of about $25 billion will be paid in Bharti stock. Since Bharti is not listed in South Africa, it will have to make a listing in order for the deal to go through.

South African regulations allow foreign companies to list in the Johannesburg stock exchange. This is called a secondary listing of foreign companies. Several companies, including some well-known names like BHP Billiton, Investec Plc, Old Mutual and SABMiller have secondary listings in Johannesburg with the primary listing elsewhere.

Bharti, people with knowledge of the deliberations say, will list on the Jo’burg stock exchange and its shares will be issued to MTN shareholders. It could be a massive issue, the biggest from any Indian company and one of the biggest in the world. Over half of Bharti’s current market capitalisation of about $40 billion will have to be issued to investors for the deal to go through. Whether Bharti will eventually make such a humungous public issue remains to be seen, but company executives are believed to be considering this option.

Once Bharti acquires 100% of MTN, it will be merged with Bharti, with the combined entity being called MTN Airtel. Sunil Bharti Mittal will be the non-executive chairman while Phuthuma Nhleko will be the CEO of the new entity. MTN chairman Cyril Ramaphosa is unlikely to be on the board.

The Bharti-MTN combine will be the world’s sixth largest telco with close to 130 million customers. It will also have access to the world’s fastest-growing mobile markets — Africa, West Asia and South Asia.

Explaining the broad contours of the deal, an industry source, who claimed to be in the know of things said: “Bharti has already got commitments from leading global banks to the tune of $18 billion. So, the company can readily raise up to $20 billion in debt. Bharti will then issue fresh equity of around $25 billion in the form of depository receipts.

The $25 billion worth of fresh equity can be used for share swap with large MTN shareholders such as the Alpine Trust and South African pension fund PIC. This will result in MTN shareholders holding on to the fresh equity in Bharti Airtel. This formula will see MTN shareholders hold 38% in the combined entity. In effect, the merger will translate into a 100% buyout.”

The Bharti spokesperson refused to comment on this possibility. A statement from MTN said they did not wish to comment further or add to an earlier statement on May 5.

This model will provide Bharti with up to $20 billion in cash (debt plus internal accruals) to buy close to 50% in MTN, while the rest of MTN’s stock would be swapped with Bharti Airtel stock. According to industry sources, this will also enable Bharti to meet pre-conditions put forward by MTN such as the company’s current CEO Phuthuma Nhleko heading the mobile business arm of the combined entity and Bharti awarding three places on its board to the MTN top brass.

Industry sources also said that buying out MTN shareholders such as the Alpine Trust and South African pension fund PIC through a share swap will enable Bharti to comply with South African regulations, which stipulate that a minimum 25% of a local company’s equity and 40-50% management control should be with local Black investors. (The Mikati family and Newshelf combined form the Alpine Trust - The Mikati family of Lebanon owns 10% and Newshelf owns 13% in MTN through the Alpine Trust.)

If this model translates into reality, the final shareholding structure of the Bharti-MTN combine will be as follows — Sunil Mittal with 15%, SingTel about 19% by virtue of its holding in Bharti Airtel, South African shareholders with about 36%, while the rest will be with the public, industry sources added.

It is also learnt that Mr Mittal and the Bharti MD Akhil Gupta are scheduled to meet Lebanon’s Mikati family which holds close to 10% stake in the south African telco, Mr Nhleko and other top management executives in a couple of days to discuss the corporate structure of the combined entity. Industry sources here say that following the meeting, both companies are likely to announce the signing of a non-disclosure agreement, the first step towards giving Bharti access to MTN’s books so that it can begin ‘due diligence.’

Industry sources also add that MTN may have already committed to an ‘exclusivity agreement’ with Bharti. This implies MTN will not disclose the terms of arrangement to any other party. Sources also added that only after the completion of due diligence from both sides would Bharti make a final offer to MTN shareholders which could be upwards of 175 rand a share. At 175 rand a share, MTN would be valued at around $45 billion.

"Bharti may raise bid offer for MTN"

Bharti Airtel, India's largest cellular operator, is planning to raise its offer to about $22.63 per share to acquire control of South African mobile player MTN, according to a media report.

Quoting a person familiar with the 'deal,' the Wall Street Journal said on Monday that Bharti is considering raising the offer to about 175 South African rand (or $22.63) per share for control of MTN.

"There is no official bid yet and MTN management insists that it be a minimum 200 South African rand per share," the WSJ reported, quoting the person, in an article published in its online edition.

When contacted, a Bharti spokesperson declined to comment.

Last week, both Bharti and MTN announced that they are in 'exploratory talks' which may or may not lead to a deal. The person said the official bid could still be the original 160 rand to 165 rand, 'depending on the terms of the agreement, how big of a stake MTN is willing to sell and other factors,' the WSJ reported.

Media reports said that Bharti -- whose market capitalisation as on May 9 stood at Rs 159,841.77 crore (Rs 1,598.417 billion) could make an official bid for MTN this week for a 51 per cent stake.

Earlier, media reports said that Bharti is looking at acquiring 51 per cent stake in MTN for about $19 billion.

If the deal takes place, it will create world's sixth largest mobile company with 130 million subscribers in more than 20 countries.

In afternoon trade, Bharti was trading at Rs 825.90, down 1.99 per cent on the Bombay Stock Exchange.

"Bharti may rope in SingTel for MTN buy"

India's largest private telecom company Bharti Airtel is believed to have held discussions to rope in Singapore Telecommunications Ltd, which directly and indirectly holds 30.5 per cent in the company, to bid for South African telecom major MTN Group.

Both companies declined to comment. Bharti on Monday said it had started "exploratory talks" with MTN.

Under South African exchange law, a mandatory offer is required to minority shareholders if Bharti acquires more than 35 per cent in the company. It will require a minimum of 25 per cent to block special resolutions.

Buying MTN, which has operations in 21 countries and 68.2 million subscribers, could be a complex operation given its shareholding structure.

MTN's largest shareholder with 23 per cent is the Alpine Trust, which is controlled, in turn, by two shareholders that have pooled their shares in the trust.

One is Newshelf664, a company floated by MTN staff and management and the other is M1, controlled by the Makati family. The other major shareholder is PIC, a South African government-owned pension fund, which has 13.5 per cent. The rest of the shareholding is widely dispersed.

MTN is listed on the Johannesburg stock exchange.

M1 has more than doubled the value of its investment since it issued shares in May 2006. Newshelf664 is largely debt funded and can sell its shares from December 2008 as part of the agreement.

Sources in banking circles said an initial entry in the company might be through the buyout of the Alpine Trust stake. Alpine has a market capitalisation of around $33 billion. If Bharti considers buying 51 per cent, the bill will be over $20 billion (Rs 80,000 crore).

According to a Financial Times report, Deutsche Bank AG and Merrill Lynch & Co are advising MTN. Goldman Sachs is believed to have agreed to provide debt of up to $12 billion, while the remaining will be taken care of by Stanchart by issuing Bharti's equity to MTN shareholders.

Experts say Bharti could leverage its low-cost telecom model perfected in India in many of the countries in which MTN operates, such as Nigeria. With a combined subscriber base of over 100 million, the two companies would also be able to leverage their global position with vendors, especially at a time when more telecom players are coming to India.

Bharti Airtel's stock, however, closed more than 5 per cent down on the Bombay Stock Exchange to Rs 846.60 a share.

Meanwhile, there were also reports of United Kingdom-based telecom major Vodafone being interested in MTN. Vodafone spokesperson Bobby Leach said: "Vodafone remains committed to its partnership in South Africa with Telkom, in Vodacom, in which Vodafone holds a 50 per cent stake."

"Why MTN buy will be good for Bharti"

Acquiring the Johannesburg-listed MTN even with a partner like Singtel will not be easy for Bharti Airtel , India's biggest telco. So, buying MTN on it's own will be an even bigger challenge.

That's because the costs involved are huge: the estimated enterprise value of MTN is about $40 billion, so a 51 per cent stake would cost about $22-25 billion, assuming some acquisition premium will be paid.

That's a large sum of money even if Bharti is in a position to generate about $3 billion of free cash every year between FY10-12. Also, even if it controls about a fourth of the Indian wireless market, the company must surely be looking for a bigger share which means continuing investments in spectrum and equipment. Bharti cannot afford to fall short of money to fund the capex in India.

However, at a price, the deal makes good business sense because it will give Bharti access to markets in over 20 countries where the penetration remains low - at around 43 per cent - and opportunities for growth are high.

De-risking a business model by expanding in new geographies is always a good idea and Bharti should be able to be able to turn MTN into a low-cost operation like its own. Analysts say MTN's cost per minute is far higher than Bharti's.

Moreover, given that the combined entity will have a subscriber base of 125-130 million, growing fast, Bharti will have better bargaining power with equipment suppliers and handset vendors.

Since both MTN and Bharti are highly profitable companies with operating margins of 40 per cent plus and a combined ebitda of around $7 billion, and since the outlook for the business remains promising, an increase in Bharti's debt from current levels of just over $1 billion is not that worrying.

So Bharti should pursue the deal because there is an opportunity even if investors are concerned: the stock lost over 5 per cent on Tuesday to close at Rs 847 with the street worried about the higher levels of debt or an overhang for the stock if the deal is funded partially through stock.

"Microsoft's $40 billion question"

BY Wendy Tanaka, Forbes......




Here's a question for Microsoft chief executive Steve Ballmer: Is Yahoo! really worth all this hassle?

After more than two months of waiting to negotiate with Jerry Yang and company, you finally got frustrated over the weekend and sent a strident letter to Yahoo!'s board members, giving them three more weeks to come to the table before you start replacing them.


You backed up your emotions with data and facts: Since Microsoft launched its $44.6 billion unsolicited bid for Yahoo! Jan. 31, the Internet portal has been trying to wrangle deals with News Corp, Google and Time Warner to stay independent, but no such deal has surfaced yet.

Your stock is down. Yahoo!'s stock, buoyed by your offer, is up. And that means your offer--which at the time was a 62 per cent premium over Yahoo!'s share price--has eroded a bit. "The public equity markets and overall economic conditions have weakened considerably," you wrote.

Up for debate is whether Yahoo! has gained or lost customers for its search engine and other offers over the past two months. You say Yahoo! is losing customers. Yahoo! chief executive Jerry Yang and chairman Roy Bostock contend Yahoo! is pulling its act together.


But the bottom line is that Yahoo! is no more amenable to a deal than it was two months ago. Maybe even less so. "Yahoo!'s business forecasts are consistent with what we outlined in our last earnings call," retorted Yang and Bostock in a return letter. "We have had constructive conversations together regarding a variety of topics, including integration and regulatory issues," they wrote. But Yahoo! is worth more than $40 billion and change, the executives maintain.

If $40 billion or so isn't enough for Yahoo!, what else could Ballmer spend the money on to bolster Microsoft's business? Fact is, $40 billion is a lot of money, no matter the currency.

Here are a few suggestions for what else Microsoft could get for $40 billion:

Hire 40,000 engineers, at $100,000 apiece, for a decade

Acquire Facebook (estimated to have a market value of $15 billion), along with just about any other meaningful social networking site, including MySpace, Bebo, Hi5 and LinkedIn. There would still be enough money left over to pay some consultants to help with integration.

Spend eight times more than Google did last year to acquire traffic--and presumably make traffic more pricey for Google, to boot.

Hire 80 million workers in China to do nothing but click on Microsoft properties and related ads for 10 years.

Promise a free Big Mac to everyone who clicks on a Microsoft ad--and give away 14 trillion of 'em.

"Microsoft likely to turn hostile in Yahoo bid"

Microsoft is likely to pursue a hostile bid for Yahoo Inc takeover, people familiar with the proceedings said.

However, the situation remains fluid as discussions continue. The software giant is likely to change tracks before announcing its decision on Friday. Microsoft said nothing about its plans.

In an interview to Wall Street Journal, Steve Ballmer, Microsoft CEO, declined to comment on his company's decision or the probable day when this decision would be made public. He said Microsoft will announce its decision when the circumstances are right.

Price will be a key factor if Microsoft turns hostile towards Yahoo. Microsoft's unsolicited cash-and-stock offer was valued at $29.48 a share as of 4 p.m. on Thursday, on Nasdaq stock market composite trading. Yahoo had rejected this offer on the grounds of undervaluation.

The software major had decided to up its bid as much as $33 per Yahoo share as major Yahoo shareholders have signalled that they want a price in the range of $35 to $37 a share, informed sources said.

In case it decides to turn hostile, Microsoft will put forth an offer which it deems will be acceptable to Yahoo shareholders, though investors might ratchet down their demands in the face of a take-it-or-leave-it Microsoft offer.

As reported in WSJ, while addressing his staff at its Redmond headquarters in Washington on Thursday, Ballmer confirmed that he was not willing to pay a dime above what he thought Yahoo was worth. He added that Microsoft will announce its decision in a relatively short order. His comments were provided by a company spokesperson.

A Yahoo spokesman declined to comment on Ballmer's remarks.

A hostile bid would raise the risk of many Yahoo employees leaving in the process. Yahoo's poison-pill anti-takeover defenses essentially require any would-be hostile acquirer to remove its board. A vote on the directors occurs annually at Yahoo's shareholder meeting. Although the annual meet is not yet announced, it likely to be held in July.

In his interview to WSJ, Ballmer said that he is confident Microsoft will be able to build a competitive online-advertising business without buying Yahoo, though such a move may be more time consuming. He voiced optimism in Microsoft's options if it decides not to pursue its Yahoo bid.

Whilst outlining his company's rationale behind buying Yahoo, Ballmer said he believed Yahoo has the technology but not the scale, like number of customers and advertisers that it needs.

Shrugging off the perception that Microsoft has failed in its attempts to build its own online services and ad business, Ballmer said he appreciates his company's strategy but doesn't like its position. He would prefer a better position compared to the company selling maximum ads, referring to Google Inc, WSJ reported.

Responding to a question on alternative acquisitions to Yahoo, Ballmer said there are very few Internet companies that have the kind of size Microsoft needs to expand its business rapidly.

As reported in WSJ, while talking about the scale of an Internet company, Ballmer listed five to six companies that have a reputation to vouch for -- News Corp's Myspace, Facebook Inc, Yahoo, Google, Time Warner Inc's AOL and Microsoft's MSN service.

Meanwhile, Yahoo continues its efforts at negotiation with Google and Time Warner's AOL Internet unit, even as it awaits Microsoft's decision, informed sources said.