"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)