"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.