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.
